Govt May Raise Interest Subvention Cap To Boost Municipal Bond Market

The central government is weighing a proposal to raise the ceiling on interest subvention for municipal bonds beyond the current Rs 26 crore per urban local body (ULB), according to a recent report by PTI. The move is aimed at encouraging more civic bodies to tap the capital market and develop world-class urban infrastructure.

Currently, the Ministry of Housing and Urban Affairs (MoHUA) provides an interest subvention of two per cent on municipal bonds issued under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT). The support, however, is capped at Rs 26 crore per ULB. Sources indicated that enhancing this cap could make muni bonds more attractive and expand their use as a financing tool.

Incentives Under AMRUT 2.0

For their first bond issuance, ULBs are eligible for incentives of up to Rs 13 crore for every Rs 100 crore raised, subject to a maximum of Rs 26 crore. For subsequent issuances, bonds need to qualify as green bonds, channelled into projects such as water supply, sanitation, renewable energy, and urban resilience. In these cases, the incentive is Rs 10 crore per Rs 100 crore, capped at Rs 20 crore.

While Bengaluru pioneered municipal bonds in 1997, other cities such as Nashik, Ahmedabad, and the Greater Hyderabad Municipal Corporation have also entered the market. Despite the Securities and Exchange Board of India (Sebi’s) guidelines issued a decade ago, the overall growth of muni bonds has been modest.

Push For Wider Participation

To improve participation, several measures are being explored. The National Bank for Financing Infrastructure and Development (NaBFID) may empanel merchant bankers, brokers, and rating agencies to guide municipal corporations in structuring and issuing these bonds. NaBFID could also help with statutory compliance, marketing, book-building, and investor roadshows.

In a step to draw retail investors, Sebi last year reduced the face value of municipal bonds from Rs 1 lakh to Rs 10,000. Still, progress remains slow despite government efforts through missions like AMRUT and Smart Cities. A higher subvention ceiling is now seen as another lever to deepen the municipal bond market and support India’s urban transformation goals.