Municipal bond issuance by special purpose vehicles (SPVs) promoted jointly by the state governments and urban local bodies (ULBs) can be effectively used to fund the staggering capital requirements for developing smart cities in India (see this column in last month’s issue of India Business Law Journal). While municipal bond issuance is normally a feasible funding alternative for SPVs promoted by large ULBs that are financially robust and have a strong balance sheet, it may not work for others.
Small and medium-sized ULBs face difficulties in raising capital using this method, for reasons such as small issuance size, prohibitive cost of issuance, lack of financial wherewithal and lack of knowledge of financial markets and the process of raising private capital. Under these circumstances bond banks or pooled financing facilities offer a mechanism for small and medium-sized ULBs to finance smart cities or other infrastructure projects through bond issuances on a sustainable basis.
A number of countries have used pooled financing structures to accelerate investments in infrastracture projects. In the US, some states have created state-level pooled financing structures or bond banks to support borrowing by smaller municipalities, which would find it difficult to access capital markets directly.
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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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