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Sebi may let civic bodies float trusts to raise funds via bonds

LiveMint logoLiveMint 25-07-2017 Alekh Archana

Mumbai: The Securities and Exchange Board of India (Sebi) is considering a proposal to allow municipal bodies to float bonds through a pooled finance mechanism to support this market, said an official with the markets regulator.

Under the pooled finance mechanism, small-sized municipal bodies can come together with their specific project requirement, and float a trust. This trust will then sell bonds and raise funds on their behalf. Current regulatory framework limits trusts from selling bonds.

“Sebi is in receipt of a large number of requests from ULBs (urban local bodies) because the smaller municipalities are not in a position to comply with the requirements of the regulations. So they are making a request to us so that we can explore the framework for a pooled bond issuance by a trust. Currently, the framework is under consideration by Sebi,” said Vandana Agarwal, a manager with Sebi, talking at a workshop on green municipal bonds jointly organized by Climate Bonds Initiative, a non-for-profit, and German Development Cooperation.

According to bond dealers, ratings are the biggest challenge for ULBs to tap the market because of lack of investor appetite for lower rated bonds. A large numbers of ULBs are rated below investment grade.

“Through a pooled finance mechanism, the bond issuing trust can get a rating bump-up due to diversification benefits. Further, upward rating migration can be targeted through credit enhancement mechanism, where potentially a multilateral agency or government refinance agency can provide a partial back stop guarantee,” said Jayen Shah, head of debt capital market at IDFC Bank Ltd.

This development come at a time when many ULBs are looking to tap the bond market following the government focus on its Smart Cities project. New Delhi Municipal Corporation, for instance, plans to raise Rs200 crore by selling bonds for strengthening its electricity distribution network.

Last month, Pune Municipal Corporation (PMC) raised Rs200 crore through bonds for a water metering project, the first to do so nearly two years after Sebi issued new norms for municipal bonds.

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