KOCHI: With Kochi corporation initiating talks with regulators and stakeholders to raise funds through municipal bonds, a new era of development financing is on the horizon for Kerala. If successful, Kochi will be the first among four corporations in the state to implement the municipal bond system. Thiruvananthapuram, Kozhikode, and Kannur corporations are also toying with the idea.
The move takes forward a state budget proposal that recommended allowing urban local bodies to raise Rs 1,000 crore through municipal bonds for projects like IT parks, commercial centres, roads, waste management systems, and water supply schemes.
What are municipal bonds?
Municipal bonds are debt instruments issued by local self-government institutions to fund infrastructure projects and daily operations. These bonds typically mature within 1 to 30 years and offer a fixed interest rate. Investors receive periodic interest payments, with the principal repaid on maturity.
India’s first municipal bond was issued by the Bengaluru Municipal Corporation in 1997, and cities like Ahmedabad, Indore, Lucknow, and Vadodara have since followed suit.
Types of municipal bonds
General Obligation Bonds: Backed by the issuer’s creditworthiness and ability to levy taxes, not tied to the income from the project.
Revenue Bonds: Linked to specific projects expected to generate revenue.
Kochi corporation plans to issue revenue bonds, meaning repayments will rely on the revenue generated by the funded projects. Experts caution that while successful projects can drive growth, mismanagement could lead to defaults and debt traps.
“The funds need to be invested in viable projects which will be profitable. Mismanagement can lead to defaults and debt traps, whereas effective utilisation can drive sustainable growth and ensure financial stability for local bodies.
Proper oversight and transparent governance will be essential in making municipal bonds a successful financial instrument in India,” said Rintu Anthony, an assistant professor with the Rajagiri Business School.
Issuance criteria
The Securities and Exchange Board of India (SEBI) mandates specific criteria for municipal bond issuance:
No defaults on debt repayment in the past 365 days.
No promoters, directors, or the issuer classified as “wilful defaulters” or “fugitive economic offenders”.
In-principle approval from a recognised stock exchange.
A strong credit rating is critical. Kochi corporation, currently without an established credit rating, plans to appoint consulting firms to support financial audits and secure ratings. Credit enhancement techniques may also be explored to improve investor confidence.
“The credit rating should be accurate and the accounts need to be transparent, which requires financial and professional accounting support. The corporation is planning to appoint consulting firms for these processes,” said Mayor M Anilkumar.
Current status in Kochi
Mayor Anilkumar recently met Ashwin Bhatia, a whole-time member of SEBI, to discuss the procedures and regulations for the launch of municipal bonds.
“Bhatia said that Kochi corporation will be given all possible support to launch municipal bonds. SEBI representatives have been informed that the procedures will be initiated as soon as possible. We may not issue the bonds during the tenure of this council. However, if we can complete the procedures by the end of this council, we will be able to issue the bonds in the next council,” the mayor said.
SEBI is also planning a two-day workshop for Kerala’s corporations, including Kochi, on the launch and management of municipal bonds.
Why municipal bonds?
Traditionally, local bodies in Kerala have relied on revenue generated through taxes and government loans. With the Kerala state government facing severe financial constraints, municipal bonds offer a sustainable financing alternative.
“The Kerala Urban Commission had earlier submitted a proposal to the state government to allow local bodies to issue municipal bonds,” added Anilkumar, who is also the vice-chairman of the Kerala Urban Commission.
“Traditionally, local bodies rely on revenue generated through taxes, tolls, and other sources. In cases of fund shortages, they often turn to loans from the state and central governments. However, given the current financial distress faced by the state government, securing such loans has become increasingly difficult,” emphasised Rintu Anthony, adding that municipal bonds provide an efficient alternative for financing and ensuring self-sustainability.
Globally, municipal bonds have been successfully used in countries like the United States and Canada, but India’s bond market remains relatively illiquid, posing challenges for secondary trading.