New Municipal bond regime may need changes in Companies Act


IndiaCSR News Network

The Securities and Exchange Board of India’s move to introduce a Municipal Bond framework may need changes in the Companies Act.

The regulator is planning to allow debt-raising under a proposed framework for Muncipal bonds. The new framework will allow bodies governing urban areas to raise debt to meet expenses. Such money will have to have a definite end-use and cannot be deployed elsewhere, said a concept paper that the regulator put out on Tuesday.

“The proceeds of the proposed issue shall be clearly earmarked for a defined project or a set of projects. The funds raised from issue of Municipal Bonds shall be used only for the projects that are specified under objects in the offer document,” it said. The move is based on recommendations from the Corporate Bonds and Securitization Advisory Committee.

However, the move will also require some changes to the Companies Act.

“For effective implementation of the proposed framework, some consequential amendments may be required to be made to the Companies Act, 2013 and the rules made there under to enable raising of funds by Corporate Municipal Entity through issue of debt securities under the proposed framework,” it said.

The Companies Act has specified certain conditions for listing and trading of debt securities. This includes having a board of directors where one-third of the members are independent; as well as having to comply with disclosure requirements.

The regulator may also allow for increased rates on tax free bonds that Municipal bodies issue.

“In India, the guidelines issued by Ministry of Urban Development (MOUD) for issuance of Tax free Bonds by Municipal Bodies provides that only bonds carrying interest rate upto maximum 8% per annum shall be eligible for notification by the CBDT as tax free Bonds such fixed rate of 8%, in the prevailing scenario is too less for investors to get attracted to Municipal bonds and therefore?there may be a flexibility in setting interest rate cap by linking it to a benchmark market rate,” it said.

The regulator’s framework is to allow fund raising by Muncipal bodies to meet their expenses in the face of growing urbanization.

“The Steering Committee on Urban Development for XI th Five Year Plan of India (2007-2012), has estimated that total fund requirement for implementation of the Plan target in respect to urban water supply, sewerage and sanitation, drainage and solid waste management is Rs. 12.7 lakh crore,” said the note from the regulator.

The Union Government too has been looking at providing for urbanization in its annual budget.

“As the fruits of development reach an increasingly large number of people, the pace of migration from the rural areas to the cities is increasing. A neo middle class is emerging which has the aspiration of better living standards. Unless, new cities are developed to accommodate the burgeoning number of people, the existing cities would soon become unlivable,” said the latest budget speech quoted in the concept paper.

“The Prime Minister has a vision of developing ?one hundred Smart Cities?, as satellite towns of larger cities and by modernizing the existing mid-sized cities. To provide the necessary focus to this critical activity, I have provided a sum of Rs. 7,060 crore in the current fiscal,” it added.

The regulator has asked for public comments on the new framework. The last date for sending feedback is January 30, 2015.


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