Municipal bonds

Topic: Urban Local Government: Municipalities and Cities · NCERT: Beyond NCERT

Meaning

A municipal bond is a debt paper that an urban local body (ULB, a city or town government) sells to investors to borrow money for infrastructure, such as sewage plants or water supply. The city repays the loan with interest over a fixed period. It matters because Indian cities have weak finances of their own, and bonds let them raise money from the market instead of only waiting for grants from the state and Union governments.

Explanation

How a municipal bond works

• The city borrows; investors lend.
• The ULB sells bonds to investors and gets money now.

• It pays interest on a fixed schedule and returns the principal (the amount borrowed) at the end of the period.

• The money goes to infrastructure. The bond pays for a specific project. The project should ideally earn revenue (for example, water charges) that helps repay the loan.

• It is regulated by SEBI. The Securities and Exchange Board of India (SEBI, the market regulator) made the SEBI (Issue and Listing of Municipal Debt Securities) Regulations, 2015 (ILMDS) [3].
• Listing on a stock exchange (so investors can buy and sell the bonds):
• Bonds sold to the public must be listed within 6 working days after the issue closes [4].
• Privately placed bonds (sold to a few chosen investors, not the public) must be listed within 4 working days [4].

Types and forms

• State-guaranteed vs. unguaranteed bonds.
• In a state-guaranteed bond, the state government promises to repay if the city cannot. Bangalore (1997) used this.

• An unguaranteed bond relies only on the city's own strength. Ahmedabad (1998) was the first.

• Green municipal bonds.

• A green bond is a bond whose money can be spent only on environment-friendly projects.

• SEBI's circular of 24 November 2022 sets disclosure rules (what the city must tell investors) for municipal bonds that count as green debt securities [6].

• Pooled finance.

• Several small ULBs borrow together through one bond.
• This lets small towns reach the market, because alone they are too small or too weak to borrow.

What a city needs before it can borrow

• A credit rating. An agency grades the city, which tells investors how safe the loan is.
• Accrual accounting. This records income and costs when they arise, not only when cash moves. Investors need it to see the city's true financial position.
• Revenue-earning projects. The project must be able to pay back the loan.
• Government support:
• MoHUA (Ministry of Housing and Urban Affairs) has given cities an incentive for bond issues under AMRUT (Atal Mission for Rejuvenation and Urban Transformation, 2015).
• The Urban Challenge Fund (Budget 2025-26) backs bankable city projects, meaning projects that can attract loans and private money.

Limits

• Only a few large cities have issued bonds since 1997. The entry conditions (rating, accounts, bankable projects) are hard to meet.
• Cities' own revenue is weak, so many cannot show they can repay. For most corporations, own revenue does not even cover revenue expenditure (day-to-day running costs) [1].

In the Constitution and practice

• No direct constitutional provision. Part IXA (added by the 74th Amendment, 1992) does not mention municipal borrowing. Like tax powers, a city's financial powers come through state law.
• Art. 243X: the state may (not must) by law let municipalities levy taxes, give them a share of state taxes, give them grants-in-aid (money given to support a body's work) from the Consolidated Fund of the State, and set up funds. A city's ability to repay a bond depends on these state-given powers.
• Art. 243Y: the State Finance Commission (SFC), set up under Art. 243I every five years by the Governor, also reviews municipal finances. A healthy SFC process makes cities more creditworthy.
• Law that governs issues: SEBI ILMDS Regulations, 2015 [3].
• Key instances:

Year	Event
1997	Bangalore: first municipal bond, with a state guarantee
1998	Ahmedabad: first bond without a state guarantee
2015	SEBI ILMDS Regulations framed [3]
2017	Pune issues bonds under the SEBI rules
2021	Ghaziabad: India's first certified green municipal bond, ₹150 crore, for a tertiary sewage treatment plant under Swachh Bharat Mission-Urban [5]
2022	SEBI circular (24 November) on green municipal debt disclosures [6]
2023	Indore: public issue of green municipal bonds; offer documents filed with SEBI (December 2022 to February 2023) [3]

• Why the need is real: the RBI Report on Municipal Finances (13 November 2024) covered 232 municipal corporations [1]. It found heavy dependence on transfers and grants [1]. Total municipal revenue is only about 0.6% of GDP, and the top 10 corporations take over 58% of all municipal revenue receipts.

Don't confuse with

• Finance Commission grants: these are transfers from above that the city does not repay. A municipal bond is a loan from the market that must be repaid with interest. The 16th FC gives ULBs ₹3,56,257 crore for 2026-31 [2].
• Green municipal bond vs. ordinary municipal bond: both are city debt. A green bond's money can be used only for environment-friendly projects, with extra disclosure under SEBI's 24 November 2022 circular [6].
• Pooled finance: several small ULBs borrow together through one bond. A normal municipal bond is issued by one city alone.
• Own-source revenue (property tax, user charges): money the city raises itself and keeps. A bond brings in money now but creates a debt. Own revenue is in fact what makes repaying a bond possible.

Prelims Hooks

• First municipal bond: Bangalore, 1997, with a state guarantee. First without a state guarantee: Ahmedabad, 1998.
• SEBI (Issue and Listing of Municipal Debt Securities) Regulations were framed in 2015 [3].
• First certified green municipal bond: Ghaziabad, ₹150 crore, for a tertiary sewage treatment plant under SBM-Urban [5]. Trap: not Indore. Indore made a public issue of green bonds in 2023 [3].
• Listing deadlines: public issue within 6 working days of closing; private placement within 4 working days [4].
• MoHUA gives cities an incentive for bond issues under AMRUT (2015).
• Trap: the Constitution gives municipalities no tax or borrowing power of their own. Under Art. 243X, all such powers depend on state law ("may", not "shall").

Mains Points

• Bonds are useful but reach only a few cities.
• Since 1997, only a few large cities have issued bonds, because of the conditions: credit ratings, accrual accounts and bankable projects.

• Weaker ULBs can get there through pooled finance, green bonds [5][6], AMRUT incentives and the Urban Challenge Fund.

• Creditworthiness starts with own revenue.

• The RBI found that own revenue does not cover running costs in most corporations [1]. This weakens their functional and financial autonomy [1].

• Reforming property tax through GIS mapping, digital payments, dynamic valuation and regular rate revision [1] would make cities able to repay loans, and so able to borrow.

• Governance must come first. States must hold regular SFCs (Art. 243Y) and city elections, and cities must publish audited accounts. The 16th FC also makes published accounts and a timely SFC conditions for grants [2]. Investors need the same openness before they will lend to a city.

Related concepts

• Property tax

Read more

• Municipal finance: property tax, transfers and municipal bonds