A feeder road giving access to India’s first superhighway, The expressway between Mumbai and Pune. (Photographer:Santosh Verma/Bloomberg News)

Pune Municipal Corporation Bond Issue Oversubscribed

The Pune Municipal Corporation (PMC) raised Rs 200 crore via a bond issue, which many saw as a test case for the revival of municipal bonds in India.

The bond issue, the book building process for which was concluded on the BSE on Monday, got subscriptions worth nearly Rs 1,200 crore, Kunal Kumar, commissioner of the municipal corporation told BloombergQuint. The coupon rate for the issue was set at 7.59 percent for the 10-year paper. The bond issue was rated AA+ by rating agencies, which allowed PMC to raise money at a spread of less than 100 basis points over the comparable government securities.

SBI Capital Markets was the banker to the issue.

The investors were primarily big banks, insurance companies, mutual funds and pension funds. We will be raising about Rs 2,300 crore over a five-year period, so this was the first tranche. The second tranche could come up close to December or by March of next year.
Kunal Kumar, Commissioner, Pune Municipal Corporation

Proceeds from the issue will be used for a water metering project undertaken by the municipal corporation. The bond issue has been structured in a way to make it more attractive to investors, whereby steady revenue streams are being parked in accounts designated for the interest payments.

PMC has a structured payment mechanism in place for the timely servicing of both the interest and principal, said India Ratings in a note issued on Friday.

The mechanism includes an escrow account where property tax (includes water tax) collections will be parked, a debt service reserve account (DSRA), an interest payment account (IPA) and a sinking fund account (SFA), which will be managed and monitored by the debenture trustees.
India Ratings

Explaining the manner in which dues will be repaid, Kumar said that in addition to property tax money being put into an escrow account, the corporation has set up a ‘water account’, where user charges will be parked.

“In the beginning, the property tax money is higher and the user charge money is lower, which will increase over time. Even this has been decided by the PMC. We have a 30-year tariff policy backing this entire project,” said Kumar while adding that over a period of time the implicit subsidies from property taxes would reduce.

The success of the Pune municipal bond issue may push other local bodies looking to raise funds via the markets. The Ahmedabad municipal corporation, too, have been in advanced stages of planning a bond issue, BloombergQuint reported on May 18.

According to rating agency Crisil, a total of 94 municipal corporations had been rated till May. Of these 94 rated municipal corporations, 10 are rated AA or above. About 14 are rated in the A category, while the rest are rated BBB or below.

Kumar said that tapping the market forces financial discipline on municipal corporations, which is beneficial in the long run.

Unless we go to the market, you don’t start thinking backwards and improving your financial strengths. That is a challenge to undertake. So the first time you decide to go to market, you have to change your style of functioning in the corporation.
Kunal Kumar, Commissioner, Pune Municipal Corporation