SEBI, in its Board Meeting dated 22 March, 2015 approved the SEBI (Issue and Listing of Debt Securities by Municipality) Regulations, 2015, thereby providing a regulatory structure for public issuance of debt securities, and listing of debt securities issued through public issue or privately placed bonds by Municipalities. A Municipality is a self-government institution constituted under Article 243Q of the Constitution (Seventy-fourth Amendment) Act, 1992 and includes a Municipal Corporation, a Municipal Council, and a Nagar Panchayat. Municipalities can issue ‘general obligation bonds’ wherein the Municipality would pay the amount through its taxation power, and ‘revenue bonds’ which are serviced by project revenues. General bonds shall be issued only on a private placement basis, while revenue bonds can be issued through public offering or private placement. Safeguards have been prescribed to protect investors, such as the Municipality should not have a negative net worth in any of the last three preceding financial yearsand should have an investment grade rating. Further the Municipality should not have defaulted in repayment of debt securities or loans obtained from Banks / Financial Institutions, during the previous 365 days.

Further, the funds raised can be used only for the projects that have been specified in the offer document. They shall have a separate escrow account for servicing them with the earmarked revenue from the projects. Moreover, Banks / Financial Institutions will be appointed as monetary agencies which will make periodic reports.The appointment of such monitoring agencies will help keep the public and investors updated on a timely basis as to how the bonds are being serviced and will help to ensure compliance. The proposed regulations provide a clear mechanism for undertaking the issuance of municipal bonds and may play an important role in improving the regulatory conditions that presently hinder such issuances. These proposed regulations for municipal bodies to raise money from the market will attract large institutional investors and pave way for municipal bonds for infrastructure projects in urban areas. However, unlike government securities, these are not risk free bonds and therefore may not be suited for retail or unsophisticated participants who may assume them to be risk free.