The country's first municipal bond offering for retail investors, issued by the Indore Municipal Corporation, will be available for subscription through February 14.
Municipal bonds have entered the market earlier, but they were only available to institutional investors. Indore is the targeted to first to individual/retail investors.
The first municipal bonds in India have been issued by the Indore Municipal Corporation (IMC), which hopes to earn up to Rs 244 crore for a solar power project. It would be the first time a civic organisation in India specifically targeted individual investment.
The base issue size is Rs 122 crore, and there is an option to keep up to Rs 122 crore of the oversubscription, bringing the total to Rs 244 crore.
Subscriptions for the issue will be accepted from February 10 through 14. It is also a green bond because the money raised will be utilised to build a 60 MW captive solar photovoltaic power plant in the Madhya Pradesh villages of Samraj and Ashukhedi.
What you should know before buying these municipal bonds is listed below (MC).
Regarding Muni Bandhan
In order to raise funds for public infrastructure projects including roads, water supply, and sewage, municipalities are now permitted to issue bonds.
Municipal bonds entered the market earlier as well, but exclusively for institutional investors, whereas IMC is the first to target individual/retail investors. Ahmedabad MC followed Bengaluru MC as the first municipal bond issuer in India in 1998.
After 2005, when the Jawaharlal Nehru National Urban Renewal Mission was established, the issuance of municipal bonds abruptly came to an end.
Guidelines for the issuing and listing of municipal bonds were released by the capital markets regulator Securities and Exchange Board of India (SEBI) in 2015 in an effort to revive municipal bonds.
Notably, Ghaziabad MC issued green bonds in 2021, making it the first municipal corporation in India to do so. In 2018, Indore MC became the first municipal corporation to be listed on the National Stock Exchange of India (NSE).
The coupon rates offered by MCs are often higher than government bonds of comparable term, despite the fact that they are thought to be sufficiently sound and have low credit risk, according to the Reserve Bank of India's (RBI) study on municipal financing, which was published in November. goes.
How are they various?
Municipal bonds are bonds issued by a city, municipality, or state to raise money. Government securities (G-secs) and state development loans (SDLs) are issued by the central and state governments, respectively, to support fiscal deficits. Public Projects, indeed.
G-Secs and SDLs are sovereign-guaranteed, whereas muni bonds may or may not be, and their rating is based on the balance sheet and financial position of the firm.
The benchmark bond yield (10-year bond yield) for India has been fluctuating between 7.30 and 7.35 percent during the previous few days in terms of interest payments.
The Ghaziabad Municipal Corporation bond (issued in April 2021) has a coupon rate of 8.1 percent, whereas the Lucknow Municipal Corporation bond (issued in December 2020) bears an 8.5 percent coupon rate.
What are offered by Indore Muni Bonds?
public offering of the 1,000 rupee face value, 10,000 rupee minimum subscription rate, rated, listed, taxable, secured, redeemable, and non-convertible green municipal bonds of Indore Municipal Corporation.
Each Bond is made up of four STRPPs, or distinct, transferable, and redeemable primary components, each of which has a face value of Rs 250.
Three years (STRPP A), five years (STRPP B), seven years (STRPP C), and nine years (STRPP D) are the tenors of green bonds (STRPP D).
Note that each of the Non-Convertible Debentures will expose investors to all four tenors (NCDs).
The green bonds, which are expected to be listed on the NSE, have an annual effective yield of 8.42 percent and a coupon rate of 8.25 percent payable every six months.
For varying tenors (3, 5, 7 and 9 years), the total issue amount for each STRPP will be divided into four equal payments of 25% each.
India Ratings & Research and CARE Ratings both gave the issue credit ratings of AA+ with a stable outlook and AA with a stable outlook, respectively.
According to Divyank Singh, IAS, chief executive officer of Indore Municipal Corporation, "high demand is predicted for this first public offering of municipal bonds in India." Escrow on the waterfall mechanism for IMC's income streams The issue made available through is totally secure.
The four STRPPs, which may be traded separately on the exchange, would give investors a lot of liquidity, according to Singh.
how to use?
An eligible investor who wants to apply in the issue must do so exclusively through the ASBA method, according to SEBI's operating circular.
An authority to block the application amount in a bank account for subscription to an issue is included in an application that is backed by ASBA, or Blocked Amount. If an investor applies through ASBA, the money for the application will only be taken out of the bank account after it has been approved for allocation.
You can submit an application through partner banks, registered stock brokers, registrars, transfer agents, depository participants, stock exchanges, or any of these entities.
Taxes on municipal bonds
There are no particular tax perks, in contrast to many Western nations. The tax rate on interest income is determined by your income tax bracket. Additionally, capital gains on the transfer of municipal bonds are not tax-exempt, while the interest is taxed at source at the appropriate rate under the IT Act.
What works?
According to experts, there is little danger involved with municipal bonds, and Indore Municipal Corporation has the second-highest credit rating of AA+.
The Madhya Pradesh government is assumed to intervene if there are any issues tomorrow, despite the fact that the issue is not sovereign-backed, according to Vikram Dalal, founder and managing director of Synergy Capital Services. The company has a great financial position, he added.
Financially speaking, the corporation's revenue income for 2021–2022 was Rs. 1,739.95 crore as opposed to Rs. 1,508.10 crore in the prior year, and expenditures excluding interest and depreciation were Rs. 1,107.88 crore.
Additionally, the issue is providing an up to 8.42 percent effective return, which is respectable for a "sub-sovereign paper."
What is incomplete?
It is not a AAA-rated issue even if it was issued by a municipality, unlike a government security. No municipal corporation in India is rated AAA, that much is true.
The sole organisation liable for repaying the debt is the municipal corporation itself, and the issuance lacks any governmental guarantees.
The proposed project carries the risk of unanticipated delays and implementation cost overruns.
The operations, reputation, and cash flows of the Corporation may suffer as a result of any such unanticipated delay in project implementation and cost escalation.
Additionally, certain limitations on the Corporation's operations are imposed by its financing agreements, and the operations and reputation of the Corporation could suffer if operating and financial covenants are not met.
Due to the division of the bond issue into four STRPPs, experts believe the instrument to be somewhat complex. Each STRPP will mature in three, five, seven, and nine years, and each NCD will be split into four tranches. When it comes to tenure, the investor has no choice, and Dalal noted that it can be challenging to maintain track of payback in terms of taxation.
How should investors react?
Retail investors are able to subscribe to the issue, according to financial specialists.
"Investors might go for the public issue of Indore Municipal Corporation as the city has been constantly earning the country's cleanest city award for the previous several years and their corporation is working in the correct path," said Deepak Panjwani, Head-Debt Markets, GEPL Capital. the route. Investors can benefit from the 8.42% yield that is also payable semi-annually because yields will eventually decline and interest rates are quite close to their high.
Dalal added that investors may look into the problem. An investor with Rs 100 in a fixed income fund, for instance, is permitted to invest up to 10% in the issuance.
Keep in mind that only up to 25% of the offering has been set aside for retail individual investors, and that the allocation will be made according to the order in which applications are received.
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