To strengthen urban infrastructure financing, the Uttar Pradesh Cabinet has approved the issuance of ₹150 crore worth of municipal bonds for Prayagraj, Varanasi, and Agra municipal corporations.
The decision was taken at the cabinet meeting chaired by Chief Minister Yogi Adityanath in the Maha Kumbh Mela area in Prayagraj on January 22. “Through these municipal bonds, the funds will be raised from the market, with a grant of ₹13 crore provided for every ₹100 crore raised. The government of India will deposit the incentive amount into an escrow account,” an official statement said.
“Additionally, up to ₹50 crore municipal bonds each will be issued for Agra, Prayagraj, and Varanasi. This initiative aims to bolster the infrastructure development in these key cities,” it said.
It should be noted that only Ghaziabad and Lucknow municipal corporations have issued municipal bonds so far. In January 1998, Ahmedabad Municipal Corporation issued the first municipal bond worth ₹100 crore without a state government guarantee to finance infrastructure projects.
What are municipal bonds?
Municipal bonds are bonds issued by urban local bodies to raise money for financing specific projects, such as infrastructure projects.
A city’s performance in the bond market depends on its fiscal performance, and credit ratings are one of the ways to determine a city’s financial health.
Who can invest in municipal bonds?
Municipal bonds are available to a wide range of investors. Individual investors, for instance, can purchase municipal bonds through a brokerage account, making them particularly attractive to those in higher tax brackets due to their tax-exempt interest. Institutional investors, such as mutual funds, insurance companies, exchange-traded funds (ETFs) and pension funds, often invest in municipal bonds to diversify their portfolios and secure stable returns. Additionally, high net worth individuals may prefer municipal bonds for their tax advantages and minimal risk, explains Swapnil Anil, Managing Director, Advisory Services, Colliers India.
Investing in municipal bonds involves several key steps. For example, if you were to invest in municipal bonds from cities like Lucknow or Ghaziabad, the first step is to do extensive research well before selecting any bond. The Lucknow Municipal Corporation or Ghaziabad Municipal Corporation are often listed on major stock exchanges like the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE), he explains.
The second step is to review the bond’s terms, including the interest rate (coupon rate), maturity period, and credit rating. Next, a brokerage account, if available, must be added and the Know Your Customer (KYC) details must be up to date. Also, an order can be placed either in the primary market during the initial offering period or in the secondary market if the bond is already listed. Once invested, monitor the investment by tracking the bond’s performance and any announcements from the issuing municipal corporation, he adds.
What is the return on investment that one can expect?
The expected returns on municipal bonds in India can vary based on several factors, including the issuing municipality’s credit rating, the bond’s maturity period, and prevailing interest rates. Municipal bonds in India have offered returns in the range of 7% to 9% annually. The Lucknow Municipal Corporation’s bond had a coupon rate of 8.5% for a 10-year period, says Anil.
Why is there a need for municipal finance?
Local bodies oversee various expenditures on local services, including transportation, water and sewers, garbage collection and disposal, safety, housing, health, recreation and culture, education, and social expenditures. Under municipal finance, they can fund these services, and the infrastructure associated with them from various sources, the report said.