How Vadodara corporation plans to raise money via municipal bonds

Municipal Bonds

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Municipal bonds

In News:

  • The Vadodara Municipal Corporation (VMC) is expected to launch municipal bonds in January, 2021.
  • VMC will become the third Urban Local Body (ULB) in Gujarat to use this method to raise money to fund development work sanctioned under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT).
  • Ahmedabad was the first city in south Asia to launch a municipal bond of Rs 100 crore in 1998. Surat Municipal Corporation was the second city in Gujarat to announce bonds in 2018, to fund a sewage treatment project worth Rs 450 crore.
  • Other ULBs that have issued municipal bonds are Lucknow, Pune and Indore.

About: Municipal bonds

  • A municipal bond is a kind of debt instrument where investors give loans to local governments (ULBs).
  • It helps to raise funds from the stock market. Bidding takes place on an electronic trading platform after the bond is listed on the exchange.
  • Municipal bonds are issued by civic bodies for specific projects and usually have a 10-year tenure. The ULB pays the annual interest on the bonds to the investor at the decided rate.
  • The face value (cost) of each instrument slot (piece) of a municipal bond is a minimum of Rs 10 lakh.
  • Bonds are issued to institutional and high net worth individuals. It can be subscribed to (purchased) by a single investor or multiple investors.

Municipal bonds under AMRUT Scheme:

  • The bonds are an integral part of the AMRUT scheme and the urban local bodies are encouraged to use the bond market for funding.
  • Under AMRUT, ULBs are paid Rs 13 crore for every Rs 100 crore raised via bonds, subject to a maximum limit of Rs 26 crore for each ULB.
  • This incentive helps the ULBs to repay the lender, including the interest component on the bond.

Conditions for approval of bonds:

  • The bonds can only be issued after an in-depth analysis of the debt paying capacity of the ULB, which is based on various parameters including the balance sheet for the past five years.
  • Credit rating firms assess the financial health of the ULBs and give credit ratings. This indicates that the ULB has the capacity to repay the annual amount owed to the lender.
  • AA++ is considered to be the best rating — which was given to Ahmedabad and Surat in Gujarat. The next best rating is the AA rating.
  • It is compulsory to open an escrow account, in which the Central government transfers all the annual incentives (Rs 13 crore per Rs 100 crore bond issued) so that the payment to be made to the investor is assured.
    • An escrow account is a third party account where funds are kept before they are transferred to the actual beneficiary.
    • It provides security against scams and frauds especially with high asset value and dispute-prone sectors like real estate.
  • ULBs also share an information memorandum, that carries details of the ULB and its financial performance.

Benefits of municipal bonds:

  • The difference between a bank loan and a municipal bond is that an institution can issue a bond only if it has favourable credit ratings.
  • The bond also increases the number of investors available to the civic body, as compared to a loan from a single bank.
  • Bonds lead to transfer of funds from the Centre, increase in transparency and efficient revenue generation.

About: AMRUT

  • Atal Mission for Rejuvenation and Urban Transformation (AMRUT) was launched in 2015 for urban transformation by implementing urban revival projects.
  • Its purpose is to:
    • Ensure that every household has access to a tap with the assured supply of water and a sewerage connection.
    • Increase the amenity value of cities by developing greenery and well maintained open spaces (e.g. parks) and
    • Reduce pollution by switching to public transport or constructing facilities for non-motorized transport (e.g. walking and cycling).
Focus areas:
  • Water Supply
  • Sewerage management
  • Storm water drainage to reduce flooding
  • Non-motorized urban transport
  • Green space/parks
  • Five hundred cities have been selected under AMRUT.
  • The category of cities that have been selected under AMRUT are:
    • All cities and towns with a population of over one lakh with notified Municipalities as per Census 2011, including Cantonment Boards (Civilian areas).
    • All capital cities/towns of states/ UTs, not covered above.
    • All cities/ towns  classified  as  heritage  cities by  Ministry of Housing and Urban Affairs  under  the  HRIDAY Scheme.
    • Thirteen cities and towns on the main stem of the rivers with a population above 75,000 and less than 1 lakh­- A main stem (or trunk) of a river is the primary segment of a river into which its tributaries join.
    • Ten cities from hill states, islands and tourist destinations (not more than one from each State).

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