Summary of this article
Sebi has lowered face value for privately placed municipal bonds.
Mandatory two-step escrow mechanism introduced for pooled finance entities.
Submission deadlines for financial results have been officially relaxed.
Investors focus on increasing the returns their portfolios generate. However, financial experts advise that they should also make allocations towards debt instruments to diversify their portfolio and hedge against losses. Municipal debt bonds are one such asset class which offer investors an option to increase their exposure towards debt-focused assets.
What Are Municipal Debt Bonds?
Municipal debt bonds are fixed-income financial instruments which are issued by local-level bodies and the municipal corporations of cities. These bonds use the money invested by investors to undertake the development of municipal infrastructure projects.
Typically, the funds are used for the creation of projects like roads and water supply systems. These instruments allow civic bodies to access capital. On the other hand, the bondholder gets regular interest income along with a return of principal once the bond matures. On August 11, the Securities and Exchange Board of India (Sebi) announced several changes to the regulatory framework for municipal debt bonds via a circular.
Sebi's New Rules For Municipal Debt Bonds Explained
Sebi's new rules for municipal debt bonds focus on three major regulatory updates: lowering face value for privately placed municipal debt securities, creating a mandatory two-step escrow account structure for pooled finance vehicles, and granting relaxed submission timelines for financial disclosures. Here's a look at Sebi's new rules for municipal debt bonds:
Lower Face Value Requirements
Sebi said in its circular that issuers will be allowed to fix the face value at either Rs 10,000 or Rs 1 lakh per security for private placement of municipal debt securities. According to the circular, securities issued at Rs 10,000 must carry a fixed maturity structure without complex obligations.
Additionally, trading lots on stock exchanges for municipal debt bonds will equal the chosen face value. Highlighting the updated rules governing issuance denominations, Sebi outlined the face value norms in the circular.
"The face value of each municipal debt security shall be Rs 1,00,000 or Rs 10,000, as deemed fit," Sebi said.
Notably, decreasing the minimum denomination for privately placed municipal debt securities is expected to potentially increase liquidity for the bonds and participation among smaller investors by making municipal debt accessible to more investors.
Two-Step Escrow Account Mechanism
In a bid to resolve structural complexities in pooled issuances where multiple local bodies combine to issue joint debt securities, Sebi has introduced a mandatory two-step escrow framework.
According to the circular, constituent municipalities forming a Special Purpose Vehicle(SPV) under government schemes must maintain individual interest payment and sinking fund accounts feeding into the central entity's accounts. Additionally, the SPV has to maintain a buffer equivalent to one year of interest obligations throughout the bond tenure.
Sebi also mentioned the obligations for such SPVs looking to raise funds.
"In case the listed entity is a pooled finance vehicle/ Special Purpose Vehicle (SPV) set up under the Pooled Finance Development Fund Scheme of the Government of India, the constituent municipalities are required to create all the above accounts and comply with the requirements specified for the same," Sebi said.
The two-step escrow mechanism is expected to potentially decrease credit risk for investors by establishing stringent ring-fenced measures against potential default.
Relaxed Timelines for Submitting Financial Results
Sebi acknowledged the administrative setup of municipal corporations and extended disclosure deadlines for the reporting of financial performance to stock exchanges. Municipal bond issuers are set to get a 60-day window instead of 45 days to submit half-yearly unaudited financial results. Additionally, the window for submitting audited financial results with audit reports has been extended to 90 days instead of 60 days.
"The listed entities shall prepare and submit half-yearly unaudited financial results to the stock exchange as soon as the same are available but within sixty days of the end of the first half year," Sebi said.
The relaxation follows recommendations from a working group which sought to identify operational hurdles in data collection faced by municipal bodies.
Through these comprehensive regulatory updates, Sebi seeks to protect investor interests, while broadening participation in the municipal bond market and establishing a robust regulatory framework.
