Lack of public information on financial performance, high debt and liabilities of urban local bodies (ULBs) has been hampering development of a vibrant municipal bond market in the country, says a report.

The municipal bond market remains relatively shallow, with a total of 30 issuances to date from several ULBs, amounting to only around ₹1,700 crore. Moreover, over 75 per cent of the municipal bonds to date were issued before 2006.

“Primary constraint in developing a municipal bond market is the lack of timely and publicly available information on fiscal performance, debt and contingent liabilities, as well as governance and management issues,” international rating agency Moody’s said in a report today. These shortcomings have also impeded the ability to assess the creditworthiness of ULBs, thereby limiting investor appetite for municipal bonds, it added.

The report further said restrictions on the maximum interest rates that ULBs can offer and unfavourable rules regarding income tax on interest earned by bondholders has constrain the market’s development.

Significant challenges

Urban local governments have a weak track record of timely project implementation and completion, which in turn weakens projected cash flows, lowering the perceived credibility of municipal bonds. “Improved disclosure and greater transparency are a pre-requisite for a fully functioning bond market, a divergence is also apparent in disclosure between issuers, with the states showing higher levels than the cities,” the report said.

In 2015, market regulator SEBI had introduced a new set of regulations designed to further develop and deepen the municipal bond market. The law primarily requires wider and more timely financial disclosure by ULBs.

“While the introduction of new regulations in 2015 imposing more stringent financial disclosure standards on urban local bodies to issue bonds, their slow implementation reflects the significant challenges that such entities face in meeting minimum disclosure standards,” the report noted.

In June 2017, Pune Municipality issued a ₹200 crore municipal bond to fund improvements to the city’s water supply. In February 2018, Hyderabad Municipal Corporation raised ₹200 crore through bonds to help fund a road project. “As an indication of the market’s potential and the level of investor interest, both issues were oversubscribed, the former six times and the latter two times,” the report added.

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