Description
The PPT explaining about Municipal bonds.
MUNICIPAL BONDS
Agenda
?
?
? ? ? ? ? ? ? ?
Introduction Types of Municipal Bonds Features of Municipal Bonds Necessity of Municipal Bonds Bond Issuance Process Driving Forces for Municipal Bonds Case in Focus – Ahmedabad Municipal Corporation Stakeholder Analysis – Benefits vs. Threats Regulatory Considerations Recommendations
Introduction to Municipal Bonds
?
Issued by various municipal bodies for raising money from the capital markets The most common objective for issuing municipal bonds is to raise capital for infrastructure projects Uses of funds: to build bridges, roads, hospitals, sewer systems, water supply and provide for other needs of local governments
?
?
Types of Municipal bonds
Classification by sources of revenue: 1. General Obligation Bonds
? ?
Backed by general revenue raising powers of the corporation. Used for projects where direct cost recovery not possible
2.
Revenue Obligation Bonds
? ?
Backed by fees/service charges paid by users of a particular service. Used for funding revenue producing public services.
Types of Municipal bonds (Cont..)
Classification by structure: 1. Taxable Bonds
2.
Tax-exempt Bonds
? ?
Brought in to provide a boost to the municipal bond market. Yieldtax-exempt bond= Yieldtaxable bonds * (1-Tax Rate)
3.
Pooled Financing
? ? ?
Available only for financially strong large municipal corporations Multiple proposals combined into a single issue Reduces cost of transactions
Features of a municipal bond
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Maturity Redemption Coupon Yield Issue size Face Value Commitment Tax treatment Credit rating Security Escrow
Need for Municipal bonds
•
Basic sources of funds for municipal bodies
Revenues of ULBs Own Tax
• Octroi • Property tax • Other taxes • • • • •
Own Non-Tax
• Water / sewerage • Building license • Vehicle/ animals Fines Investment income
Shared Tax
Stamp Duty Electricity tax Motor vehicle tax
Grants
• State government • Other agencies
Need for Municipal bonds (Contd..)
?
An estimated requirement of $200 bn. in the 11th five-year plan for providing urban infrastructure. For about 80 municipal corporations, 2000 municipalities and many city councils, despite increasing urbanization and the consequent pressure on urban services, the financial powers have undergone negligible changes.
?
Municipal Bond Issuance Process
General Obligation Bonds
Revenue bonds
Chennai: Financing Water Infrastructure
?
? ?
?
Water: key consideration in making decisions about locating industries Chennai : Drought-prone city 1990s drought: loss of production due to lack of water Need for improvement of water supply
Chennai: Financing Water Infrastructure (Contd…)
Corporation of Chennai issues INR 420 million of taxfree bonds within India
Cost of Capital: 7%
?
Cost municipal bonds ? Market rate - % tax savings Investor Preference: I. Tax exemption II. reduces risk III. diversification
?
Debt Service: INR 29.40 million
Investors’ Objectives
• Diversifying Risk • Increasing post tax returns
?
GoI Tax Subsidy: INR 12.60 million
Tax subsidy calculation ? Tax rate * Earning from bond
Driving Forces for Municipal Bonds
?
Financial Climate
?
? ?
Credit Rating
Liquidity Investor Preferences
Financial Climate
?
Credit Rating
? ? ?
Provides investors independent evaluation of a bond issue It address ability and willingness of the local body to pay the debt Major thrust on improving credit-worthiness of urban local bodies and development of capital market
? ?
Over 90 urban local bodies have been credit-rated 58 JNNURM cities rated and 36 are investment grade
?
Evaluation based on legal framework, economic base, existing operation, management capacity, project viability, financial structuring, etc. Economic base
?
? ?
?
Nature of the local economy Local employment and income characteristics Development indicators and current availability of urban service
Financial Climate
?
Credit Rating
?
Legal set-up
? ? ? ? ? ?
Borrowing powers and limits Pending litigations and disputes Powers of taxation Powers to levy user charges Actual control over revenue sources considering political implications of tax and user charges Collection enforcement mechanisms and restrictions on operations
?
Administrative factors
? ? ? ?
Organizational structure Extent of delegation Depth of management Track record in project implementation
Financial Climate
?
Credit Rating
?
Debt factors
? ? ? ? ?
Composition of the current debt burden Interest and debt service coverage ratios Past debt service performance Commitments / encumbrances on cash flows Recourse available to lenders in case of default Budget management Revenue surplus / deficit Tax base and past trends Composition and timing of revenues and expenditures Extent of cost recovery on various the services that are provided Financial flexibility to meet unforeseen contingencies Extent of state budgetary support
?
Financial factors
? ? ? ? ? ? ?
Financial Climate
?
Credit Rating
?
Project viability
? ? ?
Constitution of a project as a departmental project or an SPV Revenue flow pattern from the project Committed budgetary support
?
Liquidity
?
Household savings mainly invested in banks – a liquid source for funding bonds Large base of corporate & federal bonds Total outstanding bonds in India – approx. Rs.12.7 trillion (2004-05) 70% of this is government bonds Trading volumes – 95% of bonds traded are government bonds Top 5 bonds dominate with 40% of daily trading volume
? ? ? ? ?
Financial Climate
?
Investors’ Preferences
? ?
Retail investors – HNIs with marginal tax rate of 30% Institutional investors – funds / corporations with marginal tax rate of 35% Investment options – equity & debt instruments, treasury bills, municipal bonds Equity premiums (for period 1991 – 2004) - 11.3%, and average volatility of returns – 37.7% Corporate bonds – attractive, but taxed Tax-free municipal bonds – risk profile similar to treasury bills
?
?
? ?
Case in Focus
Ahmedabad Municipal Corporation
AMC… Situation
?
Before 1993-94, Ahmedabad Municipal Corporation was a loss-making urban local body with accumulated cash losses of Rs. 350 million AMC improved its fiscal profile from 1993 to 1996 by introducing significant fiscal and management reforms, with technical assistance from USAID. Reforms included ? Improving tax collection (octroi and property tax), ? Introducing a computerized double entry accounting system, ? Upgrading its workforce and financial management, ? Developing a comprehensive capital management program, Obtaining a credit rating from the CRISIL AMC had a closing cash surplus of Rs. 2142 million in March 1999
?
? ?
AMC… Strategy
?
In 1996, the city took a decision to develop a capital investment plan for five years (1996-97 to 2000-01) Investment of Rs. 5947 million in water supply, sewerage, roads, bridges, and solid waste management projects Rs. 4890 million allocated to address water supply and sewerage needs AMC proposed to meet 30 percent of the total investment requirement from internal accruals Remaining amount through municipal bonds and loans from financial institutions
?
? ?
?
AMC… Process
? ?
AMC got the corporation credit rated by a leading financial institution Octroi collection from ten designated points were earmarked for servicing the bond and kept in an Escrow account. The credit rating coupled with the good work done by the corporation successively for three years helped AMC in marketing its financial strategy USAID and HUDCO prepared documents for raising the bond issue Corporation very successfully held road shows Created a mechanism to ensure the returns on the money invested through an 'Escrow account' AMC went to SEBI for the registration of the city bonds First public municipal bond in India without a state government guarantee.
?
? ? ?
? ?
AMC… Financing
?
AMC took out the public issue of 10,00,000 secured redeemable bonds in 1998 City bonds, as it is popularly known, were of a face value Rs. 1000 each (for cash at par) aggregating to a total of Rs. 100 crores Annual interest of 14% and 7 year tenure Issue opened on 16th January 1998 and closed on 27th January 1998 Issue was oversubscribed as applications were received for Rs. 104.67 crores, the allotment was made by 24th January 1998. Sold 25% to Indian public and 75% were privately placed to Institutional investors, including the State Bank of India, the Unit Trust of India, Housing Development Finance Corporation, commercial banks and mutual funds
?
? ? ?
?
AMC… Financing (Contd..)
?
Transaction cost for AMC bonds, including underwriters, brokers and legal fees, as well as advertising and printing expenses, equalled 2.89% of the bonds In the first year, the bond proceeds were not used since project designs and tenders were not ready Second year saw the commencement of construction and by March 31,2000 AMC was able to spend Rs. 915 million of total bond proceeds.
?
?
AMC… Lessons
?
Municipal bonds mechanism can work in India for raising finances for infrastructure projects Corporation should have credit rating done to project its financial soundness before the investors Detailed project proposals should be ready for implementation to ensure quick utilisation of funds ULB’s with good financial position, good credibility and a sound track record, can go for municipal bonds to raise money for infrastructure development
?
?
?
Municipal Bonds In India
Current Trends
? ? ? ?
Taxable municipal bonds : Tax free municipal bonds : Pooled finance: TOTAL:
Rs. 4,450 M Rs. 6,495 M Rs. 1,304 M Rs. 12,249M
?
Since 1997, sixteen cities have issued municipal bonds without state government guarantees In 2002, AMC came out with second bond issue of Rs 1000mn
?
?
AMC has placed 5 issues till now raising nearly Rs 600crores
Economic Benefit Analysis
•Permits investment in productivity enhancing projects •Free up resources for the government •Potential of creating employment
Risk Analysis
?
Economic Threats
?
?
Systemic Threats
?
Contagion Effect
Revenue Projection Errors
Property taxes and revenue sources fluctuate with business cycles ? Depend on the centre for fiscal transfers (around averaging 31%)
?
?
Non Pareto optimality (Gordon 1983)
Lack of optimal allocation of the tax subsidy in tax free municipal bonds ? Tax suboptimal pricing benefits the rich
?
?
Too Big to Fall
Risk Analysis (Cont...)
?
Institutional Threats
? Inconsistent
? Mismatch
Tax Policy
between revenue responsibility and debt
issuance ? Absence of a state income tax system
? Black
Bonds
“black money”
? Attracts
? Political
Malpractice
? Endorse
financially and socially unworthy projects ? Money could be used in wasteful projects for the purpose of attracting voter’s interest
Case in Focus – Orange County
Fifth most populous county in USA Many sources of revenues including the famous Disney parks
Treasurer invested $ 7.4 bn of funds in interest rate sensitive products FED hiked up interest rates in 1994 Fund lost close to $1.6 billion dollars-Declared bankruptcy FED had to bail out the county • Moral hazard • Dilution of self regulation of investors
Regulatory Structures
?
Issuance of debt instruments by local bodies are governed by multiple legislations Too many regulators, with less effective regulations
• • • • • • • •
?
The Public Debt Act, 1944 The Securities and Exchange Board of India(SEBI) Act of 1992 The Local Authorities Loan Act, 1914 The Companies Act, 1956 The Securities Contracts (Regulation) Act, 1956 The Depositories Act, 1996 Sub national bodies taking the tax exempt status come under the MUD&PA and the MOF State governments themselves regulate borrowings
Need for Integration of Different Regulatory Agencies
?
Municipal Securities Regulatory Board (MSRB) regulates Bonds in the United States
India lacks a similar body State Finance Commissions (SFCs) deals with
? ? ?
? ?
assignment of powers relating to taxes transfers Limited role in so far as borrowing powers
Borrowing Powers
?
Local Authorities Loans Act of 1914 is very old and have outdated provisions Estimates of borrowing powers are made based on the annual rental value, which have not been revised for long Few States have passed laws on guarantees, but none has passed a law on capping borrowings Necessary for a clear policy on borrowing powers. It will also bring in market discipline and fiscal stability
?
?
?
Municipal Bankruptcy
?
The existing framework of insolvency in India mainly relates to corporate insolvency Not relevant insofar as enforcing secured assets of or bringing about insolvency proceedings against the ULBs Need for laws relating to Municipal Bankruptcy:
•
?
?
Promulgation of a law to lay down a separate insolvency process (in the nature of a fast-track recovery process) for local bodies. Constitution of separate insolvency courts to try matters pertaining to borrowings by and insolvency of, local bodies. Promulgation of a separate statute setting out the revised manner of constitution of local bodies, in order to facilitate greater transparency and responsibility in fiscal dealings
•
•
Supply Side Constraints
?
There is a fixed cap of 8% annual interest on tax-free interest from municipal bonds
?
Institutional investors with long-term funds face regulatory constraints on purchasing municipal bonds.
?
Institutional investors such as the insurance companies are constrained
because of restrictions imposed by the investment guidelines of IRDA
?
Commercial banks, governed by the RBI’s asset and liability
management requirements
?
Given the poorly developed government securities market, municipal bonds are relatively illiquid investments for lack of exit opportunities for institutional investors.
Demand side constraints
?
There are too few creditworthy issuers seeking bond financing. There are too few financially viable projects seeking bond financing
?
There is a lack of intermediation support to help issuers achieve bond structures that respond to investor needs while providing the issuer with the longest possible tenor, lowest possible interest rate, and lowest possible cost of issuance
?
There are a variety of “administrative and managerial” constraints that inhibit and discourage potential issuers of municipal bonds. Divergence of opinion on the optimal debt equity ratio for ULBs.
Demand side constraints (Cont..)
?
There is need for further clarity on how the GoI will operationalize the sanctioning mechanism for tax-free pooled finance development bonds.
?
There is need for further clarity on how will the RBI approved credit rating agency carry out the surveillance throughout the tenor of the Tax Free Pooled Finance Development Bonds.
Recommendations
?
Review the 8% cap on interest rate for tax-free municipal bonds and prescribe a benchmark market rate linked to SBI-PLR rather than an absolute percentage
?
Expand the range of “approved investments” for insurance and pension organizations to include municipal bonds of investment grade or higher Include municipal bonds in the list of eligible investments for Employee Provident Fund Organization Provision of “bond insurance” as credit enhancement may be explored as a security
?
?
against default by municipal bodies
?
Provide investment opportunity in municipal bonds to individual/retail investors, CBDT to include municipal bonds in the list of eligible investments/subscriptions for the purpose of claiming deduction under section 80C of the Income Tax Act, 1961
References
? ? ?
www.rbi.org www.nseindia.com http://www.ilfsindia.com/downloads/bus_rep/ahmedabad_bonds_re p.pdf www.developmentfunds.org
? ?
http://www.careratings.com/Content/CreditRatings/3municipal_bond s.pdf
http://mpra.ub.uni-muenchen.de/9807/1/MPRA_paper_9807.pdf
?
Thank You
doc_517759334.ppt
The PPT explaining about Municipal bonds.
MUNICIPAL BONDS
Agenda
?
?
? ? ? ? ? ? ? ?
Introduction Types of Municipal Bonds Features of Municipal Bonds Necessity of Municipal Bonds Bond Issuance Process Driving Forces for Municipal Bonds Case in Focus – Ahmedabad Municipal Corporation Stakeholder Analysis – Benefits vs. Threats Regulatory Considerations Recommendations
Introduction to Municipal Bonds
?
Issued by various municipal bodies for raising money from the capital markets The most common objective for issuing municipal bonds is to raise capital for infrastructure projects Uses of funds: to build bridges, roads, hospitals, sewer systems, water supply and provide for other needs of local governments
?
?
Types of Municipal bonds
Classification by sources of revenue: 1. General Obligation Bonds
? ?
Backed by general revenue raising powers of the corporation. Used for projects where direct cost recovery not possible
2.
Revenue Obligation Bonds
? ?
Backed by fees/service charges paid by users of a particular service. Used for funding revenue producing public services.
Types of Municipal bonds (Cont..)
Classification by structure: 1. Taxable Bonds
2.
Tax-exempt Bonds
? ?
Brought in to provide a boost to the municipal bond market. Yieldtax-exempt bond= Yieldtaxable bonds * (1-Tax Rate)
3.
Pooled Financing
? ? ?
Available only for financially strong large municipal corporations Multiple proposals combined into a single issue Reduces cost of transactions
Features of a municipal bond
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Maturity Redemption Coupon Yield Issue size Face Value Commitment Tax treatment Credit rating Security Escrow
Need for Municipal bonds
•
Basic sources of funds for municipal bodies
Revenues of ULBs Own Tax
• Octroi • Property tax • Other taxes • • • • •
Own Non-Tax
• Water / sewerage • Building license • Vehicle/ animals Fines Investment income
Shared Tax
Stamp Duty Electricity tax Motor vehicle tax
Grants
• State government • Other agencies
Need for Municipal bonds (Contd..)
?
An estimated requirement of $200 bn. in the 11th five-year plan for providing urban infrastructure. For about 80 municipal corporations, 2000 municipalities and many city councils, despite increasing urbanization and the consequent pressure on urban services, the financial powers have undergone negligible changes.
?
Municipal Bond Issuance Process
General Obligation Bonds
Revenue bonds
Chennai: Financing Water Infrastructure
?
? ?
?
Water: key consideration in making decisions about locating industries Chennai : Drought-prone city 1990s drought: loss of production due to lack of water Need for improvement of water supply
Chennai: Financing Water Infrastructure (Contd…)
Corporation of Chennai issues INR 420 million of taxfree bonds within India
Cost of Capital: 7%
?
Cost municipal bonds ? Market rate - % tax savings Investor Preference: I. Tax exemption II. reduces risk III. diversification
?
Debt Service: INR 29.40 million
Investors’ Objectives
• Diversifying Risk • Increasing post tax returns
?
GoI Tax Subsidy: INR 12.60 million
Tax subsidy calculation ? Tax rate * Earning from bond
Driving Forces for Municipal Bonds
?
Financial Climate
?
? ?
Credit Rating
Liquidity Investor Preferences
Financial Climate
?
Credit Rating
? ? ?
Provides investors independent evaluation of a bond issue It address ability and willingness of the local body to pay the debt Major thrust on improving credit-worthiness of urban local bodies and development of capital market
? ?
Over 90 urban local bodies have been credit-rated 58 JNNURM cities rated and 36 are investment grade
?
Evaluation based on legal framework, economic base, existing operation, management capacity, project viability, financial structuring, etc. Economic base
?
? ?
?
Nature of the local economy Local employment and income characteristics Development indicators and current availability of urban service
Financial Climate
?
Credit Rating
?
Legal set-up
? ? ? ? ? ?
Borrowing powers and limits Pending litigations and disputes Powers of taxation Powers to levy user charges Actual control over revenue sources considering political implications of tax and user charges Collection enforcement mechanisms and restrictions on operations
?
Administrative factors
? ? ? ?
Organizational structure Extent of delegation Depth of management Track record in project implementation
Financial Climate
?
Credit Rating
?
Debt factors
? ? ? ? ?
Composition of the current debt burden Interest and debt service coverage ratios Past debt service performance Commitments / encumbrances on cash flows Recourse available to lenders in case of default Budget management Revenue surplus / deficit Tax base and past trends Composition and timing of revenues and expenditures Extent of cost recovery on various the services that are provided Financial flexibility to meet unforeseen contingencies Extent of state budgetary support
?
Financial factors
? ? ? ? ? ? ?
Financial Climate
?
Credit Rating
?
Project viability
? ? ?
Constitution of a project as a departmental project or an SPV Revenue flow pattern from the project Committed budgetary support
?
Liquidity
?
Household savings mainly invested in banks – a liquid source for funding bonds Large base of corporate & federal bonds Total outstanding bonds in India – approx. Rs.12.7 trillion (2004-05) 70% of this is government bonds Trading volumes – 95% of bonds traded are government bonds Top 5 bonds dominate with 40% of daily trading volume
? ? ? ? ?
Financial Climate
?
Investors’ Preferences
? ?
Retail investors – HNIs with marginal tax rate of 30% Institutional investors – funds / corporations with marginal tax rate of 35% Investment options – equity & debt instruments, treasury bills, municipal bonds Equity premiums (for period 1991 – 2004) - 11.3%, and average volatility of returns – 37.7% Corporate bonds – attractive, but taxed Tax-free municipal bonds – risk profile similar to treasury bills
?
?
? ?
Case in Focus
Ahmedabad Municipal Corporation
AMC… Situation
?
Before 1993-94, Ahmedabad Municipal Corporation was a loss-making urban local body with accumulated cash losses of Rs. 350 million AMC improved its fiscal profile from 1993 to 1996 by introducing significant fiscal and management reforms, with technical assistance from USAID. Reforms included ? Improving tax collection (octroi and property tax), ? Introducing a computerized double entry accounting system, ? Upgrading its workforce and financial management, ? Developing a comprehensive capital management program, Obtaining a credit rating from the CRISIL AMC had a closing cash surplus of Rs. 2142 million in March 1999
?
? ?
AMC… Strategy
?
In 1996, the city took a decision to develop a capital investment plan for five years (1996-97 to 2000-01) Investment of Rs. 5947 million in water supply, sewerage, roads, bridges, and solid waste management projects Rs. 4890 million allocated to address water supply and sewerage needs AMC proposed to meet 30 percent of the total investment requirement from internal accruals Remaining amount through municipal bonds and loans from financial institutions
?
? ?
?
AMC… Process
? ?
AMC got the corporation credit rated by a leading financial institution Octroi collection from ten designated points were earmarked for servicing the bond and kept in an Escrow account. The credit rating coupled with the good work done by the corporation successively for three years helped AMC in marketing its financial strategy USAID and HUDCO prepared documents for raising the bond issue Corporation very successfully held road shows Created a mechanism to ensure the returns on the money invested through an 'Escrow account' AMC went to SEBI for the registration of the city bonds First public municipal bond in India without a state government guarantee.
?
? ? ?
? ?
AMC… Financing
?
AMC took out the public issue of 10,00,000 secured redeemable bonds in 1998 City bonds, as it is popularly known, were of a face value Rs. 1000 each (for cash at par) aggregating to a total of Rs. 100 crores Annual interest of 14% and 7 year tenure Issue opened on 16th January 1998 and closed on 27th January 1998 Issue was oversubscribed as applications were received for Rs. 104.67 crores, the allotment was made by 24th January 1998. Sold 25% to Indian public and 75% were privately placed to Institutional investors, including the State Bank of India, the Unit Trust of India, Housing Development Finance Corporation, commercial banks and mutual funds
?
? ? ?
?
AMC… Financing (Contd..)
?
Transaction cost for AMC bonds, including underwriters, brokers and legal fees, as well as advertising and printing expenses, equalled 2.89% of the bonds In the first year, the bond proceeds were not used since project designs and tenders were not ready Second year saw the commencement of construction and by March 31,2000 AMC was able to spend Rs. 915 million of total bond proceeds.
?
?
AMC… Lessons
?
Municipal bonds mechanism can work in India for raising finances for infrastructure projects Corporation should have credit rating done to project its financial soundness before the investors Detailed project proposals should be ready for implementation to ensure quick utilisation of funds ULB’s with good financial position, good credibility and a sound track record, can go for municipal bonds to raise money for infrastructure development
?
?
?
Municipal Bonds In India
Current Trends
? ? ? ?
Taxable municipal bonds : Tax free municipal bonds : Pooled finance: TOTAL:
Rs. 4,450 M Rs. 6,495 M Rs. 1,304 M Rs. 12,249M
?
Since 1997, sixteen cities have issued municipal bonds without state government guarantees In 2002, AMC came out with second bond issue of Rs 1000mn
?
?
AMC has placed 5 issues till now raising nearly Rs 600crores
Economic Benefit Analysis
•Permits investment in productivity enhancing projects •Free up resources for the government •Potential of creating employment
Risk Analysis
?
Economic Threats
?
?
Systemic Threats
?
Contagion Effect
Revenue Projection Errors
Property taxes and revenue sources fluctuate with business cycles ? Depend on the centre for fiscal transfers (around averaging 31%)
?
?
Non Pareto optimality (Gordon 1983)
Lack of optimal allocation of the tax subsidy in tax free municipal bonds ? Tax suboptimal pricing benefits the rich
?
?
Too Big to Fall
Risk Analysis (Cont...)
?
Institutional Threats
? Inconsistent
? Mismatch
Tax Policy
between revenue responsibility and debt
issuance ? Absence of a state income tax system
? Black
Bonds
“black money”
? Attracts
? Political
Malpractice
? Endorse
financially and socially unworthy projects ? Money could be used in wasteful projects for the purpose of attracting voter’s interest
Case in Focus – Orange County
Fifth most populous county in USA Many sources of revenues including the famous Disney parks
Treasurer invested $ 7.4 bn of funds in interest rate sensitive products FED hiked up interest rates in 1994 Fund lost close to $1.6 billion dollars-Declared bankruptcy FED had to bail out the county • Moral hazard • Dilution of self regulation of investors
Regulatory Structures
?
Issuance of debt instruments by local bodies are governed by multiple legislations Too many regulators, with less effective regulations
• • • • • • • •
?
The Public Debt Act, 1944 The Securities and Exchange Board of India(SEBI) Act of 1992 The Local Authorities Loan Act, 1914 The Companies Act, 1956 The Securities Contracts (Regulation) Act, 1956 The Depositories Act, 1996 Sub national bodies taking the tax exempt status come under the MUD&PA and the MOF State governments themselves regulate borrowings
Need for Integration of Different Regulatory Agencies
?
Municipal Securities Regulatory Board (MSRB) regulates Bonds in the United States
India lacks a similar body State Finance Commissions (SFCs) deals with
? ? ?
? ?
assignment of powers relating to taxes transfers Limited role in so far as borrowing powers
Borrowing Powers
?
Local Authorities Loans Act of 1914 is very old and have outdated provisions Estimates of borrowing powers are made based on the annual rental value, which have not been revised for long Few States have passed laws on guarantees, but none has passed a law on capping borrowings Necessary for a clear policy on borrowing powers. It will also bring in market discipline and fiscal stability
?
?
?
Municipal Bankruptcy
?
The existing framework of insolvency in India mainly relates to corporate insolvency Not relevant insofar as enforcing secured assets of or bringing about insolvency proceedings against the ULBs Need for laws relating to Municipal Bankruptcy:
•
?
?
Promulgation of a law to lay down a separate insolvency process (in the nature of a fast-track recovery process) for local bodies. Constitution of separate insolvency courts to try matters pertaining to borrowings by and insolvency of, local bodies. Promulgation of a separate statute setting out the revised manner of constitution of local bodies, in order to facilitate greater transparency and responsibility in fiscal dealings
•
•
Supply Side Constraints
?
There is a fixed cap of 8% annual interest on tax-free interest from municipal bonds
?
Institutional investors with long-term funds face regulatory constraints on purchasing municipal bonds.
?
Institutional investors such as the insurance companies are constrained
because of restrictions imposed by the investment guidelines of IRDA
?
Commercial banks, governed by the RBI’s asset and liability
management requirements
?
Given the poorly developed government securities market, municipal bonds are relatively illiquid investments for lack of exit opportunities for institutional investors.
Demand side constraints
?
There are too few creditworthy issuers seeking bond financing. There are too few financially viable projects seeking bond financing
?
There is a lack of intermediation support to help issuers achieve bond structures that respond to investor needs while providing the issuer with the longest possible tenor, lowest possible interest rate, and lowest possible cost of issuance
?
There are a variety of “administrative and managerial” constraints that inhibit and discourage potential issuers of municipal bonds. Divergence of opinion on the optimal debt equity ratio for ULBs.
Demand side constraints (Cont..)
?
There is need for further clarity on how the GoI will operationalize the sanctioning mechanism for tax-free pooled finance development bonds.
?
There is need for further clarity on how will the RBI approved credit rating agency carry out the surveillance throughout the tenor of the Tax Free Pooled Finance Development Bonds.
Recommendations
?
Review the 8% cap on interest rate for tax-free municipal bonds and prescribe a benchmark market rate linked to SBI-PLR rather than an absolute percentage
?
Expand the range of “approved investments” for insurance and pension organizations to include municipal bonds of investment grade or higher Include municipal bonds in the list of eligible investments for Employee Provident Fund Organization Provision of “bond insurance” as credit enhancement may be explored as a security
?
?
against default by municipal bodies
?
Provide investment opportunity in municipal bonds to individual/retail investors, CBDT to include municipal bonds in the list of eligible investments/subscriptions for the purpose of claiming deduction under section 80C of the Income Tax Act, 1961
References
? ? ?
www.rbi.org www.nseindia.com http://www.ilfsindia.com/downloads/bus_rep/ahmedabad_bonds_re p.pdf www.developmentfunds.org
? ?
http://www.careratings.com/Content/CreditRatings/3municipal_bond s.pdf
http://mpra.ub.uni-muenchen.de/9807/1/MPRA_paper_9807.pdf
?
Thank You
doc_517759334.ppt