Latest SEBI amendment with Govt. incentives augers well for Municipal bond issuance in the medium term


The recent changes are likely to increase the number of issuance during FY2020 compared to the past two years

The Securities and Exchange Board of India (SEBI) has recently on August 21, 2019 approved the second round of amendments to the SEBI (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015. The key amendments include expansion in the scope of regulations to other entities involved in municipal functions; changes in requirements related to accounting, audit and disclosure of financial statements; modifications in the provisions pertaining to debt-servicing mechanism of the municipal bonds and other changes. This along with the Ministry of Housing and Urban Affairs (MoHUA)’s extension of the incentive scheme in FY2020 for the entities, would enable raising funds through municipal bonds. As per the scheme, an entity would be eligible for an incentive of Rs. 13 crore for an issuance of at least Rs. 100 crore bond (maximum incentive of Rs. 26 crore for each entity). The scheme would be available to 12 entities on a first come, first serve basis during FY2020 (was available to 10 entities in the previous year).

Commenting on the amendments, Jayanta Roy, Senior Vice President and Group Head, Corporate Sector Ratings, ICRA said, “During FY2018-2019, seven urban local bodies raised Rs. 1,390 crore through eight municipal bond issuances. The latest changes will further expand the investor base for municipal bonds and is likely to have a positive impact on the overall development of the domestic municipal bond market in the medium to long-term.”

As per ICRA, the expansion in the scope of the regulations will increase the number of eligible entities for issuance of municipal bonds. The entities, which would become eligible, are urban development authorities, water supply and sewerage boards, solid waste management entities, slum development boards, etc. Moreover, special purpose vehicles (SPVs) under the Smart Cities Mission (SCM) and state pooled finance entities (SPFEs) will also be eligible to issue municipal bonds.

With the increase in coverage of the regulations to a large number of entities other than urban local bodies (ULBs) as well as the extension of the incentive scheme, the number of issuances during FY2020 is likely to increase as against a total of eight issuances during the last two years. The first municipal bond issuance in FY2020 has been made recently by the Greater Hyderabad Municipal Corporation (GHMC) for Rs. 100 crore. Additionally, three more entities are reportedly in the final stages of issuing municipal bonds worth Rs. 600 crore during FY2020.

While the accounting standards for the ULBs were mentioned in the original regulations, the accounting standard requirements for the newly added entities, which are involved in municipal functions, have now been added in the regulations. Additionally, the disclosure timelines of financial statements by the issuers have been largely aligned with those for corporate bonds. A separate process has been prescribed for the entities (mostly ULBs), for which the statutory auditor is the Comptroller and Auditor General (CAG) of India. In such cases, a CAG appointed auditor would conduct the first level audit of the issuer’s financial statements, followed by a subsequent audit by the CAG. Considering a longer time required for the completion of CAG audit and criticality of audited financial statements to investors, the new process in ICRA’s opinion would address the issue and therefore is a positive step from investors’ perspective.

Concludes Jayanta Roy, “The recent amendments address a number of other concerns too, especially those pertaining to disclosure norms and debt-servicing mechanisms. This will potentially boost the confidence of investors and augment the availability of finance for urban infrastructure through municipal bonds.”