The public organizations of India were always skeptical to use modern innovative ways to raise capital from the market for public purposes. There were many reasons for it, the first and foremost being the socialist legacy of the country. Public organizations have been more dominant than the private players in India since independence, and raising capital from private players was considered a dent in their self-importance. But the times are changing and now there is more trust in the market among the people as well as in the government organizations. The phase of ‘crony socialism’ and ‘stigmatized capitalism’ is almost over and the country is accepting private players as main the main drivers of growth and investment. This is where muni bonds or municipal bonds have played a huge role.
The trust in the market is reaching a matured stage as some municipal corporations of the country have decided to list themselves at the National Stock Exchange of India (NSE) to raise capital through bonds. The bonds are popularly known as muni bonds or municipal bonds. Indore, the commercial hub of central India and business capital of Madhya Pradesh, led five local bodies that would collectively raise up to Rs 1,200 crore through the sale of municipal debt papers. Indore Municipal Corporation, rated as AA (SO) or two notches lower than the top grade, has raised about Rs 140 crore by selling bonds, which offered 9.25% interest with a 10-year maturity. Indore muni bonds or municipal bonds have been oversubscribed 1.26 times, extending the total bid value to Rs 215 crore.
The local body did not retain the full sum. There were five investors, including MP provident fund and other state-owned entities which obtained allotments. Madhya Pradesh Chief Minister Shivraj Singh Chauhan while attending the listing ceremony said “After these bonds from Indore, even cities like Bhopal, Gwalior, and Jabalpur will get their bonds. We are a financially sound State with surplus revenue.” The cities in Madhya Pradesh will be the first to be listed at NSE to raise capital from the market through bond issuance. Earlier, two local bodies from Pune and Hyderabad sold muni bonds, but they are listed at the Bombay Stock Exchange (BSE).
The state is leading the way due to the fact that it has been able to post double-digit economic growth over the last decade. Under the leadership of CM Shivraj Singh Chauhan, the state performed exceptionally well in the field of agriculture as well as industrial growth. Millions of people have been pulled out of poverty due to the healthy agricultural growth of the state. Commenting on why investing in muni bonds is good for investors, he said “Madhya Pradesh has been growing at double-digit rates for the last 10 years. We have doubled our agriculture produce in five years, there is no village that has not yet been connected with an all-weather road. We are a power-surplus State with 24×7 electricity.”
The issuance of Municipal bonds is still new in India, while in nations like the United States there is a liquid market for such type of issuance by local bodies or municipal corporations. Vikram Limaye, Managing Director & Chief Executive Officer, NSE said “Healthy states will be able to raise money. Unless we get the market developed right in the next two-three years, it will be difficult for the economy to grow at a higher pace, based on only bank financing. We must have more capital raising programmes from all types of issuers, including SMEs, mid and large-cap companies.”
Through the issuance of bonds, cities will be able to raise money for various infrastructure projects which are in the pipeline. Through this innovative way to raise capital, the cities will no longer have to depend on state or central government for money to finance every small project. With the initial success of Indore in raising money, other cities and states will be motivated to use this path. Nonetheless, investors will only put money in these bonds if the finances of the states are prudent, thereby making it very important for states to follow fiscal prudence.