Municipal Bonds

Municipal Bonds, also known as muni bonds, are debt instruments issued by municipal corporations or Urban Local Bodies (ULBs). Investors/lenders, in turn, receive interest payments per the payment cycle and the principal at maturity. The local governmental bodies utilise these funds to finance socio-economic development projects such as building bridges, hospitals, educational institutions, public facilities, or urbanisation of specific regions within their municipality.

Returns from these municipal bonds are then reimbursed from the profits generated by such projects or tax revenues. 

Among the several ways available to invest, buying municipal bonds online is becoming increasingly popular. Potential investors can do so via KredX, an online investment platform of digital gold, PMS, and bonds.

Types Of Municipal Bonds In India

Municipal bonds are categorised according to the source of their interest payments and principal repayments. In general, such bonds are not taxable. However, municipalities may issue bonds that are not qualified for tax exemption. Investors looking forward to investing in such bonds can buy municipal bonds of two kinds –

  • General Obligation Bonds (GOBs) – Issued by government entities, these bonds raise finance for general projects such as building infrastructural facilities for specific regions. These are not backed by the revenue generated from a particular project. However, some GOBs are repaid from dedicated property taxes, while others are paid from general funds.
  • Revenue Bonds – Such bonds are issued for specific projects like constructing a particular building. These are used to finance the expenditure of revenue-generating projects. Hence, investors buy municipal bonds of such nature as the profit margin from these bonds is more when compared with GOBs.

SEBI Guidelines On Municipal Bonds

In July 2015, the Securities and Exchange Board of India (SEBI) revised the regulations associated with the issuance of these bonds. According to the latest guidelines, a municipal corporation issuing debt securities must meet the following prerequisites – 

  • The municipality should have a positive net worth income in the last three years.
  • The bond should at least have an investment grade rating of BBB.
  • Such municipality or issuer must not default in repayment of loans or debt securities obtained in the previous year.
  • The corporate municipality entity or promoters/directors/group of companies should not be enlisted in the wilful defaulters’ list published by the Reserve Bank of India (RBI).

History Of Municipal Bonds Issuance in India

  • The first official municipal bond was issued by Bangalore Mahanagara Palike (BMP) in 1997.
  • The Bangalore Municipal Corporation raised Rs. 125 crores in 1997 through a private placement backed by the state government.
  • The following year, Ahmedabad Municipal Corporation issued its first municipal bond of Rs. 100 crores without a state government guarantee.
  • In 2000-2001, the Indian government gave tax exemption to interest income from certain municipal bonds used for infrastructural development like the supply of drinking water, sewerage or sanitation, solid waste management, drainage, roads, flyovers, bridges, and urban transport.
  • In 2002 the first tax-free municipal bond was issued by the Ahmedabad Municipal Corporation to raise Rs. 100 crores for sewerage and water supply.
  • The SEBI’s detailed guidelines in 2015 clarified municipal corporations’ regulatory status. So, potential investors looking for a safe investment avenue can buy municipal bonds.
  • Pune Municipal Corporation raised Rs. 200 crores in 2017 through municipal bonds at an interest rate of 7.59% p.a. to fund its 24x7 water supply project.

Importance Of Municipal Bonds Market

Property tax is the only source of revenue for municipalities. Thus, India requires a well-developed muni bond market for several reasons. These bonds will aid the ULB’s to bridge the funding gap to finish projects. This market’s growth is also significant to upgrade the Indian metropolitan cities. Besides, municipal bodies must be self-sufficient to carry out Central’s Smart Cities and Amrut projects successfully. 

Hence, investors must subscribe to municipal bonds for strengthening the Indian economy. To make the process simpler, KredX is facilitating investment in municipal bonds online. Investors can buy such investment instruments in a few simple steps to diversify their portfolio and optimise their risk-reward quotient. 

Advantages Of Municipal Bonds

  1. Tax Benefits

When investors buy municipal bonds, the return is exempted from taxation if they comply with the SEBI guidelines. 

  1. Transparency

Trustworthy agencies like CRISIL rate municipal bonds, which offer investors transparency regarding the investment’s credibility.

  • Low Risk

Muni bonds are safer investment avenues than stocks since government bodies issue them. Hence, investors can dilute the risk in their investment portfolio by purchasing municipal bonds online

Nonetheless, any individual or entity must assess factors like their risk-aptitude, investment horizon, and objectives before investing in muni bonds. They should also evaluate parameters like the municipal corporation’s credit ratings.