SEBI Planning To Ease Municipal Bond Norms For Smart Cities, Others

Capital markets regulator Securities and Exchange Board of India is planning to ease its norms for municipal bonds for smart cities and other registered entities working in areas of city planning and urban development.

SEBI had issued its Issue and Listing of Debt Securities by Municipalities Regulations nearly five years ago. Since then, seven municipalities have raised nearly Rs 1,400 crore by issuing their debt securities, which are commonly known as ‘muni bonds’.

The markets regulator is now proposing to allow this route for a larger number of entities, including special purpose vehicles set up under the central government’s ‘Smart Cities Mission’.

The proposed norms would be presented before the SEBI board for its approval at a meeting scheduled later in August, the officals said.

After representations from the industry and market participants for amending its ILDM Regulations to expand this market segment, SEBI had initiated a public consultation process in June proposing certain amendments to these norms.

After taking into account the feedback, SEBI has decided to amend the regulations to provide a greater flexibility in fundraising and strengthen investor protection.

Under the current regulations, this fundraising route is only available to the issuers defined as a municipality under the relevant articles of the Constitution of India or the corporate municipal entities set up as a subsidiary of a municipality for the purpose of raising funds for a specific municipality or a group of those.

SEBI is now proposing to allow issuance of ‘muni bonds’ also by other entities, such as entities or bodies like urban development authorities and city planning agencies that perform functions similar to a municipality such as planning and execution of urban development projects.

Since such entities are not defined as a municipality under the Constitution, they have not been able to raise funds from the market through municipal bonds so far.

Besides, SEBI also plans to allow this route for other structures where a group of municipalities pool their resources together to jointly raise funds through issuance of bonds. These structures are generally known as Pooled Finance Development Funds.

In addition, the regulations would also be amended to allow fundraising through muni bonds by special purpose vehicles set up for implementing the smart city projects.

Under the government's Smart Cities initiative, SPVs have been set up at the city-level in form of a limited company under the Companies Act for implementing the projects. These companies are promoted by the state government or union territory and the urban local body of the area.

These SPVs undertake functions like ensuring adequate water supply, sanitation, sustainable and inclusive development of cities etc, thus performing tasks similar to that of municipalities.

SEBI is also proposing changes relating to accounting, auditing and disclosure of financial statements to take into account the expanded list of eligible entities and the requirements of such entities to get their accounts audited by the Comptroller and Auditor General of India and approved by various authorities.

Besides, SEBI plans to relax norms relating to creation of escrow accounts and do away with requirements for appointing a monitoring agency and establishing a separate project implementation cell.

Also, the existing regulations allow issuance of only revenue bonds with a minimum tenure of three years and maximum five years, if it is a public issue. This clause has been proposed to be dropped.

In case of private placement, the minimum subscription amount per investor is currently Rs 25 lakh, which is being proposed to be reduced to Rs 10 lakh to align it with the regulations for corporate bonds.

In another proposal, a private placement offer can be made to up to 200 persons in one financial year, but this limit would not apply to an invitation to qualified institutional investor.

Besides, the filing of draft offer and the final offer document with SEBI have been proposed for private placements as well, in addition to public issues.