Municipal bonds offer one creative financing solution

By Hemant Sahai and Anjan Dasgupta, HSA Advocates
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The capital requirements for developing smart cities over the next two decades are staggering. While some funding will be available from the central and state governments and urban local bodies (ULBs) for the initial investments to upgrade core infrastructure, this will be inadequate in the context.

Hemant Sahai
Hemant Sahai

The preferred corporate implementation structure that is emerging for smart cities envisages nodal planning, developmental and execution authorities in the form of special purpose vehicles (SPVs) created as limited liability companies under India’s Companies Act, 2013, promoted jointly by the respective state governments and the municipalities (or ULBs). Since not all infrastructure projects in the smart cities can be rolled out on a public-private partnership basis, and budgetary support will be limited, the SPVs/ULBs will need to raise additional capital. Municipal bonds are being viewed as a promising source of alternative funding for smart city infrastructure.

As the municipal bond market in India is still nascent, opportunities in overseas capital markets are also being explored. Given the growing need for private finance in infrastructure projects and the potential for municipal bonds to bridge this gap, the Securities and Exchange Board of India (SEBI) on 15 July issued the SEBI (Issue and Listing of Debt Securities by Municipalities) Regulations, 2015. Under the regulations, municipalities (as established under India’s constitution) and entities set up as subsidiaries of municipalities under the Companies Act are permitted to issue non-convertible debt instruments.

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Hemant Sahai is the managing partner and Anjan Dasgupta is a partner at HSA Advocates. HSA is a full-service firm with offices in New Delhi, Mumbai and Kolkata, and with a correspondent relationship in Bangalore.

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