As Urban Development Department fastens its belt to come up with a Municipal Bond for Ranchi Municipal Corporation (RMC) in due time after rating agency CRISIl finding it financially sound to raise money from market, experts believe that the department needs to do a lot before it floats any such bond. They believe that though raising money from such instruments is not impossible now a days, the department is of course lacking as far as taking such activity on a mission mode is concerned. The Pioneer presents a vivid picture of Municipal Bonds and their relevance in a city like Ranchi.

What is Municipal BondIJ

It is a capital market instrument to raise money from market to fund projects like flyovers, severage-drainage, water supplies, and such development oriented projects within any municipal corporation area. These bonds can remain open to be purchased by institutional investors and for common people, both. Municipal Corporation, in this case RMC, will have to repay the investors the interest and principal amount from the revenue it generates from the projects which will be funded through the Bond.

Why is Municipal Bond gaining popularityIJ

With requirement of development projects increasing exponentially, it has been becoming difficult for a municipal corporation to fund each and every project by itself. And when State government also finds it difficult to keep on funding municipal corporations for long and for all projects, the corporation takes route of Bonds. Many corporations are giving such bonds a sovereign guarantee, which means in case there is any chance of investors losing their money due to any reason, their principal amount will be safe.

Does this Bond have any background in IndiaIJ

Municipal bonds exist in India since last two decades. RMC is not going to be the first to issue such bond, as corporations in Madurai, Ahmedabad, Nasik,  Bengaluru, Maisuru and a few others have come up with corporation bonds in past, that also prior to 2010. However, they were not popular because they were not tradable and were purchased by institutional investors only. As Securities and Exchange Board of India (SEBI) has allowed them to be offered to the public and listed them on Stock Exchanges, they have not only become purchasable by retail investors but tradable also, making them increasingly popular.

What are the challenges for RMCIJ

Rating Agency CRISIl has given RMC a BBB minus rating, which means instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk. So, first of all, it will have to disclose its balance sheet to at least those whom it believes would be potential Bond buyers. Second, it will have to decide whether who will be the guarantor of the Bond. Then, there is almost no awareness about RMC bonds in the market. Hence, RMC will have to create huge amount of awareness and will have to lure investors. Road shows might be required, investor relationship programmes might be required. Above all, it will have to present a picture to its potential investors that the projects it will be funding are return giving and investors’ money will not be stalled. As share market expert Praveen Morarka said, it’s not impossible, but not possible without mission mode.

What are the risksIJ

Not in Indian market, yet. But from global markets, Municipal Bonds have posed considerable amount of threat. Rating agency CARE says that investors in Municipal Bonds in China are on the verge of losing huge sum, as Municipal Corporations might turn defaulter anytime. Though investors of US investing in similar bonds are not so unfortunate, risk factor does involve there too.