UP’s ‘Atmanirbhar’ step for infra financing

On November 13, when municipal bonds worth ₹200 crore issued by Lucknow Municipal Corporation opened for subscription, it took just 60 seconds and 21 bids for the issue to get an oversubscription of 4.5 times.

With the bond issue, Lucknow has joined 8 Indian cities that have capitalised on the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and Smart Cities Mission championed by the government's Ministry of Housing and Urban Affairs (MOHUA), to raise an aggregate of ₹3,690 crore.

The latest bonds from Uttar Pradesh would be partially funding the north Indian state’s AMRUT and other infrastructure projects which are earmarked to have a capital requirement of ₹310.95 crore. The 10-year bonds, whose principal will be paid in 7 instalments beginning year four, got listed on the BSE on December 2. These are taxable with a coupon rate of 8.5% per annum. In terms of credit ratings, the bonds have been rated AA Stable and AA(CE) by India Ratings and Research and Brickwork Ratings, respectively.

On its part, the MOHUA has been incentivising municipal bond issues at the rate of ₹13 crore per ₹100 crore of bonds issued. Considering the reform incentive of ₹26 crore, the actual cost of the bonds will be working out to around 7.25%.

Speaking on the occasion of the bond listing, Yogi Adityanath, chief minister of Uttar Pradesh, called the development a matter of pride for his state. “It is the trust of the investors which Uttar Pradesh has earned during last three and a half years of governance,” he said.

“It will augment our effort to improve infrastructure in urban areas and it shows the improvement in the industrial climate of the state and the trust the investors have reposed in the state machinery”, he added.

The chief minister further highlighted how this move would change the “fundamental work culture” of the state's municipal corporations. Moreover, it will not only aid Lucknow in augmenting its infrastructure, but would motivate other corporations as well. "To work in such a direction, Ghaziabad Municipal corporation will soon bring its bond to BSE,” he added.

While congratulating the Lucknow Municipal Corporation for its successful bond raising, Ashish Kumar Chauhan, BSE’s MD & CEO, said that the bonds’ order book was filled by more than double in a matter of a few minutes, which establishes the corporation as a credible entity in the Indian bond market.

“BSE firmly believes that the Indian bond market has a potential for substantial growth,” said Chauhan. “The BSE bond platform has helped bring in transparency and efficiency in price discovery for private placement of debt securities and the platform enables to subscribe seamlessly.”

Also speaking on the occasion, A. K. Mittal, MD & CEO, A. K. Capital—one of the merchant bankers to the bond issue along with HDFC Bank—took pride in the fact that his firm has been a leading merchant banker in the municipal bonds space in terms of volumes. “Lucknow Municipal Corporation bonds are backed by a strong structured payment mechanism making it a secure investment with an attractive return for the investors,” said Mittal.

Further, Mittal added that the Indian municipal bond market is at a very nascent stage compared to its U.S. counterpart. “But, given the rapid pace of urbanisation, municipal bonds are going to play a pivotal role in shaping the urban infrastructure sector in the country,” he said.

According to MOHUA, AMRUT has a reform agenda which includes credit rating of the Urban Local Bodies (ULBs) and floating municipal bonds. And, ULBs with investment grade credit rating can float municipal bonds to strengthen their financial capabilities. As of June 20, 2019, MOHUA highlighted that credit rating work had been completed in 467 ULBs, of which 163 ULBs got investment grade credit rating of BBB- and above, which included 36 ULBs with A- or above.

All the moves are in the Atmanirbhar (self reliance) direction, where the municipal corporations which have historically been reluctant to meritoriously tap capital markets are now lining up to make the right moves and makeovers.