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Better Disclosures Key To Developing Municipal Bond Market In India: Moody’s

Yet another attempt to kick-start India’s municipal bond market has sputtered. After Pune raised funds via municipal bonds in June 2017, the market has seen little action. Since then, Hyderabad is the only other municipal corporation to tap the markets to raise Rs 200 crore in February 2018.

Rating agency Moody’s Investors Service says this is a consequence of limited information available on the finances of these municipalities.

Lack of publicly available information on indicators including fiscal performance, debt and contingent liabilities is preventing proper credit assessment of these bodies, Moody’s said in a report dated May 9.  The rating agency added that weak governance continues to be a concern as well. Together these factors are preventing a pick-up in issuances.

According to data provided by Moody’s, India has seen only 30 municipal bond issues to date from 14 urban local bodies. Only Rs 1500 crore has been raised through such issues.

In 2015, the Securities and Exchange Board of India (Sebi) eased rules for the issue of municipal bonds but also sought more timely disclosure of financial information. Typically, municipal corporations tend to release financial information with a significant lag, which leads to uncertainty among potential investors.

With the exception of the larger capital cities that are interested in accessing capital markets, most municipal corporations do not make their accounts public, said Moody’s while adding that Indian urban local bodies continue to lag behind their global peers in terms of disclosure standards.

Apart from the lack of adequate information, some regulator roadblocks also persist, said Moody’s. This includes restrictions on the maximum interest rates that municipal corporations can offer, and unfavourable rules regarding income tax on interest earned by bondholders.

The rating agency added that municipal bodies also typically have a weak track record of timely project implementation and completion, which in turn weakens projected cash flows. This lowers the perceived credibility of municipal bonds, said Moody’s.

Should some of these issues get resolved, municipal bonds can offer a useful financing route for infrastructure development, Moody’s said.

A deepening of the municipal bond market in India would also improve the ability of local governments to access a reliable flow of capital and enhance accountability for their borrowing activities. And a more transparent, direct borrowing model among urban local bodies would in turn improve the central government’s oversight of local government debt.  
Moody’s Investors Service