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Why in the News?
The US Embassy and Treasury selected the municipal bond issued by the Vadodara Municipal Corporation for a case study on the successful listing at the Bombay Stock Exchange (BSE).
Key Points:
Background:
VMC listed a five-year Rs 100 crore bond at the Bombay Stock Exchange (BSE) in March 2022.
The municipal bond will be used for 14 projects under AMRUT scheme and received 36 bids on the BSE BOND platform for Rs 1,007 crore—10 times the issue size.
It has been the most successful municipal bond in the country with the highest subscription and a low yield price
What are Municipal Bonds?
It is a kind of debt instrument where investors offer loans to local governments.
Purpose: They are issued by civic bodies for specific projects and usually have a 10-year tenure. The ULB pays the annual interest on the bonds to the investor at the decided rate.
Significance: The bond helps raise funds from the stock market. The bond also increases the number of investors available to the civic body, as compared to a loan from a single bank.
Benefits:
Transparency: They are issued to the public and are rated by renowned agencies such as CRISIL, which allows investors transparency regarding the credibility of the investment option.
Tax benefits: They are exempted from taxation if the investor conforms to certain stipulated rules.
Low risk: Municipal bonds are issued by municipal authorities, implying involvement of minimal risk with these securities.
Limitation:
Long maturity period: They come with a lock-in period of three years, imposing a burden on the liquidity requirements of investors.
Low-interest rates: These rates are considerably low when compared to returns from market-linked financial instruments such as equity shares.
History of Municipal Bonds Issuance in India: Municipal bonds were first issued in India in 1997, five years after the 74th Constitutional Amendment decentralized urban local bodies.
