Municipal bonds : Gujarat’s municipal

Q. What is the news ?

• The Vadodara Municipal Corporation (VMC) is supposed to launch municipal bonds in January 2021 , and it will become the third Urban Local Body (ULB) in Gujarat to use Municipal bonds to raise money to fund development work sanctioned under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT). 
• It has sought approval for the same from the state government.

Q. How was the earlier Ahmedabad experience?

• Ahmedabad was the first city in south Asia to launch a municipal bond of Rs 100 crore in 1998, which was completely subscribed. 
• It followed up with four more bonds — two Rs 100 crore ones in 2002 and 2005, a Rs 98 crore bond in 2004, and one of Rs 200 crore in 2019. Except the first, the rest of the Ahmedabad bonds were privately placed, according to sources in the AMC.
• Surat Municipal Corporation was the second city in Gujarat to announce bonds in 2018, to fund a sewage treatment project worth Rs 450 crore.

Q. What are the details of this Vadodara’s municipal bonds?

• The Vadodara Municipal Corporation  is riding on the favourable credit ratings from two agencies for two proposed bonds of Rs 100 crore each, and expects to issue the bond at the exchange by January 2021.
• The VMC General Board had, in its budget for 2019-20 financial year (FY), given in-principal approval for mobilisation of Rs 100 crore through issuance of Municipal Bond which was raised to Rs 200 crore in the FY 2020-21. 
• The VMC had appointed the India Rating and Research (Fitch) Ltd and CRISIL Ltd for the credit rating. While Fitch assigned AA+/Stable, CRISIL ratings for VMC are AA/Stable — considered two best ratings for issuance of the bond. 
• The VMC has also appointed SBI Capital Markets Ltd and the MV Kini Law Firm, New Delhi, as the transaction advisers and legal counsel for the proposed bond. SBI Capital Markets Ltd is mainly responsible to coordinate, assist and guide various stakeholders and hold investor meetings to mobilise the proposed sum. 
• Meanwhile, the United States Treasury Department is also providing the VMC with the technical assistance and guidance for proposed Municipal Bond under the India-US Economic and Financial Partnership programme.
• The VMC, which has struggled to meet its monthly expenses due to a financial crunch in the past, however, says its debt-paying capacity has been examined and found to be stable. The municipal bond is seen as a dynamic debt instrument which will lower the annual liability component of the VMC currently from about Rs 45 crore to Rs 35 crore.

Q. What is a municipal bond?

• A municipal bond is a kind of debt instrument where investors offer loans to local governments. They are issued by civic bodies for specific projects and usually have a 10-year tenure. The ULB pays the annual interest on the bonds to the investor at the decided rate. 

Q. What is the difference between a bank loan and municipal bonds?

• The difference between a bank loan and a municipal bond is that any institution can secure a bond only if it has favourable credit ratings. The bond helps raise funds from the stock market. The bond also increases the number of investors available to the civic body, as compared to a loan from a single bank.
• Bonds are issued to institutional and high net worth individuals. The face value of each instrument slot of a municipal bond if a minimum of Rs 10 lakh. It can be subscribed to (purchased) by a single investor or multiple investors.

Q. Why is the government pushing for municipal bonds?

• Under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme, urban local bodies (ULBs) are encouraged to tap the bond market. Bonds help ensure improved credit profiles, direct transfer of funds by the Centre, transparency and efficient revenue generation.
• The government also pays ULBs Rs 13 crore for every Rs 100 crore raised via bonds, subject to a ceiling of Rs 26 crore for each. This incentive takes care of the repayment that the ULB must make to the lender, including the interest component.
• Moreover, recently  Lucknow Municipal Corporation (LMC) had issued bonds at an interest rate of 8.5% and received bids worth Rs 450 crore from interested investors. Among the other ULBs that have issued bonds are Ahmedabad, Pune and Indore. According to the Ministry of Housing and Urban Affairs, in 2018-19, eight ULBs issued bonds and were incentivised with Rs 181.33 crore by the ministry. In the following financial year the ministry decided to incentivise up to 12 ULBs for issuing municipal bonds on ‘first come, first serve’ principle, based on the date of issue of bonds.

Q. How do investors bid for the municipal bond and get paid?

• The bidding takes place on an electronic trading platform after the bond is listed on the exchange. The bidding is open to all investors and is facilitated by the transaction agent appointed by the ULB, who gets a commission of 0.10% after the money is transferred to the account of the ULB. 
• There could be a single investor as in the case of Ahmedabad and Surat, where Gujarat State Financial Services (GSFS) picked the entire bond of Rs 200 crore each, or there could be multiple investors, who can bid for any number of slots having a value of Rs 10 lakhs each. 
• Once the bucket cap is reached, the bid is closed and the bidders must consent to the interest rate that has been decided after the last bid is made.

Q. How do corporations facing an overall financial crunch pay investors?

• The ULBs who earn approval for issuing bonds, do so after an in-depth analysis of their debt-paying capacity, based on various parameters as well as the balance sheet for the immediate preceding five years.
• While credit rating firms assess the financial health of the ULBs, AA++ is considered to be the best rating — which was also given to Ahmedabad and Surat in Gujarat. The next best is the AA rating.
• ULBs also share an ‘information memorandum’, which is a facsimile of the ‘share certificate’ in a stock market. The memorandum carries details of the ULB and its financial performance. The law firm hired by the ULB prepares this memorandum although the “due diligence report” is filed through the merchant banker with the SEBI.