SINGAPORE, March 30 (IFR) - India has approved new rules for its municipal-bond market that pledge to give local governments easier access to funding as they seek to meet urban infrastructure growth targets.
Prime Minister Narendra Modi's pro-reform government plans to modernise India's mid-sized municipalities and create 100 so-called "smart cities", a move that calls for annual spending of Rs350bn (US$5.63bn) over the next two decades.
Big and cash-rich entities, such as the Brihanmumbai Municipal Corp, which manages Mumbai, are understood to be considering issuing muni bonds to help finance the anticipated increase in expenditure.
The Securities and Exchange Board of India, the securities regulator, approved the new rules last weekend. The rules only need to be published in India's official gazette to become law.
Above all, the regulations set clear disclosure standards for the municipal bodies, something that market players said would provide more confidence to investors.
Still, a deal under the new rules is at least a few months away, according to Devendra Pant, chief economist and senior director, India Ratings and Research, the local arm of Fitch.
"We don't anticipate a muni-bond deal immediately," Pant said. "The municipalities will have to put in place a lot of disclosures and accounting practices under the new rules before they tap the market."
The regulator will allow municipal bodies to issue in the public markets only under the revenue bond format, where a specific cash flow is assigned to the bonds.
For private placements, issuers can offer revenue bonds or general obligation bonds, which do not need to be tied to specific cash flows.
New regulations also cap the amount of any project that can be funded through municipal bonds, ensuring that issuers have some skin in the game. Municipalities, however, are allowed to fund their 20% minimum contribution to the project cost from internal resources or government grants.
Meanwhile, all public issues are required to have an investment-grade rating. Sebi has also set the minimum tenor for all muni bonds at three years.
"Municipal bodies will fund infrastructure that will have a long gestation period. Hence, the muni bonds are anyway likely to be issued for over three years," said New Delhi-based Pant.
Muni-bond issuers, if they are allowed to price a note, also have to declare whether they have defaulted on a security or loans in the previous one year.
"It is very important to note the definition of a default by Sebi," said Pant. The regulator considered "any non-payment of money at a pre-agreed date" as a default, he said.
This provision should prevent municipal bodies with weak corporate governance from accessing the market. A requirement that eligible municipal issuers cannot have a negative net worth in any of the three preceding financial years should have a similar effect. (Reporting By Manju Dalal, editing by Timothy Sifert, Steve Garton and Dharsan Singh)
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