Sebi: Supply, Not Demand, Hinders India''s Municipal Bond Market

Mumbai, Jun 19 (PTI) The challenge in expanding India's municipal bond market is currently more about supply than demand, with municipalities needing to come forward and tap the market, Sebi Chairman Tuhin Kanta Pandey said on Friday.

"Currently, it is more than the demand, it is a supply issue where municipalities are not really coming forward to issue. If you start coming forward to issue, I think the investors will take it," Pandey said during the post-Sebi board meeting press conference.

Pandey said the municipal bond market is still at a nascent stage and requires a stronger ecosystem involving regulatory clarity, capacity building among municipalities and greater investor awareness.

On Friday, Sebi approved amendments to the municipal debt securities regulations, with the objective of developing the municipal bond market in India. The revised framework will allow municipalities to raise funds for refinancing existing debt of specific projects.

Municipalities will have to disclose details of existing lenders and loans being refinanced in offer documents or placement memorandums, enabling investors to assess financial health and liquidity risks.

Sebi also provided clarity on fundraising by two or more municipalities through pooled finance vehicles. The issuer will specify disclosure requirements in offer documents, along with operational aspects such as agreements between pooled finance special purpose vehicles (SPVs) and municipalities and escrow account mechanisms for repayment arrangements.


Pandey said the regulatory framework needs to become clearer and more enabling, especially for smaller municipalities. While mechanisms such as pooled finance vehicles exist, they need to be utilised more effectively to help municipalities access the market.

"The first is a regulation which should be more clear, it should be more enhanced. For example, certain incentives announced by the government may not always be possible for smaller municipalities. So they can have a pooled vehicle," he said.

He said another key area is sensitising state governments and municipalities about market access, reforms required and operational aspects such as escrow mechanisms.

Sebi has conducted several meetings and engagements with municipalities and state governments, but more capacity building is needed at the municipal level through workshops and seminars, he added.

Highlighting the importance of investor confidence, Pandey said investors also need to understand the risks associated with municipal securities and the safeguards available, including escrow arrangements.

"There is a three-pronged thing -- regulation, capacity building at the municipal level and investors," he said.