SEBI on Wednesday mandated wider disclosure and compliance norms for issuers of listed municipal bonds. Broadly, SEBI said listed entities should prepare and submit half-yearly unaudited financial results, widened the definition of issuers and issued a structured payment mechanism through escrow accounts.

Bond issuers will have to follow SEBI guidelines on continuous disclosure and compliance. Every credit rating of such bond issuers will be reviewed at least once a year by a registered credit rating agency. It further said that in the event of the credit rating being downgraded by two or more notches below the rating assigned at the time of issue, the listed entities will have to disclose the reasons for the downgrade and the steps, if any, it intends to take to recover the rating. Any change in credit rating should be promptly disseminated to the stock exchanges where such securities are listed, SEBI said. Along with half-yearly financial results, a report containing the status of implementation of project (s), reasons for their delay if any, and the utilisation of issue proceeds for execution of the projects must be submitted.

Municipal bonds are debt instruments issued by a state, municipality or county to finance its capital expenditures such as building roads or public schools.

“We opine that in the long run, such norms would help in deepening the municipal bond market and, hence, the corporate bond market in India. These norms are multifaceted and are likely to bode well for all municipal entities seeking to raise resources to foster development. As this segment evolves, the government can introduce schemes where funding at the federal level is made conditional on such borrowing supplementing the efforts,” credit rating agency CARE said in a report.

According to CARE, with these norms, municipalities which have already raised or are planning to raise funds from the markets will be better prepared compared to those which have not.

“However, the stringent norms laid down will challenge them to be more transparent in their accounting process and help reduce the opacity in the financial information of the entities. It will bring in transparency and discipline in the financial result reporting by the entities. Tax revenues are to be used for servicing of debt. It should ideally be the first charge so that there is an assurance that funds are always available for servicing debt,” CARE report said.

There is a view that the creation of an escrow mechanism will help improve the credit worthiness of the municipal entities and will build confidence among investors to invest in the municipal bonds.

Bodies that can issue municipal bonds in line with SEBI include municipalities, statutory bodies, a board or corporation, government authority, trusts, agencies and special purpose vehicles notified by either the central or the state government. It can also include any structural set-up under a pooled finance and development fund scheme of the government.

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