A municipality is a self-government institution constituted under Article 243Q of the Constitution of India and includes a municipal corporation, a municipal council and a nagar panchayat. To facilitate funding mechanisms for municipalities, SEBI notified the SEBI (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015, on July 15, 2015. The regulations permit municipalities to issue: (i) revenue bonds, which are serviced by revenues from one or more projects, and (ii) general obligation bonds, which are not backed by revenues from any particular project, but are serviced through tax proceeds of the municipality. However, municipalities which have had a negative net-worth or have previously defaulted in their repayment obligations are not eligible to raise funds under these regulations.

Only revenue bonds may be issued to the public. These bonds have to be compulsorily listed on a stock exchange. Further, municipalities have to obtain a minimum credit rating of A+ from a recognized credit rating agency. However, both revenue bonds and general obligation bonds may be issued on a private placement basis. These may be listed provided certain conditions are met such as, minimum subscription amount per investor must not be less than Rs. 25,000.

The regulations provide a clear mechanism for issuing municipal bonds and will help develop India’s municipal bond market. However, unlike government securities, these are not risk free and may not be suited for retail or unsophisticated participants. Another point of concern pertains to the applicability of the SCRA, 1956 which governs all dealing in securities and empowers SEBI and stock exchanges in this regard. Section 28(1)(a) states that the SCRA shall not apply to the government or any local authorities, and hence, to municipal bonds. This provision may be amended to better enable SEBI to govern issuance of debt securities by municipalities