Context

The municipal bonds issued by the Lucknow Municipal Corporation have been listed on the Bombay Stock Exchange (BSE).

About

What are municipal bonds?

• Municipal corporations can raise funds through bond issuances, called municipal bonds.
• The debt raised is from investors like pension funds.
• The municipal bodies set aside an amount from their monthly property tax collections for interest and principal repayment.
• Typically, the interest payment is half-yearly. Most of the municipal bond issuances have their own structured repayment pattern.

Municipal corporations Municipal corporations are government bodies that typically form the third tier of the government in urban areas after the central and state government.  They have their own expenditures and sources of revenue. Typically, municipal bodies provide services like water, sanitation, sewage and solid waste management. Some bigger municipal bodies also run schools. Their source of revenue includes levies like property tax, government grants and fees for the services provided.

Municipal bonds, an emerging trend

• Municipal bonds have gained traction over the last few years with civic bodies raising funds to meet the rising requirements under the flagship Smart City Mission and Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme of the central government.
• In 2017, the central government had announced incentives for municipal bodieswho raise funds through these municipal bonds.

Other listed municipal bond issuances Besides Lucknow, some of the other bond issuance that have been listed include those of the municipal bodies of Pune, Indore, Bhopal, Ahmedabad and Hyderabad.

Do these bonds have sovereign guarantee?

• These bonds, like the state development bonds, are not backed by a sovereign guarantee.
• A sovereign guarantee is typically provided by the central government promising debt repayment for a third party in case of a default by the latter.
• Due to this, the interest rates on municipal bonds are also higher than the interest rate on central government securities and State Development Loans (SDLs).

How does listing help?

• Listing of bond issuances makes them more transparent and ensures information flow to investors, Pant said.
• Under the listing conditions, accounts have to be audited half-yearly. This ensures greater reliability.