Municipal Bond in India

A municipal bond is a bond issued by a local government, or their agencies to finance the local fund requirements. In the light of the ambitious ‘Smart-Cities Mission’, where the Union Government is devolving funds for the aspirant cities, we can tap the private sector through self-financing mechanisms under the umbrella of Municipal Bonds.

Municipal Bond | History 

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In India, the Bangalore Municipal Corporation was the first municipal corporation to issue a municipal bond of Rs.125 crores with a State guarantee in 1997. However, the access to capital market commenced in January 1998, when the Ahmedabad Municipal Corporation (AMC) issued the first municipal bonds in the country without State government guarantee for financing infrastructure projects in the city. AMC raised Rs.100 crores through its public issue.

Municipal bond | The Need

Indian urban areas can no longer rely solely on public capital flows. Increased private sector engagement via public private partnerships, should be a paramount goal. This requires a more active and coordinated leadership in project management, technical guidance and risk mitigation across different levels of the government.

Municipal Bond | Current status of the market

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Currently, India’s municipal bond market is largely untapped, which is highlighted by the fact that so far only a total of Rs 1,353 crore has been raised through the issuance of municipal bonds. Because of severe constraints in both supply and demand, only a limited number of ULBs have the experience of raising funds through municipal bonds.

Municipal bonds | Significance

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  • Cities in India were estimated to require over Rs 40 lakh crore during 2011-2031 for capital infrastructure, whereas the aggregate annual revenues of municipalities are likely to be less than Rs 1.2 lakh crore (of which Mumbai alone accounts for Rs 30,000 crore).
  • There is massive capital investment need in municipal infrastructure and funds from programmes such as Jawaharlal Nehru National Urban Renewal Mission (JNNURM) can only partly meet the requirement.
  • Therefore, to meet their financing needs, the municipalities have to seek recourse to other means including issuance of municipal bonds. Municipal bonds can quite obviously play a pivotal, singular role in funding this gap.
  • Municipal bonds can also simultaneously deepen the long-term infrastructure financing market in India as well as redirect retail investments into liquid securities (by city residents) away from real estate and gold.
  • By creating opportunities for citizens (as retail investors) to invest in tangible public causes in their cities, these bonds can also build strong bonds of trust between municipalities and citizens; bonds of trust that can galvanise citizen participation in cities at historic scale and to mutual financial benefit.

Tapping the municipal bond market in India

  • A long-term roadmap to financial self-sufficiency of municipalities needs to be drawn up covering powers over revenues and borrowings, efficiency of revenue administration (both assessments and collections) and systematic measurement, reporting and review of revenue performance. Such a roadmap will require collaborative effort between the Centre and the states.
  • There is a crying need to professionalise financial management in municipalities. The scale of funding required for public expenditure in our cities cannot be met with the human resources (both in terms of numbers and skills and competencies) that they currently possess. The revenue and finance departments of municipalities need to be urgently professionalised and made market-oriented. The Institute of Chartered Accountants of India can play a significant role here.
  • There needs to be a deliberate creation and positioning of the municipal bond brand to make it popular among citizens, and a slew of enabling measures to make them attractive.
  • Enabling measures such as making all municipal bond issuances tax-free, making investments in muni bonds by banks part of their priority sector lending and actively encouraging pension funds and insurance companies to participate in municipal bond issuances need to be put into place by respective regulators. These are presently crucial missing links.
  • Municipalities need to produce audited balance sheets each financial year and get themselves credit-rated so that they are able to access the municipal bond market in a credible and sustained manner.
  • SEBI and RBI needs to work in tandem to realise the investor confidence and probably allow the municipal bonds to trade in secondary markets for maximisation of gains of all stakeholders.


The Union finance ministry alone is capable of making municipal bonds work, because this requires serious domain expertise and leverage with states and regulatory institutions. SEBI, the RBI, the CBDT and the ICAI are all institutions that have roles to play and all of them fall under the broad umbrella of the Union Finance Ministry. Though local self-government is a state subject, the Centre has a crucial role to play in addressing the infrastructure deficit in our cities, for which municipal bonds will be highly significant. The federalist Indian government can learn from the US and its highly advanced municipal bond market. India’s ability to replicate the US general obligation bond model will largely depend on the ensuing capacity of local governments to pay their obligations with a good track record. This will, in turn, necessitate a robust and growing tax base and an expansion of their own revenues.


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