The market for municipal bonds in India, while growing, hasn't really picked up, like the west. Over the past nine years some 20 cities raised around Rs 4,500 crore. In contrast the municipal bond (muni bond) market in the US is estimated to be over $4 trillion. Securities and Exchange Board of India wants to change that.

On Wednesday, Sebi issued a consultation paper, which proposes several changes to the framework governing municipal debt.

The proposals include aligning certain provisions related to municipal debt with those governing non-convertible securities (NCS). 

"In order to encourage retail participation in municipal debt securities, there is a need to specify similar framework, as provided under the NCS Regulations, and also to provide greater clarity for municipal debt securities issued under ILMDS (issuance and listing of municipal debt securities) Regulations, " it said. 

The regulator has proposed a face value of Rs 10,000 or Rs 1 lakh for municipal bonds. 

Under the proposals, issuers who want to refinance existing debt may have to disclose existing lenders, rate of interest, repayment schedule, purpose of existing debt, among other things. 

Information on the same may be useful for the investors to assess the issuer’s financial health, and liquidity risk, said the market regulator.

Furthermore, not more than 25 per cent of the issue proceeds could be utilised towards working capital requirements of the project being financed.

Also, the issuers will not be able to use the proceeds for general purposes and it will have to specifically linked to the working capital requirements of the underlying projects being financed through such issuances.

The extant framework provides for an enabling provision for raising of funds by two or more municipalities through a pooled finance vehicle. However, there are no provisions mandating specific disclosures required to be made in the offer document in respect of the same.

Sebi says for better clarity regarding the pooled finance arrangement and the repayment mechanism, certain operational aspects like the agreement between the pooled vehicle SPV and the constituent municipalities and the escrow account mechanism may have to be specified. 

Notably, under a two-step escrow account mechanism, interest and sinking fund accounts will have to be maintained at the municipality and special purpose vehicle level. 

Sebi also proposed that any person connected with the issue shall not offer any incentive, whether direct or indirect, in any manner, to any person for making an application in the issue, except for fees or commission for services rendered in relation to the issue. 

Published on: May 13, 2026 10:13 PM IST