The Government of India, in order to boost the municipal bond market, allowed the municipalities to issuer tax-free municipal bonds. The central government amended the Income Tax Act (1961 vide the Finance Act 2000), whereby interest income from bonds issued by local authorities was exempted from income tax. The GOI issued guidelines for issue of tax-free municipal bonds in February 2001. These guidelines stipulate eligible issuers, use of funds, essential pre-conditions, maturing period, buy-back, nature of issue and tax benefits, ceiling amount for a project, compulsory credit rating, and external monitoring of the tax-free municipal bond.

In India, the guidelines issued by Ministry of Urban Development (MOUD) for issuance of Tax free Bonds by Municipal Bodies provides that only bonds carrying interest rate upto maximum 8% per annum shall be eligible for notification by the CBDT as tax free Bonds. The Corporate Bonds and Securitization Advisory Committee (CoBoSAC) of SEBI was of the view that such fixed rate of 8%, in the prevailing scenario is too less for investors to get attracted to Municipal bonds and therefore it suggested that the rate on such tax free bonds may not be restricted to 8% and there may be a flexibility in setting interest rate cap by linking it to a benchmark market rate.

A committee was set-up by Ministry of Urban Development (MOUD) to review the progress of implementation of the recommendations of World Bank Report on regulatory framework for municipal borrowings. In the meeting of the committee held in July 2013, it was, inter-alia, recommended that SEBI will draft new disclosure and regulatory requirements for issuance and listing of Municipal bonds. A copy of the minutes of the said meeting was forwarded to SEBI by MOF in August 2013.

A sub-committee of SEBI submitted its report to CoBoSAC in October 2014 wherein the committee accepted its recommendation and concluded the following.

I. There should be a separate framework for issuance and listing of debt securities by ULBs or Municipal bodies and SEBI may frame separate regulations in this regard.

II. The framework should provide for issuance of debt securities by ULBs or Municipal bodies to the public as well as privately placed Municipal bonds that are proposed to be listed on the stock exchanges.

The committee, inter-alia recommended the following requirements, subject to which municipalities may issue debt securities:

a. The funds raised from issue of Municipal Bonds shall be used only for the projects that are specified under objects in the offer document.

b. The proceeds of the proposed issue shall be clearly earmarked for a defined project or a set of projects;

c. It will be mandatory for the issuer to obtain rating from a credit rating agency registered with SEBI before the issuance of Municipal Bonds.

d. The Municipal Bonds should have a minimum maturity of 3 years. The issuers will have option to offer deep discount bonds or other financial innovations especially to enhance the tenor of the bond.

e. The issuers may have the option for buy-back arrangements of the face value of the bonds from an investor.

f.   The issuers shall maintain a separate account of the amount raised from the issuance of Municipal Bond, to be utilised only for the project related expenditure;

g. The issuers shall establish a separate Project Implementation Cell and designate a Project Officer who shall monitor the progress of the project(s) and be responsible for ensuring that the funds raised through Municipal Bonds are utilised only for the project(s) for which the Bonds were issued.

h. The funds raised by the issuer are utilised in accordance with the time-table for utilization of bond proceeds and only for the project(s) for which permission has been granted by the Central Government.

i.   With respect to audit of accounts of the Municipal bodies, it was suggested that within six months of the close of every financial year, the escrow account and the project account shall be audited by the auditors appointed by the Municipal Corporations, as permissible under their respective constitutions. However, if it is a statutory corporation, then the accounts shall have to be audited by the statutory auditor. Further, the accounts shall have to be audited in a manner, which is friendly with the investor community and also there should be a single point of contact in each ULB/Municipality, with respect to such accounts, with whom the investors can interact and clarify their doubts, if any.

Considering the aforesaid recommendations of CoBoSAC, SEBI proposes to lay down a framework governing the issuance and listing of debt securities by ULBs/ Municipal bodies in India directly or through a Corporate Municipal Entity.

In the SEBI Board Meeting held in November 2014, an information memorandum on developments in the Corporate Bonds Market was presented, wherein the Board was informed about the CoBoSAC recommendation of laying down a separate framework for municipal bonds.

For effective implementation of the proposed framework, some consequential amendments may be required to be made to the Companies Act, 2013 and the rules made there under to enable raising of funds by Corporate Municipal Entity through issue of debt securities under the proposed framework

SEBI proposes to frame SEBI (Issue and Listing of Debt Securities by Municipality) Regulations, 2015, draft of which is enclosed. Public comments are invited on the draft regulations

In the light of the above, SEBI has proposed to frame SEBI (Issue and Listing of Debt Securities by Municipality) Regulations, 2015 which shall apply to-
(a) public issue of debt securities; and
(b) listing of debt securities issued through public issue or on private placement basis on a recognized stock exchange.

A few important Conditions of the draft regulations are:

1. The debt securities shall have a minimum tenure of 3 years
2. Minimum credit rating of "A+ or equivalent.  
3. Minimum subscription limit not to be less than 75% of the issue size
4. Mandatory listing of the debt securities
5. 100% asset cover to be maintained
6. It can have an option to buy-back the debt-securities at their face value.

Download the Concept Paper and Complete Draft Regulations Click Here >>