Municipalities Postpone Large Bond Issues Amid Uncertainty Over End-Use Guidelines

Mumbai Municipalities Await Clear Guidelines for ₹100 Crore Incentive Scheme

Mumbai: Urban local bodies planning to tap the debt market are waiting for formal guidelines from the Centre on how the proceeds of municipal bond issuances can be deployed. This comes three months after the government announced a ₹100 crore incentive for municipal bond issuances of more than ₹1,000 crore in the FY27 budget.

Four municipalities are in talks to issue bonds, including Ahmedabad Municipal Corporation, which plans to raise up to ₹1,000 crore and may hit the market within three months. Thane Municipal Corporation, Panvel Municipal Corporation, and Navi Mumbai Municipal Corporation are also in talks to debut in the bond market. Brihanmumbai Municipal Corporation, the country's biggest municipality, plans to appoint merchant bankers for a mega ₹10,000 crore issue, its first ever.

The municipalities of Patna, Nasik, Bengaluru, Vadodara, and Aurangabad are also said to be hitting the debt market this year, according to media reports. Urban local bodies issue bonds to raise capital to help build public infrastructure, including projects for road construction, building an auditorium, water storage, or water treatment purposes.

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The government had previously offered an incentive of ₹13 crore per ₹100 crore bond raised and up to ₹26 crore under the Atal Mission for Rejuvenation and Urban Transformation (Amrut) scheme. However, the incentive announced in the FY27 budget does not have a notified framework detailing eligible use of proceeds or operational conditions.

The lack of clarity on deployment of funds raised by municipal corporations under the latest incentive scheme becomes a challenge for investors, raising uncertainty on the productivity of the funds and the repayment ability.

"Generally, as part of offer documents, they (municipal bonds) tend to convey the purpose but most of the time, funds are utilized for some other purpose and also as investors, we are not able to track the end-usage of the funds," said Sandeep Pandey, fixed income chief investment officer at SBI Pension Funds.

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From a legal perspective, there is no correlation between the issuance and the incentive scheme as municipalities can issue bonds as a form of debt funding even in the absence of any incentive scheme. However, the incentive scheme can make the bond issuance cheaper for the issuer and allows for additional allocation of funds.

The Centre has not responded to an email seeking comment on the matter, leaving municipalities and investors in limbo.