What are Municipal Bonds?

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What are Municipal Bonds? Blog Image

Overview:

Finance Minister recently stated that municipal bodies will be allowed to issue bonds for improving their infrastructure, and cities will be incentivised to improve their creditworthiness over the bon

About Municipal Bonds:

  • What is it? A municipal bond or muni bond is a debt instrument issued by municipal corporations or associated bodies in India. 
  • Purpose: The funds raised are used to finance socio-economic development projects.
  • History: It was first issued in the 1997 by Bangalore local body for infrastructure development projects 4 years after decentralization of powers and authorities to the Municipal bodies by the 74th constitutional amendment.
  • Tax Exemption: Municipal bonds are exempted from tax provided the buyer adheres to the rules laid by the municipal corporations. The interest is also exempted from taxes.
  • Securities and Exchange Board of India (SEBI) Guidelines :
  • The municipal body should not have a history of defaulting at repayments of loans or debt instruments acquired from financial institutions in the past year.
  • It should possess a positive net worth in all the three years preceding the issuance of municipal bonds. 
  • Such municipal entity, its Group Company or directors, and promoters shall not be mentioned in the willful defaulters’ list published by the Reserve Bank of India.

 

What is a bond?

  • It is a debt security.
  • Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time.
  • When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation.
  • In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal.

 


Q1) What is the difference between a debt security and equity security?

Equity securities represent a claim on the earnings and assets of a corporation, while debt securities are investments in debt instruments. For example, a stock is an equity security, while a bond is a debt security.

Source: Budget: BBMP official hails municipal bonds, expert has doubts