Improving Access to Capital Market through Municipal Bonds PEARL Programme JNNURM
Workshop Proceedings
19 September 2013, Multipurpose Hall, India International Center New Delhi
Improving Access to Capital Market through Municipal Bonds PEARL Programme JnNURM
P R O C E E D I N G S
19 September, 2013 Multipurpose Hall, India International Center, New Delhi
Organised By
Ministry of Urban Development, Government of India National Institute of Urban Affairs, New Delhi
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Acknowledgement
The Institute wishes to express its sincere appreciation to the following individuals for their guidance and support:
Ministry of Urban Development, Government of India: 1. Ms. Nisha Singh, JS, MoUD & Mission Director, JNNURM 2. Mr. Anand Mohan, Director, MoUD 3. Technical Cell, JNNURM, MoUD
Team at NIUA:
Advisor: Prof. Jagan A. Shah, Director, NIUA Project Coordinator: Dr. Debjani Ghosh, NIUA Compilation: Ms. Nilanjana Dasgupta Sur, NIUA
Rapporteurs: 1. Ms. Shilpi Madnawat 2. Mr. A Nanda Kishore 3. Ms. Rita Dey 4. Ms. Aastha Joshi
IT Support: 1. Ms. Indu Senan 2. Ms. Sangeeta Vij 3. Ms. Supreet Narang 4. Ms. Santosh
Admin Help: 1. Mr. Diwan Singh 2. Mr. H.P.Pandy, 3. Mr. Ajoy Kashep
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Content
Acknowledgement 1
Contents 2
Abbreviations 5
6 Introduction to Workshop
The Event
Inaugural Session 7
Welcome Note Inaugural Address Key note Address Points for Discussion Vote of Thanks
Technical Session 1: Importance of Credit Rating and Financial 11 Management
Opening Remarks by the Chairperson Panelist 1: Ms. Aditi Nayar, AVP, ICRA Panelist 2: Mr. Shameek Ray, Head, Debt Capital Markets, ICICI Securities Primary Dealership Ltd. Panelist 3: Mr. Alok Shiromani, Head, Technical Cell, JNNURM, MoUD
Technical Session 2: Role of Credit Rating in Accessing Capital 17 Market
Opening Remarks by the Chairperson Panelist 1: Mr. Nagarjan Narasimhan, Senior Director- Ratings, CRISIL Limited Panelist 2: Mr. Madan Sabnavis, Chief Economist, Credit Analysis and Research Limited (Care) Panelist 3: Mr. Tarun Bansal, Regional Head – North India, India Ratings and Research Private Limited Concluding Remarks by the Chairperson
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Technical Session 3: Experience of ULBs in Securing Good Rating 25 in Accessing Bond Market
Opening Remarks by the Chairperson Panelist 1: Mr. S. S. Hastak, Exe. Engineer and Nodal Officer (CBUD), Nagpur Municipal Corporation, Maharashtra Panelist 2: Mr. Rahul Joshi, Chief Operating Officer, Powertec Engineering Pvt Ltd Points for Discussion
Technical Session 4: Regulators and Investors Response to 32 Constraints in Issuing Municipal Bonds
Opening Remarks by the Chairperson Panelist 1: Mr. Ananta Barua, Executive Director (Bonds), SEBI Panelist 2: Mr. Ashish Sable, SVP & Head, SBI Capital Markets Limited Points for Discussion Concluding Remarks by Chair
Technical Session 5 - Concluding Remarks and Way Forward 38
Concluding Remarks and Way Forward: Mr. A.S. Bhal, Economic Advisor, MoUD Vote of Thanks: Ms. Shyamala Mani, Prof. NIUA
Annexure 1: Agenda of the Workshop 39
Annexure 2: List of Participants 41
Annexure 3: Profile of Chairperson and Speakers 43
Annexure 4: Presentations 47
Importance of Credit Rating and Financial Management in Accessing Capital Markets : Aditi Nayar‐ ICRA Limited Need for Credit Rating and Financial Management Reforms in JnNURM Cities: Alok Shiromany, Team Leader Technical Cell Leader, Cell, JnNURM, MoUD Improving access to capital markets to Municipals - Role of credit rating: Madan Sabnavis, Chief Economist, CARE Ratings
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Role of Credit Rating in Accessing Capital Markets for Urban Local Bodies: Nagarajan Narasimhan, Senior Director, CRISIL Ratings Experience of ULBs in Securing Good Rating in Accessing Bond Market: Rahul Joshi, Chief Operating Officer, Powertec Engineering Pvt Ltd Nagpur Experience on Accessing Bond Market: S. S. Hastak, Nagpur Municipal Corporation, Nagpur Fund raising through Municipal Bonds Investors response to constraints in issuing municipal bonds: Ashish Sable, SVP & Head , SBI Capital Markets Ltd.
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Abbreviations
AMC Ahmadabad Municipal Corporation AT&C Aggregate Technical and Commercial CREF Credit Rate Enhancement Fund DPR Detailed Project Report FRBM Fiscal Responsibility and Budget Management Act, 2003 FSDC Financial Stability and Development Council GDP Gross Domestic Product GSFS Gujarat State Financial Services Ltd. GST Goods and Services Tax HPEC High Power Executive Council HUDCO Housing and Urban Development Corporation Limited ICRA Information and Credit Rating Agency of India ICRIER Indian Council for Research on International Economic Relations JnNURM Jawaharlal Nehru National Urban Renewal Mission LBT Local Body Tax MoUD Ministry of Urban Development MPL Miscellaneous Professional Liability Bonds NIUA National Institute of Urban Affairs PEARL Peer Experience and Reflective Learning Programme PPP public private partnership PSU Public Sector Undertaking RBI Reserve Bank of India SEBI Securities and Exchange Board of India SLNA State Level Nodal Agency SME Small and medium enterprises SPV Special Purpose Vehicle T&D Transmission and Distribution TNUIFSL Tamil Nadu Urban Infrastructure Financial Services Limited UIG Urban Infrastructure and Governance ULBs urban local bodies VMC Vishakhapatnam Municipal Corporation
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Improving Access to Capital Market through Municipal Bonds
The Event
The Workshop on “Improving Access to Capital Market through Municipal Bonds” was organised under the leadership of Ministry of Urban Development (MoUD) in collaboration with National Institute of Urban Affairs (NIUA), who is the National Coordinator of the Peer Experience and Reflective Learning (PEARL) Programme. The one day event was organised at the Multipurpose Hall, India International Center, New Delhi on 19 September 2013. The workshop covered topics like credit Issues with municipalities in the light of the flagship programme “Jawaharlal Nehru National Urban Renewal Mission” (JnNURM) experience, challenges with investment grade urban local bodies (ULBs) in issuing bonds, case studies on credit enhanced structures done by municipalities till date in India and so on. It also focused on areas like Ahmedabad, Nagpur and Hyderabad’s experience on accessing bond market, challenges faced by Indore ULB in accessing the capital market despite having good rating, constraints in issuing municipal bonds according to the regulators and Investors and approach to overcome these challenges. The Agenda of the workshop is enclosed as Annexure -1. The workshop was attended by officials from Ministry of Urban Development, Ministry of Finance, mission cities, SLNA, experts and other dignitaries (Annexure 2). The distinguished Chairpersons and Speakers were successful in bringing about some lessons learnt from each of the session at the workshop (Annexure – 3). The presentations made at the workshop are enclosed as Annexure – 4.
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Inaugural Session
Welcome Note: Dr. Debolina Kundu, Associate Professor, NIUA
Inaugural Session of the workshop on ‘Improving access to capital market through municipal bonds’ started with an opening note by Dr. Debolina Kundu, Associate Professor, NIUA highlighting the agenda of the workshop which included issues and importance of credit rating and financial management, role of credit rating and accessing capital market, experiences of urban local bodies in securing good rating and accessing bond market and regulators and investors response to constraints in issuing municipal bonds. Dr. Kundu welcomed Dr. Isher Judge Ahluwalia, Chairperson, ICRIER and Ms. Nisha Singh, JS and Mission Director, MoUD and requested Dr. Ahluwalia to give inaugural session address.
Inaugural Address: Dr. Isher Judge Ahluwalia, Chairperson, ICRIER
Dr. Ahluwalia started by mentioning that the current discourse on external finance is usually directed towards bonds and leverage funding through public private partnership (PPP) as two available options. In India, getting funds through PPP in urban sector has few success stories like Tamil Nadu and Ahmedabad and it is often related to availability of JnNURM funds as soft options that encouraged ULBs to stop looking at capital markets because accessing capital market means exercising certain disciplines in terms of a credible and transparent revenue model.
Taking a cue from HPEC report recommendations, she shared some of observations and suggestions reported - introduction of local bodies finance list in constitution and need for devolution of part of Goods and Service Tax (GST) to urban local bodies; need for an agreed program with state government to recover all operation and maintenance costs through user charge recovery over a period of given time frame; need for a municipal commissioner or a
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municipal body to know its assets and liabilities and preparation of a medium term framework; need for timely audits to facilitate financial transparency and accountability considering the tenure of typical municipal commissioner and demanding better governance. Connecting the above notes from HPEC report to the conference theme she said, while the subject of workshop today is finance, underlying it really is governance and role of market in bringing discipline to ULBs. And there is also greater need for a regulatory framework and credible revenue model to give comfort to lender.
Extending the discourse on PPP and capital market funding, she said they are often discussed together. In case of PPP the pace at which it unravels from signing a contract to arrangements falling apart is rapid mainly due to open expectations, in capital market funding it takes time to convince a prospective lender especially with no regulatory framework set in place. She also shared examples like the case of Kanpur solid waste management – a waste to energy plant based on thermal combustion technology and the role of political economy at state level visible downfall in collection efficiency by private player and slow upsurge in the recent times. In case of Allandur, a Mayor led campaign to put 100 percent underground sewerage with public deposits is appreciated across political parties but a recent administrative decision to integrate Allandur into Chennai Municipal Corporation made a sudden downfall in user charge payments to private player. This model was in place since 2004 and it could not sustain even a decade. The third example being Gorai Landfill closure and Gas Capture Project based on PPP had the potential to earn carbon credits but due to escalation of the waste estimates Municipal Corporation is now repaying back to Asian Development Bank with its own funds due to its advance purchase agreement signed and received advance against future delivery of carbon credits. Dr Ahluwalia than concluded her address with remark on need for steady long term perspective while planning for fund mobilization especially through external finance mechanisms. Improving governance resulting in creditworthiness and market worthiness is the underlying component of accessing capital market.
Key note address: Ms. Nisha Singh, JS and Mission Director, MoUD
Ms. Singh started the discussion with her remarks regarding points raised by Dr. Ahluwalia with the question ‘Why do ULBs miscalculate?’ and need for professionally qualified urban planners and financial analysts in ULBs technical staff cadre highlighting the role of institutional memory, institutional expertise and so on. Giving examples of horticulture and agriculture
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cadre in transforming the Himachal Pradesh horticulture revolution and its economy, she highlighted the point. She also agreed that to some extent JnNURM was not able to bring in the expert or professional consultant to the state and ULBs which it should have through its capacity building proposals.
Regarding devolution of a defined percentage of Goods and Service Tax (GST) to the concerned ULBs and need for a thought and policy directives to the states, to put in the same in cadre of a local body, she referred to Mumbai Municipal Corporation as an indicative example and also talked about the need for a professionally qualified urban planners and financial management experts with a skill driven approach in every ULB in India.
Points for Discussion:
Sharing of Experiences in the Capital Market in India: The discussion started with the Tamil Nadu case where bonds were mobilized under the pooled finance development scheme for 7 ULB requirements. Briefing about the scheme and its development since launch in 2008 and success in 2010 in mobilizing the bonds were discussed. Challenges in terms of an advisors and merchant bankers driven market; preparation of pooled finance development toolkit by merchant bankers and lack of ownership; issues relating to fixing the rate; processing time for approval from government; and aiding mechanisms in the form of credit rating enhancement fund to cover the expenses incurred in the process of issue of bonds were also discussed.
Reasons for Success in 2010 in mobilizing the Municipal Bonds in Tamil Nadu: In 2010 the reason for a success rate might be due to the improved market conditions. Other reasons might be varied like – bidding process for PSU issued bonds with its transparent process of bidding and selecting a lowest bid might end up giving up mandate to a speculative rate with possibility of not delivering. The revisions in tender document with a clause clearly indicating the rejection of a freak bid were other reasons.
Agencies are forced to take the Lowest Bid: Agencies are not forced to take the lowest bid in all cases and sometimes the agency arranges a merchant banker to meet to understand the market behavior and based on the feedback received from the meeting, the market rate is decided. With instance of market rate decided in advance in case of 2010 where TNUIFSL had a success. Success depends on situations such as the right timing, the right issue size, the right rate and so on resulting in cautious approach.
The Demand Side versus the Supply Side Constraints: Introduction of JnNURM reforms aimed at improving the system and the systemic problems that existed within the
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cities giving the cities a low credit level. On the other hand, there are constraints that are faced by the merchant bankers typically investors like the insurance funds, provident funds, and the banks with constraints in investments in bonds due to their internal regulations. Therefore, the approach towards bond market in India is in the right direction but there is a need for speeding up the process to have credit worthy cities to access the capital market either through pooled bonds or directly and also need for consensus between multiple agencies to minimize the constraints in regulatory framework. Bonds were started and introduced through USAID-FIRE D project in 1996 with Ahmadabad and Bangalore following the path with an upward graph till 2008 and as JnNURM progressed it crowded out the entire borrowing by ULBs. Supply side constraints are regulatory constraints in terms of lack of conducive and proper environment; lack of rule based borrowing by the ULBs and longer duration for approval process. Regarding demand side constraints – disinterest in borrowing by investment grade ULBs in India due to lack of development accountability is one of the major reasons. There is a need for strengthening the local finance for 80 percent of ULBs which do not have the financial mean apart from understanding capital absorption capacity and capital sustaining capacity of ULBs.
The borrowing market scenario in India: After 2008 even the borrowings from banks have gone down like in the case of total HUDCO lending portfolio where 10-15% portfolio is related to the urban sector and rest 85% lending to the other sectors. Therefore, there is a need to create the accountability for all the four corners – lender, borrower, regulatory environment and voice.
Vote of Thanks:
Dr Debolina Kundu thanked Dr Ahluwalia for chairing the session, Ms Nisha Singh for the opening remarks and all participants.
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Session 1: Importance of Credit Rating and Financial Management
This session focused on the importance of credit rating and financial management in accessing capital markets in India.
Chairperson: Dr.Isher Judge Ahluwalia, Chairperson, ICRIER
Expecting the session to be interesting and would have informative deliberations, Dr. Ahluwalia invited the three key speakers Ms. Aditi Nayar, Mr. Shameek Ray and Mr. Alok Shiromani to make their presentations.
Panelist 1: Ms. Aditi Nayar, AVP, ICRA
Ms. Aditi Nayar started her address by reminding the audience of the growing importance of the urban sector and the sector’s increasing share in GDP, and its financing requirement. She mentioned that for a subset of ULB’s under JNNURM rated by ICRA the per capita municipal revenue base was found to be approx. Rs. 2300. This includes both revenue and capital expenditure, and needs to be covered from own revenue as well as transfers from the state and central government.
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Although there have been some success stories in public private partnerships, real cost recovery is the key issue that needs to addressed to scale up such ventures. Term lending from banks haven’t emerged as a major source of funding for urban infrastructure and one of the reason is the very long tenure of infrastructure projects which sometimes create assets and liability mismatches. As regards bond issuances, the size is very small as compared to the overall size of the bond market. But there are some key advantages to bonds which should be looked at by the urban sectors. Bonds can be structured to have a fairly long repayment period and this is very helpful for infrastructure projects which may not start generating revenue immediately. Through pool issuances, smaller issuers can come together as they have in Karnataka and Tamil Nadu and raise funds from the market. In India, SEBI regulates bond issuances and requires that bonds which are to be listed are rated by a credit rating agency registered with the SEBI.
Credit rating is essentially a symbolic representation of the rating agencies current opinion of the relative credit risks in the underlying debt instrument. Basically it is a relative measure of credit ranking. In India the rating symbols are standardized and in case of ICRA, long term rating scale goes from AAA to D rates. Now the rating symbols have to be prefixed by the name of the rating agency. Rating does provide a number of advantages to both the borrowers as well as lenders. It bridges the information asymmetry that exists between the issuers and the investors.
In the case of urban sectors in India this is particularly important because the market participants don’t have the knowledge or the tools to adequately access the finances of the ULBs. So the rating agencies bridge the gap between the ULBs and the market participants.
Also since credit rating is an independent opinion after a fairly rigorous analytical process, it provides some confidence to the lenders given the relatively weaker accounting systems of ULBs as compared to the corporate. Also the rating agencies help to widen the investor base, by getting participants who wouldn’t otherwise invest in unrated papers, or below a certain rating threshold.
The criteria that ICRA follows to decide a ULB’s ratings are many. In terms of legal and administrative framework the municipal act has to be checked as it outlines the rules and responsibilities. It highlights the discretionary and the obligatory functions, as well as the revenue raising powers that the ULB has and that provides the foundation towards understanding the roles and responsibilities. In terms of the intergovernmental fiscal relationship the most important is the nature and the consistency of funds transfers. If the devolutions are formula based it is helpful. In ICRA’s experience, ULB’s devolution policy is mixed across states. Some states have clear formula based devolution mechanisms and other states haven’t made the norms clear. In terms of management quality, things that are regarded positively are project management and execution capability. The kind of safe guards that are adopted against time and
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cost over runs, the level of computerization, of institutional mechanisms for quick decision making and the quality of financial statements are also important.
As regards service level characteristics, ULB’s capacity to deliver the required services both in terms of the operational ability and the revenue adequacy is analysed. Revenue sources like property taxes and user charges are dependent primarily on the level of economic activity within the city’s jurisdiction. Track record of the entity in revising user charges is also important. Collection efficiency is vital indicator of the ability of the ULB to raise revenues to recover costs.
The coverage and quality of services being provided by the ULB relative to peers and the bench mark is also critical. It helps to access investment required to provide a bench mark level of services and has implications for the acceptability of tariff increases in the local area. In addition, the liquidity profile of the ULB’s, the level of debt which is currently under service and the level of contingent liabilities are also crucial to form an opinion of the financial health of the entity.
It was observed that about 60% of the entities have an investment grade credit quality. Among the inconsistencies that were found in financial management are inconsistencies in terms of the debt that was reported in different financial statements for a single year. There was a case, in which the opening balances for one year and closing balance for the previous year that did not match. Such inconsistencies reduce the level of confidence in financial data. Some of the suggested improvements would be a lesser variation between the budget estimates and actuals through better planning, and a better budgeting process and also a quicker release of audited actuals. Overall primary dissemination of appropriate information is absolutely crucial to form an opinion and improve the confidence of the market participants.
Panelist 2: Mr. Shameek Ray, Head, Debt Capital Markets, ICICI Securities Primary Dealership Ltd.
Mr. Ray started by mentioning that the investor guidelines are very restrictive in India. The provident fund sector which is into long term assets because they have long term liabilities, are eligible to invest in government securities, state government securities, public sector, private sector and so on, but not in Municipal Bonds, because it is not an issue by a public sector, nor by an independent entity. It has a government linkage, but is in a category of its own. So this is a grey area. This kind of exemptions should be
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removed from the system.
Secondly, merely changing the guidelines will not help. There is a common demand from the government that more money be invested into the infrastructure sector. For that to happen first of all these projects have to be more bankable. The pension and the insurance sectors are holding small retail investors money. Fund managers are very risk aware. First the principal has to be preserved till the small investor retires. The returns have to be decent, but they have to be much more than decent if the risk is high. If the projects are more bankable money will flow in. Just changing a guideline will not enable the money to flow in. Apart from certain investors who invest in the municipal bonds, there are many investors like insurance companies and mutual funds who look at any kind of debt asset as a trading asset. They want to get in, hold it for a year or maybe less and get out. Any asset which does not have a readily available market for trading is not attractive to them. There is an illiquidity premium for illiquid assets.
In case of Tamil Nadu they have successfully placed bonds. The bond issuance size was small and investors who will hold the bond till maturity had to be found. But, If the idea is to make the market grow 10 folds or 20 folds then there is a need to have market acceptance of these bonds.
To make the bonds tradable one needs to do a lot of things like improving the financials. The rating agencies and the MoUD must have regular sessions like this to have conceptual clarity. Investors can be invited and everything can be explained to them. But at the end of the day if this kind of exercise is held once in every three years, and there are issuances then it wouldn’t help. There has to be a target like in one year there will be 2 or 3 issues and a recurring flow.
There was a large issue of Rs 200 crores in 2001 or 2002. The particular municipality involved in the issue was strong in assets and it had a lot of fixed deposits which was given out to various banks. Only entities which had an existing relationship with the Municipality and understood the issue invested in it. But there is a need to bring other investors into the picture.
The bonds have to be listed to have liquidity. Unlisted bonds don’t find takers whether it is a bank, mutual funds or primary dealers. Regulator actually insists that investment be made only in listed bonds.
For listing quarterly financials, disclosures are needed. Also other compliance issues have to be met which can be challenging for the first time issuers and especially those who do not have an internal team to do it on time. There should be systemic processes and departments to fulfill such compliance issues. We have been issuers to municipalities. At times we have been impressed by the professionalisms of the municipal bodies; but this was top driven, coming from the
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commissioners. It should not only be top driven, it should be bottom driven and then it is sustainable.
To reach out to the market there would be a need to better understand the process, and have more sessions with the rating agencies, arrangers and investors. The PSU’s and state level undertakings follow the tender route for procurement. Generally the PSU processes are fairly transparent and good. In case of state government undertakings or state level undertakings the processes is often murky. The tenders are designed by advisors who encourage certain sections of the market to be chosen and others not to be chosen. The government has to work with the municipalities to make the tendering process as transparent as possible.
As far as the future is concerned institutional investors must be encouraged to come forward. To bring the municipal bond market forward public placement route has to be taken, as the private issue route is more difficult.
Panelist 3: Mr. Alok Shiromani, Head, Technical Cell, JNNURM, MoUD
Mr. Shiromani mentioned that credit rating is an independent evaluation of credit quality. It highlights for the investors the weaknesses and strengths that exists in the municipal finances. It helps in increasing accessibility to the capital market.
The initiative that the MoUD has taken in this area is to appoint four well-known credit rating agencies, namely CRISIL, Fitch Ratings, ICRA, and Care Ratings to rate the JNNURM cities. This exercise was initiated in January 2008 and initially 65 mission cities were rated. Not all UIG towns were rated because of lack of information. Out of these 65 cities only36 cities have received an investment grade rating.
Assessment of the reports of credit rating agencies and the mission directorate’s own assessment revealed that, even though empowered by the constitution, the cities are not financially self- reliant. They are largely dependent on transfers and grants from the state and central government. The grants are reducing so those municipal bodies which are dependent on external sources are facing a difficult situation. Another important point is that their internal accruals are very inefficient or insufficient. The ULB’s sources of revenue have inadequately captured the buoyancy in the economy.
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There is a lack of exchange relationship between the taxes levied and services rendered. The tax payer does not get the required services in the town. This is a deterrent in paying higher taxes. All this leads to under investment and a low equilibrium is achieved. Because ULB’s generate low revenue and invest less in the infrastructure, consequently, there is less infrastructure facility within the system.
JNNURM funds were meant to leverage and get more funds from either the market or from the financial institutions or from PPP. This is something that the ULB’s needs to do. Another aspect that needs focus is better investment planning. There is an urgent need to take up bankable and commercially viable projects. Many ULB’s do not prepare detail engineering plans, detail procuring plans or costing plans. They just prepare a DPR, which is not detailed, and when they implement the project on the ground there are lot of issues and lot of delays. The DPR originally prepared is far from reality.
Attempt should be made to reduce the capital cost through appropriate measures. In municipal financial management and expenditure management area we need to reduce the non-revenue stream. Appropriate costing of services and better targeting of subsidies is a must. Asset management is also lacking. ULB’s own source revenue must be increased by increasing property tax, levying development charges and using land mobilization.
In the area of financial management the municipal bodies have been encouraged to improve their systems through the mandatory reforms of the JNNURM, like accounting reforms, property tax reforms, user charges etc. User charges are encouraged to recover 100% of the cost. The municipal accounting reforms aims to improve the accountability and transparency in the municipal system. This will help to raise finances, and make the financial statement more accurate, so that credit rating agencies and the bond markets can understand their finances better. This will also help in policy formulation. For appropriate fixation of taxes and service charges the municipal body has to understand the cost of a municipal service. Most municipal bodies do not know even the cost of delivery of water. In the absence of such information it is difficult to levy appropriate charges.
Some of the milestones that have been laid down by the MoUD are the preparation of accounting manuals. Till today 21cities have developed their own municipal accounting manuals. These manuals are prepared on the basis of a national accounting manual which was prepared by the MoUD in the year 2005. As of date 32 cities have moved to the accrual system of accounting. ULB’s have been asked by the Ministry to improve the recovery and coverage of property tax. The norms specified for property tax collection is 85% coverage of properties in the city and minimum 90% collection efficiency. 42 ULB’s has achieved the first level and 29 ULB’s has achieved 90%
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and above collection efficiencies. These are the reform mile-stones which have been laid down for the JNNURM cities.
The Chairperson concluded the session with a vote of thanks to the speakers.
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Session 2: Role of Credit Rating in Accessing Capital Market
The second session of the workshop focused on the Credit Issues with municipalities in light of JNNURM experience. It also talked about the challenges with investment grade ULBs in issuing bonds and case studies on credit enhanced structures done by municipalities till date in India.
Chairperson: Prof. O. P. Mathur, Distinguished Professor of Economics, NIUA
Prof. Mathur initiated the session by mentioning that credit Issues with municipalities in the light of JNNURM has got wide experience and this is the right time to talk on the challenges being faced by the with investment grade ULBs in issuing bonds. He welcomed the speakers Mr. Nagarajan Narasimhan, Mr. Madan Sabnavis and Mr. Tarun to share their views on the topic.
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Panelist 1: Mr. Nagarjan Narasimhan, Senior Director- Ratings, CRISIL Limited
Mr. Narasimhan started by mentioning that bond market is 10% of equity markets in India. If equity markets are in trillions, bond markets are a tenth of that amount. In that sense, India is a peculiar market compared to developed nations where bond markets are many multiples of the equity market.
Of the 65 ULBs, India was rated 20 and of the 65 ULBs rated in total, 20 were rated A, or above. Very few ULBs actually access the bond market, and in the last 5 years it has been seen that there is practically no issuances. Talking about the role of credit rating in India, he mentioned that:
• Credit rating helps in accessing the market for part funding the projects at the city level. However, the part funding will depend on the ULB’s credit worthiness. • It also helps to monitor ULB’s record of service delivery, reform orientation and recovery of cost services. • Facilitate in benchmarking of ULB’s and assist them in understanding their development needs. • Improve service delivery and enter into Public Private Partnership along with an independent agency for performance assessment.
Credit rating methodology is typically the involvement of business-related risks, financial risks, management risks and project risks.
Credit rating of corporate bodies and ULBs is similar in broad aspects. ULBs serve some different purposes so adjustments must be made in that direction and also include all the risks a corporate body is exposed to. Some municipalities have a lot of industrial activities or are nodal points in the logistics chain giving natural advantages to some cities while added to that are the legal and administrative framework as enablers for ULBs to fix tariffs, raise tariffs, etc. This is termed as the industry risk.
How well the ULB and municipal body leverages this economic base while providing quality service is the operating efficiency. So the Corporators look at the revenue surplus or deficit, the
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capital expenditure, the level of autonomy, whether the tariffs are in line with costs, whether the ULB is able to enhance these tariffs on a periodic basis etc.
Corporator also look at the socio-economic profile of population, and the efficiency in using the economic management like the expenditure control, reform orientation, political environment, etc. Nearly half of the income profile of ULBs is from grants, and the proportion of their own revenue is worsening. There are two basic problems- half of the ULBs rated are non-investment grade and the earnings profile is one another problem. Some of the other problems are:
There is a diversity of income sources and there is an over dependence on grants. Service coverage and quality are not up to the mark, and so ULBs cannot charge more for them. In terms of electricity, Bankers have moved on from just noting Transmission and Distribution (T&D) losses to Aggregate Technical and Commercial (AT&C) losses, which counts commercial efficiency. Services provided must be measured, billed and the payments collected to get the returns on investment.
Mr. Narasimhan went on to explain that the surplus depends also on the expenses, and whether there is a control on the operating and capital expenditures. Capital expenditure will need to monitor whether the project is being executed in the cost and time envisaged for it, and will determine whether the ULB can support the project initially from its own revenues before it seeks other sources of funds- whether it is the government or the capital markets.
Credit enhancement in various forms can, however, take up the overall rating. Some Best practices are:
Chennai raising money from the bond market Market linked tax rate system, such as market-relevant property taxes depending on the locality and the characteristics of the building itself Jaipur’s incentives for tax collection Chennai’s efficient tax administration Nagpur’s enabling legislative profile
The need to access external finances arises from huge need for funding, which cannot be met by the state governments, as well as the fact that markets have their own expectations. This leads to certain challenges:
Structural challenges- for which the ULBs cannot do much, and problems at the ULB level. On the regulatory level, there is an absence of a dispute resolution mechanism, of a secondary
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market, lack of institutional memory due to transfers, and the regulatory framework must also ensure ULB independence. At the ULB level, the problems are that they don’t have latest financials, they practice cash based accounting, their disclosure standards, and that they must develop more transparent mechanism and projects based on financial viability.
Mr. Narasimhan also mentioned that there have been no issuances in the last 3-4 years. In the last 15-odd years Rs. 3000 Crore have been raised, so the appetite exists. An important aspect of the bond market is that organizations need to first issue and then become regular issuers. That’s when the investors will also become more comfortable. Credit rating can be increased through some practices:
Escrow- put some money away to support debts. Cash collateral and other multi- level support systems.
The market is very long term, like a marathon. It requires commitment, preparation and investment into your own body to participate in a marathon, and it is the same for participating in the market. Corporators also need enabling mechanisms from the regulatory side.
Panelist 2: Mr. Madan Sabnavis, Chief Economist, Credit Analysis and Research Limited (Care)
Mr. Madan Sabnavis started by mentioning that he is an economist by profession and had joined CARE Ratings in 2010, which is when his exposure to ULBs began. Rating agencies were supposed to rate certain specified ULBs, and there was an initial rating followed by a surveillance rate. 13 ULBs were being looked after by Care Ratings. His experience was that it was firstly difficult to locate the offices of these ULBs and when found the officials were surprised and had no idea where the data was.
The second round of surveillance was easier, and some kind of habit had been developed within these ULBs, which was a positive signal. The non-investment grade ULBs were cognizant of the fact that they needed to improve, and make sure they have the numbers.
In 2011, a well performing ULB came to the organisation and wanted an issuer rating, and therefore were provided with a very good rating. The ULB Was not interested in raising money, but wanted to highlight this grade on their website as a matter of prestige.
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ULBs didn’t understand the purpose of credit rating, as they were not interested in borrowing money. Therefore the ULB treated the process as an expense, and thought in terms of money saved is money earned. This was a setback for the Agency.
He mentioned that when a Rating Agency talks of bond markets, and asks them to borrow more from institutions and depend less on the government, that leads to a major challenge. Municipal Corporations have lots of money but are not obligated to spend it because they’re not obliged to do so. So for making them more financially viable:
There is a need to change the mindset; and There must be created demand and supply.
Therefore, according to him, grants must be given to the better performing municipal bodies only, contingent on certain financial discipline, performance parameters achieved during the year. In the future there will be a major funding problem. In a bad year, the Government of India must cut down on expenses and the capital expenditures and projects are also reduced. As the grant kitty reduces, the distributions reduce and capital expenditure also reduces, to ULBs must be forced to look at debt markets to make the difference.
Mentioning methodology of creating Bond Markets, he went on to mention that the Agency must mimic what happens in corporate debt markets. State governments have their own commitments in terms of the FRBM. Government cannot give guarantees as they have their own liabilities. Returns must also be comparable to that the market expects. The tax free bonds that have been issued by the Public Sector Companies have done remarkably well in the current environment, so the Agency’s need to have some tax benefit given, as well as a comparable market oriented interest rate, and only then will there be a demand for these kinds of bonds.
Panelist 3: Mr. Tarun Bansal, Regional Head – North India, India Ratings and Research Private Limited
Mr. Tarun Bansal started by mentioning that his Agency was mandated to rate 21 ULBs, and the experience was diverse. There were some very strong ULBs like those from Maharashtra or Delhi, and some weak ones with low revenue profile like those from the North East, Rajasthan and Madhya Pradesh.
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Larger ULBs were cash surplus but the people governing the city are not aware what they need to deliver today, and five years from now. They didn’t have a vision about how the city should look like.
One municipal commissioner mentioned that they were selected for a grant under JnNURM and no sufficient documents were available other than that. It had to take ministry interventions and 18 months for the Agency to get sufficient information that would allow the Agency to conduct the rating.
Mr. Bansal questioned the participants by mentioning that how do the Agencies encourage these cities to invest, plan and plan for the future? It all boils down to governance and what we want to give to our stakeholders in the next 1-5 years in the form of various services. This will lead to absorption capacity of the municipalities, because it will lead to more projects planned and ULBs need for more borrowing and revenue sources and things will then fall in place. However, he mentioned few steps on starting a bond market:
Incentivisation for debt component in financial structure. A borrowing part included in the plan. There must be a regular pipeline. Strong ULBs must borrow to finance, so the market becomes better and there is more information about the ULB in the market. Being a regular issuer is important because ULBs will be in an area that is already crowded by Government, banks and financial institutions and corporate. These three occupy the mind space of debt investors. Rating bridges the gap as information on ULB comes out for the first time in the market. It gives a transition of how various cities and ULBs have performed on their credit ratings over a period of time, leading to a buildup of confidence. Builds confidence in ULBs in general.
Pool finance is a wonderful vehicle which is used widely in US. Only Karnataka and Tamil Nadu have done that in India. It enables weaker ULBs rated BBB or lower to access funds at competitive rates. Creating an escrow to fund specific projects is also a good idea, and also popular in the US- an important tourist city there funded its infrastructure by having a cess on room tariff to fund the Mass Transit Rapid System. In case of new areas developed within the municipality Tax Increment Bonds are used so that as development goes on, tax is increased to finance further development in an area. This is also practiced in the US.
In case of Latin America, multilaterals go and invest directly in ULBs and enhance their credit. This leads to capacity building at the ULB, and the credit rating gets enhanced. In India
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multilaterals cannot credit or enhance the ULB debts directly. Multilaterals however want to invest in India.
Concluding Remarks by the Chairperson:
Prof. O.P. Mathur mentioned that right from 1997 to date; there are only 22 ULBs which have gone to the market. In US, in 2010, the local government debt was 12% of the GDP, so there is no comparison between the other countries and India. In the process he brought out some vital points to be considered in terms of bond markets in India. They are:
He mentioned that this was the first time ULBs have been rated in India, and it’s a very new experience for MoUD. Instruments had been rated before, but not ULBs. The intent was that this would be a regular feature on the part of the MoUD to rate the municipalities at least once in three years to gauge improvement, if any. Secondly, it was trying to capture current status and the difference from investment grade, the distance it must travel to become investment grade. A small group was created by MoUD to keep reading these reports to see what kind of a reform agenda emerged from them. However, the initial protocols changed both in respect of the regularity in terms of rating which was planned in 2007, and the group that was supposed to read these reports were also wound up as soon as the personnel changed. Another vital point was that it was not certain on whose debt is a municipal debt. A municipal debt is not a guaranteed loan and the RBI doesn’t recognise ULBs as a borrower. They recognise the central and state governments, but in 16- 17 years they haven’t developed a mechanism to deal with this. The implicit assumption is that state government will pay defaults. Fourthly, there are no bankruptcy laws; therefore any lender is not comfort in terms of accountability. So the kind of comfort that the lender needs is not present. Bankruptcy laws will help ULBs access the markets. Fiscal responsibility is absolutely critical. Municipalities own revenues are just about Rs. 760 per capita, though Rs. 1430 is the total revenue figure that was spoken about in 2007-08. It is about Rs. 767 or Rs. 768, which is virtually like Rs. 2.5 per capita per day. With this kind of revenue nothing big will ever happen. There’s a huge lag between potential of raising municipal revenue and what they can raise. In fact if there were some norms laid down for this purpose, it would certainly help in improving their ratings as well as their chances of entering the bond markets.
Prof. Mathur concludes by questioning the participants on the fact that still it is not clear to what extent the rating depended on the municipal revenue component, which was one of the components that the rating agencies looked at, and to what extent did the rating depended on
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intergovernmental transfers. There were 7 components, but the others were non-financial in nature. The two components which were financial and critical for the rating were not clear in these terms. He also mentioned that the weight-age could be guided by the ministry in forming regulations. Some kind of weight would give an idea to the ministry, as the weight lies with own revenue, that would have a different strategy and transfers would have a different strategy.
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Session -3 Experience of ULBs in Securing Good Rating in Accessing Bond Market
The topic of session 3 was, 'Experience of ULBs in Securing Good Rating in Accessing Bond Market' that focused on the Nagpur and Ahmedabad’s experience on accessing bond market. It also focused on the challenges faced by Indore ULB in accessing the capital market despite having good rating. This session was chaired by Mr. A.S. Bhal, Economic Advisor, MOUD. The presentations were made by Mr. S.S. Hastak and Mr. Rahul Joshi.
Chairperson: Mr. A. S. Behl, Economic Advisor, MOUD
Mr. A. S. Behl, Economic Advisor, MOUD welcomed the participants and the speakers to the session. Addressing the session an interesting topic, he requested Mr. S.S. Hastak, Executive Engineer, Nagpur Municipal Corporation to make his presentation and to talk on Nagpur’s experience in accessing Bonds and securing a good rating in the market.
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Panelist 1: Mr. S. S. Hastak, Exe. Engineer and Nodal Officer (CBUD), Nagpur Municipal Corporation, Maharashtra
Mr. Hastak shared some of the experiences of municipal bonds which were related to Nagpur Water Supply Scheme Pench-III, Part-I and second for the Augmentation of Nagpur Water Supply Schemes Pench- IV. The first Bond was a Municipal Bond that was accessed for a project called Nagpur Water Supply Scheme Pench-III, Part-I. The Bond was issued at Rs. 100.00 crores with a 13% rate of interest in January 2001. The repayment period for the Bond was 7years. The amount that was raised was Rs. 50 Crores and the actual subscription of Bonds was Rs. 31.12 Crores. The interest payment period was half yearly and the Trustee Bank was Bank of Maharashtra, Nagpur. The Consultant for the project was M/s Artefact Software Ltd., Nagpur and the sole arranger for the project was SBI Caps Limited. The Rating Agency was M/s ICRA Ltd. Mumbai who gave a credit rating of `AA` to NMC in June 1999.
The second Bond that was accessed by NMC was the Tax Free Municipal Bonds for the project on Augmentation of Nagpur Water Supply Schemes Pench-IV. The Bond was issued at Rs. 128.30 Crores with an interest of 7.75% per annum in March 2007. The repayment period was 7 years and the amount raised was Rs. 50 Crores with an actual subscription cost of Bonds at Rs. 21.70 Crores. The half yearly interest was paid to the Trustee Bank i.e. Bank of Maharashtra, Nagpur. The consultant for the project was M/s Mennen Financial Services Ltd., Mumbai and the sole arranger was SBI Caps Limited. The Rating Agency M/s Fitch Rating India Pvt. Ltd had given a credit rating of `AA` to NMC in February 2007.
He mentioned that the experience of Raising of Tax Free Municipal bonds by NMC was not encouraging mainly due to poor response from subscribes/ investors for making investment in Municipal Bonds and due to absence of guarantee of State Government for repayment of Miscellaneous Professional Liability (MPL) Bonds. The other experiences that he shared were – (1) low trend of revenue increase in ULB, (2) lack of aggressive marketing, (3) absence of relationship of trust and (4) lower rate of interest available in capital markets.
NMC had also raised loans through the Nationalized Banks as its contribution of 30% after availing the JNNURM share. In 2010, NMC raised a loan of 200 Crores through nationalized banks for meeting its 30% share under JNNURM projects. The repayment period was 7 years and the rate of interest 8.5% -9.5%. Financial Management was done through escrow mechanisms
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with daily transfer of 20Lakhs from ULB revenue to the escrow account. Bank also allowed 19 months moratorium period in which ULBs required paying interest only. Loan amount was availed as per the requirement of releasing payment to the agencies involved in the project implementation.
Mr. Hastak went on to mention that recently NMC is facing problems due to replacement of Octroi with Local Body Tax (LBT) in the state, which has led to an advert impact on the revenue collected. This in the process is effecting the payment of the 20 Lakhs that was being transferred to the escrow account. As this is the initial period of the LBT, there are difficulties being faced which would improve with the improvement in the LBT revenue.
Lastly, he mentioned that to make the system sustainable there should be a constant flow of revenue that is available from the municipal sources like property tax, Octroi and so on. The relationship of trust between the Bank and the Municipal Body is what is required to make the system successful as in the case of Nagpur Municipal Corporation.
Panelist 2: Mr. Rahul Joshi, Chief Operating Officer, Powertec Engineering Pvt Ltd.
Mr. Joshi shared the experiences of two cities on issuance of municipal bonds namely Ahmedabad and Vishakhapatnam. Starting with the Ahmedabad Municipal Corporation (AMC) case, he mentioned that the ULB had first issued its Bond in 1998. The key features of the Bond were:
A bond is not guaranteed by the State Government. It had an innovative security mechanism which involved Escrow’s Octroi revenue from 10 naka’s to directly go to the two designated accounts – (1) interest payment account and (2) principal payment account, prioritizing the payment process of all bond holders over all the other payments of the Municipal Body. The excess money left after this payment would be used for general fund for the municipal corporation.
However, this innovative method was ratified by CRISIL, who later modified the method and approach as well. As a consequence CRISIL gave AMC an AA (SO) structural obligation rating. This resulted that Bankers and investors starting investing in these bonds. The other factors that secured the CRISIL AA (SO) rating are:
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In 1996-97, 80% of total revenues comprised Octroi and Property Tax, grants were less than 10%: Reform of Property Tax was underway – groundwork for move to unit area method of assessment from ARV method was being laid Revenue surpluses had been rising for the last three years AMC had a well defined vision regarding future provision of civic amenities backed by a well defined capital investment plan for water, sewerage, roads and street lighting (TCE, AIC Watson). It had also fleshed out in detail the financing plan for its investment plan with the assistance of US Aid, IL&FS and national and international experts. The senior management of AMC was highly motivated, market savvy and technically competent. Subsequent issues in 2002 – 9% p.a. (AA (SO), Rs 100 cr), 2004 – 6.4% p.a.a (AA (SO), Rs 58 cr) and 2005 – 6% p.a. (AA (SO), Rs 100 cr) had tenors of 10 years each and were privately placed. They were also credit enhanced through escrow of a mix of Octroi and Property Tax revenues. The collections in the escrow accounts were distributed pari-passu amongst existing and new bonds. To curb growth of revenue expenditure concerted efforts to reduce establishment and administrative expenditures from 2003 resulted in their reduction from 72% of total revenues in FY 02-03 to 52% in FY 06-07. Capacity development at AMC has been supported by institution building by the state in the form of GSFS Capital & Securities Ltd., acting as an intermediary to facilitate market access by ULBs and state government entities. GSFS Caps has been the lead arranger for the subsequent three issues.
Talking on points that the rating agencies look at while giving ratings, he mentioned the following:
Economic Parameters – nature of economic base and its growth prospects; Financial Parameters – large, stable own revenue base, high tax and user charge collection efficiencies, low growing revenue expenditures which are significantly less than revenues, low debt and good debt management practices, capital expenditures which are predictable with a proper financing strategy ; Service Delivery and Managerial Assessment Parameters – infrastructure availability, capital investment trends, reform track records; Legal and Administrative Framework – taxing powers, borrowing powers, including, ability to charge assets and cash flows, functional domain. The key parameters influencing ratings are: Financial Performance and Service Delivery and Managerial Assessment
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Also, conceptualizing and detailing an investment plan and its financing as well as reviewing municipal accounts and practices to present them in a SEBI format are time consuming affairs hence, a ULB going in for its first bond issue needs to provide sufficient time for the same. For instance, it took AMC 22 months from the date of the first resolution of AMC’s Standing Committee (March 3, 1996) to the date of issue opening (January 16, 1998) to bring out its first bond issue.
While sharing the Vishakhapatnam Municipal Corporation (VMC) experience while accessing Municipal Bonds, he stated that the bond was issued to part finance the hundred crore Godavari Drinking Water Supply Scheme. The AA-(SO) rating by CARE was influenced by several factors, the prime being:
In 2002-03, 71% of total revenues comprised Property Tax, Other taxes and Water Charges. grants were less than 20%: Negligible outstanding debt (Rs. 9.73 crore from LIC) with repayment liability assumed by Government of Andhra Pradesh. Positive and growing revenue surpluses over the last four years VMC had a well defined water supply project detailed in a DPR for which tendering was underway. It had also fleshed out in detail the financing plan for it’s the water supply project with the assistance of IL&FS. The Municipal Commissioner, Deputy Municipal Commissioner and the Mayor were positively inclined towards a bond issue with the Municipal Commissioner acting as champion. Vishakhapatnam Municipal Corporation Act, 1979 allowed creation of mortgage on VMC property including the water supply project assets being created as well as escrow of all taxes, duties and cess. Credit enhancement through escrow of Property tax revenues and 30% of water charge revenues aggregating to 27% of total revenues of VMC.
He went on to mention that VMC also applied for tax-free status on its bonds in FY 03-04 from the Government of India, Ministry of Finance through Ministry of Urban Development and Poverty Alleviation. It received tax-free status on only Rs 50 crore on the total issue size of Rs 70 crore on December 29, 2003. The delay in obtaining tax-free status meant that the bond issue was delayed till the fourth week of March, 2004. The delay resulted in only Rs 63 crore of the bonds being placed with the entire shortfall being experienced in the tax-free bond category.
Mr. Joshi mentioned that the process of issuing a municipal bond is long drawn particularly for the first bond issue taking anywhere from 18-24 months from date of council resolution to the date of bond issue. Reasons are:
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Municipal accounts are on a single entry, cash basis. Also, very often they are in local language and need to be translated into English which takes time. The account figures particularly cash balances do not tally from one year to the next for example, closing balance of cash in previous year can be different from opening balance of cash in the current year. As there is no balance sheet, the outstanding debt picture has to be built from journal entries. The capital investment plan and its financing need to be fleshed out in detail. The process of getting approvals from state governments, central governments, in case of tax- free status, is time consuming. Appointing merchant bankers, bond trustees etc takes time. Preparation of prospectus, credit rating and getting SEBI approval is also a time consuming process. For instance, VMC embarked on the process on 7th Feb, 2003, GoAP approval was received on 20th March, 2003. However, tax-free status from MoF was received on 29th December, 2003 with MoUDPA approval on 12th January, 2004. As a consequence the entire process of rating, appointing investment bankers, due diligence, SEBI approval and listing agreements with NSE was squeezed into a period of 2 months. Further, the short period of time left for expiry of the tax-free status meant that there was no flexibility in timing the market to attract the maximum interest from investors looking for tax breaks.
He concluded by giving some useful recommendations for ULBs planning to issue municipal bonds. Some of the recommendations were -
ULBs should start the process early with the preparation of a CDP and a business plan based on it, business plan should have projects identified for investments and a preliminary financing plan, and ULBs should obtain credit rating and approvals for issue of tax-free municipal bonds in the early part of the financial year to get a sufficient time to place the issue under favorable market conditions.
Points for Discussion:
Municipal Bond Markets in India: The municipal bond market in India could have been very vibrant if the financial architecture would have been apprehensive of the capital market that is present within the country. The easiest way to get finance is to approach the public sector bank that controls 80% of total business. But given the way it is structured, due to lack
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of competition amongst the banks to generate higher returns and also due to lack of search for higher profiles of investable projects, the system stops at this point. For a developing scenario, the municipalities have to have a lot capacity along with trust of the banks to generate the municipal bonds.
Raising the appetite of the Municipalities for need for money: The HPEC report mentions that there is a need for 40 Lakh Corer to bring about development in the country. But this is a normative condition i.e. if everything goes well than the cost calculation would imply. Under JnNURM Phase I, grants were provided both from the central government and the state government. Even this amount could not be spent by municipalities, which shows that the appetite for money within municipalities is lacking completely. So under JnNURM Phase –II, Planning Commission have suggested that cities should prepare a 10 year plan illustrating the kind of projects that the city would carry out, expected outcome and ways to finance the project.
Merchandise the land Vs. Buying Municipal Bonds: Each state, parastatal-bodies and cities within a state have all got land that makes the landuse pattern in any state very inefficient. If these lands are merchandised then the appetite for money could be generated. It should be checked whether merchandising land would be cheaper than buying municipal bonds from the market in India.
Leveraging of funds under JNNURM -2: Under JnNURM Phase I, a project has equal share from the central government, state government and the municipal body. But the scenario should be that MoUD should only provide a concessional amount along with a grant amount and a loan amount to the municipal corporation, so that ULBs are encouraged to access the market.
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Session IV: Regulators and Investors Response to Constraints in Issuing Municipal Bonds
This session focused on the Regulators and Investors response to constraints in issuing municipal bonds. It mainly talked about the constraints in issuing municipal bonds according to the regulators and Investors and also concentrated on the approaches to overcome these challenges. It was Chaired by Mr. Parmod Kumar, Director – UD, MoUD and the speakers were Mr. Ananta Barua, Executive Director (Bonds), SEBI and Mr. Ashish Sable, SVP & Head, SBI Capital Markets Limited.
Chairperson: Mr. Parmod Kumar, Director – UD, MoUD
The Chair began by setting the context for the fourth session of the workshop wherein the constraints in issuing municipal bonds according to the regulators and investors and the approach to overcome the challenges would be discussed. Mr. Kumar stated that the Municipal Bond has recently become such an important issue that it is being talked about by the Finance Minister himself in many forums. Municipal Bond has also been made a part of the
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agenda of Financial Stability and Development Council (FSDC) meeting chaired by the Finance Minister. The subject is being looked after very meticulously and the Minister has also mentioned about how to revive the Municipal Bonds.
The Ministry of Finance is regularly pursuing this issue with the Ministry of Urban Development so as to ease out certain conditions and guidelines as far as the regulatory framework is concerned. So far as the initiation at the MoUD is concerned, they have fine tuned the recommendations given by the World Bank report in 2012, regarding the regulatory framework for structure of the Municipal Bonds and have submitted certain proposals to the Ministry of Finance and seeking their approval. The Chair also informed the participants about the coming up of certain guidelines related to this issue which would kick start the schemes.
Mr. Kumar then invited the first speaker of the session Mr. Ananta Barua, to give an insight into the subject matter.
Panelist 1: Mr. Ananta Barua, Executive Director (Bonds), SEBI
Mr. Barua started by informing the participants that SEBI as a capital market regulator wants to encourage all types of issuers to access the capital market, so that there is a depth in the market and also the purpose of all types of issuers is served. SEBI has come out with a lot of regulations catering to many types of issuers, whether it is to encourage venture capital or small SME segment. They even have a different segment as far as Municipal Bonds are concerned and it forms one of the important areas which SEBI wants to encourage.
He went on to discuss about the main constraints in the issuance of Municipal Bonds, as:
SEBI as a regulator allows all types of securities which can be accessed in the market and which are basically marketable in nature. The first question that arises is about the nature of the instrument - Municipal Bond. The challenge is with different authorities giving different notion to it. Even the RBI does not recognize Municipal Bond as a debt of Government and it does not figure in Central or State Government. This has a lot of implications as different types of bonds have different set of rules and platform for trading. If it is not in Government securities, then it has to be in Corporate Bonds and then both have different accounting
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treatment. For example, in case of governmental securities, even if it is held to maturity then it need not be a market to market which is just the opposite with Corporate Bonds whether it is to maturity or for trading. So one thing that possesses challenge is the nature of securities. Secondly, when an issuer comes, he uses a different vehicle. With Company there is no problem as the liability is on their book, but as a Municipal Corporation, it has been seen that they have tried to issue their securities under different structures, called as conduit issuer. Then the question arises whether they come through a trust route or SPV route. Different things are being explored and one suggestion that came up was if the Municipal Corporation can come through floating a SPV company under Section-25 of the Companies Act. Now under Section-25, the companies are mainly for charitable purposes and they are not allowed to declare dividend and members also do not get bonus. However, after analyzing the sections it was permitted for an SPV formed under Section-25 as a company, to access the market. The coming of a Municipality through this route was one of the challenges. Thirdly, when a bond is raised, there are two requirements by the bank - whether the bond needs to be secured or it may be unsecured. If the bond is unsecured, the requirement under the Companies Act is that they have to create some reserves - trustee and mention from where these loans are to be serviced. In case of Tamil Nadu, mortgaging the assets of the municipality is not allowed. However, in states like Maharashtra, assets can be mortgaged to raise the loan. In USA, a separate bankruptcy law applicable to municipal corporations has been passed where loans can only be reorganized or readjusted and there is no possibility of liquidation of Municipal Corporations. But in India there is a corporate law and none for municipal corporations. Another challenge is that we have a separate law/ regulations for equity and debt. The authority of SEBI comes only when the debt securities are issued to the public and as per the law if you issue it to the public, then it has to be listed. SEBI has no jurisdiction even if is privately placed, but not listed.
The Speaker then referred to certain points that were already discussed but with a different perspective on how these can be challenges in issuing Municipal Bonds. He raised the point that earlier the regime was control of capital issue where there was a merit regulation and the regulator was seeing whether any project is good or not from the point of view of the investors. This regime is no longer in place. Now the regulator need not see whether the project is viable or not, they only have to ensure the disclosures, material disclosures etc. which help the investors to take informed investment decisions.
In 2008, SEBI came out with the regulations where the shift was totally towards disclosure based regime and there one of the requirements is rating. Earlier, there were two ratings and investment
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grade rating was mandatory. Now only one rating would do and it need not be investment grade. In a totally disclosure based regime, when an issuer comes, there are mainly 3 types of disclosures
Pertains to the issuer – who is the issuer and what is his track record? What is the project for which the loan is being raised? The nature of the security, how it will be paid and how this security is arrived at?
Mr. Barua ended by suggesting that as far as Municipal Corporation is concerned, we have to also see what type of disclosure requirement is to be prescribed. For the Municipal Corporations, the revenue kind of bonds, where one maintains an escrow i.e. some revenue pools are there which can service those bonds, that is a good model to access and it can be facilitated fast.
Panelist 2: Mr. Ashish Sable, SVP & Head, SBI Capital Markets Limited
Mr. Sable agreed with Mr. Barua that in case of Municipal Bonds, the regulatory part is the most challenging. As stipulated by the Chair, he also felt that the credit enhancement is an important part of the issue. He then went on to share his experience and informed that the SBI capital market has incidentally handled the middle municipal corporation bonds. Their experience with the Bangalore and Ahmadabad Municipal Corporations has been noteworthy. However, Nagpur Municipal Corporation had faced under subscription. Things don’t go as planned when one has a wrong conclusion and then one ends up in addressing something else.
He feels that it is important to note that typically urban funding methods have been used. Charges, grants, private participation, monetization and borrowing from the debt markets have been used worldwide. In India, typically there are soft loans, internal accruals, credits available from HUDCO and LIC, limited borrowings from the banks and then the bonds.
He said it would be necessary to adopt the following framework to create a vibrant municipal bonds market in India, its keys points being:
Identifying the viable bankable projects and whether I am handling a bond requirement for a viable project or not Crystallizing the means of finance
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Process of obtaining approval Structuring of the debt issue – this is where the intermediaries come into play Credit enhancement
Mr. Sable also raised the point that typically the instrument structure is why bonds. There was a mention of the term loans. Generally people go through HUDCO or LIC to the banks and find it easier to raise money rather than raising the amount through bonds. The main reason is that there is flexibility in term loans whereas bonds require an absolute clarity and delay of even a day and a rupee is treated as default. Sometimes even the bank may lend money to pay in interest but that does not happen in a bond. One needs to have discipline when talking about the market. It is ready to give the amount in a cost effective manner and better than a bank rate, when given the surety that one is credit worthy and has a bankable project. This type of conditionality has to be adhered to not only when one launches a bond issue but also on an on-going basis.
He used the platform to suggest that there is a need to understand the limitation of the municipal corporation to get the financial auditors on a regular basis. It is also important to realize that the municipal corporation may not be in a position to adhere to the disclosure requirements. So instead of going to a public, the institutional investors need to be approached. The insurance companies and the provident funds are the major investors for the municipal bonds.
Points for Discussion:
The Chair mentioned that SEBI has given a provision that companies listed under Section-25 can go for the bonds and for the public listing, but those SPV which are earlier registered as trust, they will not be allowed. He enquired if it means that the states like Tamil Nadu and Karnataka will have to re-register themselves under Section-25 or some way out is to be found out. To this Mr. Barua said that mostly the trusts have been created as a vehicle of investment on behalf of investors and not for raising themselves. One of the participants raised the point that the corporate bond markets in India are badly under-developed, but it was mentioned that the primary issuance every year is around 3 lakh crores in last year. So is it that the secondary markets are not developed? Mr. Barua replied by saying that in India, they are trying to develop that market as in two limited countries, USA and Korea such that all the requirements for infrastructure, municipalities etc. can be met. In terms of the proportion of the total amount being raised both in terms of ratings as well categories of issuers, it has been seen that they are expanding, particularly in the last couple of years. What we can definitely say is that more and more people setting up the corporate bond desk is also an important criteria that the market is developing now.
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One of the participants suggested that unless the market is broad based including retail, investors it will never truly be a vibrant market and will remain an institutional market.
Concluding remarks by Chairperson:
The Chair appreciated the points highlighted by Mr. Barua and went on to add certain other provisions which are being thought of at MoUD, as:
As per the present provisions of the State Pool Finance Scheme, MoUD is supposed to provide some of the grants to the States to go for those provisions. Currently 50% of the cost of this institute is to be borne by the government i.e. MoUD. As per the new thought, 100% of the cost would be borne by the MoUD. In the case of Credit Rate Enhancement Fund (CREF), earlier the limit was that either 10% of the bond issue or 50% of the CREF would be given by the MoUD as a grant, whichever will be lower. But now the thought is to make that one whichever is more. Another relaxation which is being thought of is that earlier, only sanitation related projects were taken over first but such restriction is being removed and all those provisions which are as per the 74th Constitutional amendment act would be included now. Any municipality can take any project under this state pool finance. Earlier first the ULB was supposed to go for the property tax reforms but now this condition has also been relaxed.
Mr. Kumar however stressed that these ideas were simply meant to kick start the scheme and the real issue is the governance. Until and unless the governance at the ULB level comes, it would be difficult to revive the Municipal Bond market. He then invited Mr. Ashish Sable to give his views on the topic.
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Session V: Concluding Remarks and Way Forward
Concluding Remarks and Way Forward: Mr. A.S. Bhal, Economic Advisor, MoUD
Mr. A.S. Bhal appreciated the discussions made during the interactive sessions and mentioned that the experience has been very enriching and a real eye opener on some of the issues. As mentioned by Mr. Pramod, Mr. Bhal also informed the participants that a lot of ferment was going on regarding the Municipal Bond segment since 2012 and somehow the things were not happening. But now, with the Finance Minister putting the subject matter in his budget speech, a lot of ideas have started to pour in. He hoped that the activities carried out between the Department of Economic Affairs and the Urban Development on the subject would lead to some good effect on the ground.
Vote of Thanks: Prof. Shyamala Mani, Professor, NIUA
Prof. Shyamala Mani extended a word of thanks especially to the Mission Director Ms. Nisha Singh to make her presence and inaugurate the workshop and also thanked Dr. Isher Judge Ahluwalia to deliver the inaugural session. She gave a vote of thanks to the honorable Chairs, eminent Speakers and all the distinguished participants at the workshop for their active involvement in the discussions and making the workshop a success.
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Annexure – 1
Agenda of the Workshop
9:00 – 9:30 am Registration & Tea
Inaugural Session (9:30 – 10:00 am) : Welcome and Introduction to Workshop
• Welcome Note by Dr. Debolina Kundu, Associate Professor, NIUA • Address by Dr. Isher Judge Ahluwalia, Chairperson, ICRIER • Key note address by Ms. Nisha Singh, JS and Mission Director, MoUD
Session 1 (10:00 – 10:45 am) : Importance of Credit Rating and Financial Management Importance of credit rating Chair: Dr. Isher Judge Ahluwalia, Chairperson, ICRIER and financial management in accessing capital • Ms. Aditi Nayar, AVP, ICRA markets • Mr. Shameek Ray, Head, Debt Capital Markets, ICICI Securities Primary Dealership Ltd. • Mr. Alok Shiromani, Head, Technical Cell, JNNURM, MoUD
Session 2 (10:45 – 11:15 am) : Role of Credit Rating in Accessing Capital Market
Credit Issues with Chair: Prof. O. P. Mathur, Distinguished Professor of Economics, municipalities in light of NIUA JNNURM experience. • Mr. Nagarajan Narasimhan, Senior Director - Ratings, Challenges with investment CRISIL Limited grade ULBs in issuing • Mr. Madan Sabnavis, Chief Economist, Credit Analysis and bonds. Research Limited (CARE) • Mr. Tarun Bansal, Regional Head-North India, India Ratings Case studies on credit and Research Private Limited enhanced structures done by municipalities till date in India.
11:15 – 11:30 am Tea & Snacks
Session 3 (11:30 – 12:15 pm) : Experience of ULBs in Securing Good Rating in Accessing Bond Market
Nagpur and Ahmedabad’s Chair: Mr. A. S. Bhal, Economic Advisor, MoUD experience on accessing bond market. • Mr. S. S. Hastak, Exe. Engineer and Nodal Officer (CBUD), Nagpur Municipal Corporation, Maharashtra Challenges faced by Indore • Mr. Rahul Joshi, Chief Operating Officer, Powertec ULB in accessing the Engineering Pvt Ltd
capital market despite having good rating.
Session 4 (12:15 – 01:00 pm): Regulators and Investors response to constraints in issuing municipal bonds
Constraints in issuing Chair: Mr. Parmod Kumar, Director – UD, MoUD municipal bonds according to the regulators and • Mr. Ananta Barua, Executive Director (Bonds), SEBI • Mr. Ashish Sable, SVP & Head, SBI Capital Markets Limited
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Investors.
Approach to overcome the challenges.
01:00 – 01:15 pm Concluding remarks • Mr. A. S. Bhal, Economic Advisor, MoUD and way forward • Prof. Shyamla Mani, Professor, NIUA
01:15 – 02:15 pm Lunch
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Annexure -2
List of Participants at the Workshop
JNNURM Experience Sharing Workshop ‐ II Learning from Cities, PEARL Project, JNNURM Venue : Multipurpose Hall, IIC, New Delhi, Date : 18 September 2013
Sl.N Name Designation Office Address Phone/Mobi E.mail o le
1 Lovlesh Devra Delhi NCR Head Creative Circle Nagpur 965050066 [email protected] 2 T.P. Devadass Executive Engineer Tamilnadu Slum Clearance 943205082 Board, Chennai 3 V.K. Singh Accounts Officer Nagar Nigam, Allahabad 9839742535 4 Dr. H.S. Dhapila M.O.H. N.P.P. Nanital 9927855808 drharendra
5 Harshul Vrma Business Manager N.K. Buildco, Jaipur 7665622220 [email protected]
6 Ravikant Joshi Advisor CRISIL Infrastructure 9825042955 [email protected] Advisory, Mumbai
7 M.D. Lele Chief Planner, CIDCO 4th Floor, CIDCO Bhawan, 942308122 [email protected] Mumbai 8 Anindya Mallick Senior Director, Bldg IOB, Cyber City, 8447590828 anmallickdeloitte DELOITTE Gurgaon
9 Shymala Mani Professor NIUA 9811428447 [email protected]
10 Dr. Satpal Singh Research Analyst NIUA 9911151145 [email protected] 11 M. Ramsekhar C.E.O. IPE Global 8130976161 [email protected]
m
12 Aastha Joshi Research Analyst NIUA 9868040762 [email protected]
13 Debolina Kundu Associate Professor NIUA 9990048720 [email protected] 14 K. Ambedkar Accounts Officer o/o Commissionr, VMC, 986651556 Vijayawada
15 J.P. Pant Senior Database ORG Pvt. Ltd., Bectal 9868581055 [email protected] House
16 Promila Jain Research Analyst NIUA [email protected]
17 Paramita Datta Dey Senior Research NIUA 9911254428 [email protected] Officer
18 Shabana Charaniya Urban Specialist NIUA 9560205528 [email protected] 19 Ramesh Banse XEN MCF MCF 9818646501 20 Anand Bhal MHA
21 Pathan Ayyubkhan Dy. City Engineer Pcnac 9922501721 [email protected]
22 Alok Shiromany Team Leader Tech.cell MoUD 9810174741 [email protected] 22 Sharath Pillaiamarn Refom Expert JNNURM Tech.cell MoUD
23 Rahul Mallik SWM Expert JNNURM MoUD 9899849486 [email protected]
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24 Dr. KSSVV Prasad Head of Deptt., aaruee associated, 9490623700 [email protected] Environmnet Water Hyderabad Supply Division
25 Prof. Veena Garella Consultant UMC, Ahmedabad 8800588995 [email protected]
26 Paras Magu Manager CRISIL Infrastructure 9818399438 paras.magu@crisil.com Advisory, Gurgaon
27 M. Vinaykumar Executive Engineer Greater Vis Munp., 9848497464 [email protected] Visakhshu Corporation 28 Murali Mohan T. Manager, Deloitte Bldg IOB, Cyber City, 8573910540 [email protected]
Gurgaon om 29 Nalini Shanglo Research Officer NIUA 30 Archana Roy Research Officer NIUA 31 Ajay Nigam P.O. NIUA 32 Naveen P.O. NIUA 33 R.K. Dahiya System Analyst NIUA 9899727199
34 Ruchi Gupta AVP‐Consultancy Darashaw & Co. Pvt. Ltd. 8130622922 [email protected] Defence Colony, Delhi
35 Rita Dey Urban Planner NIUA 9818050722 [email protected]
36 Rahul Kumar Jha Assistant Engineer V.K.S. Infratech Mgnt Pvt. 8001656077 [email protected] Ltd
37 S.S. Hastak Nodal Officer, CBUD Nagpur Municipal Corpn. 9823098620 [email protected] 38 S.K. Chadha CEUT o/o Enginering Deptt., UT, 7508185401 Chandigarh 39 Jnananjan Panda Consultant NIUA‐MoUD 9899656269 [email protected]
m 40 M.Ahmed J.R.O. NIUA
41 Anand Sahoo Conultant aaruee associated, 9868255122 [email protected] Hyderabad 42 T.K. Majumdar Director (MoUD) MoUD 43 V.P. Singh Commissioner MC, Chandigarh 9872698800 commissionermc@chandiga
rh.com
44 S. Viswanathan Commissioner Guwahati Municipal 9678010456 [email protected] Corporation, Guwahati
45 S.V. Singh Director, JnNURM MoUD, Nirman Bhawan 26906969 [email protected] 46 N. Bhattacharjee MoUD, CBUD Nirman Bhawan 47 Anshita Aswani MD UMC Global 48 Swati Ramanathan Co‐founder Janegraha Centre
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Annexure – 3
P R O F I L E
MS. NISHA SINGH
Ms. Nisha Singh belongs to the Himachal Pradesh Cadre of IAS (1987 Batch). She undertook her current responsibilities as the Joint Secretary of MoUD on 28th April, 2011. Prior to this, she was attached with the M/O Health & Family Welfare as a Secretary.
In her over 24 years of experience, she has been associated with several esteemed organizations/ departments. Commencing her career with the Land Revenue Management & District Administration as an Assistant Commissioner (UT) in 1989, some of her earlier assignments include – serving as Divisional Commissioner in Land Revenue Management & District Administration at Shimla, Member (Admin) at State Electricity Board at Shimla, Managing Director of HP Small Scale Industries & Exp Corporation, Director of Central Information Commission at Punjab. She has also held the position of Director at MoUD and Environment & Forest, Government of HP and Deputy Secretary at M/O Urban Development & Poverty Alleviation.
She is a Post Graduate in Philosophy with First Class and has obtained M.Phil degree in International Relations. She has a First Class Graduation in Geography Political Science.
Ms. Nisha Singh has been an active participant in various Training Programmes, both National and International. She has attended training on ‘The WTO & the New Trade Regime’ organized by the Administrative Staff College of India, Hyderabad; ‘E-Governance & Management of IT’ by Indian Institute of Management, Bangalore; ‘Management of Environment and Natural Resources’ by IILM Institute for Integrated Learning in Management, New Delhi and on ‘Public Private Partnership’ organized by Anna Institute of Management, Chennai. She has also participated in International Training Programmes held at UK and Singapore.
DR. ISHER JUDGE AHLUWALIA
Isher Judge Ahluwalia is Chairperson, Board of Governors, the Indian Council for Research on International Economic Relations (ICRIER). She was awarded Padma Bhushan by the President of India in the year 2009 for her services in the field of education and literature. Dr Ahluwalia was Chairperson of the High Powered Expert Committee on Urban Infrastructure and Services during 2008-2011. She is Member, National Manufacturing Competitiveness Council and is on the Boards of a number of premier research institutes in India. Dr Ahluwalia was Vice Chairperson of the Punjab State Planning Board from 2005 to 2007.
Dr Ahluwalia is a Member of the Eminent Persons Group on India-ASEAN (Association of South East Asian Nations) set up by the respective governments. She is Vice Chairperson, Global Development Network, New Delhi and Member, Board of Trustees of the International Water Management Institute, Sri Lanka. She was Chairperson, Board of Trustees of the International Food Policy Research Institute (IFPRI), Washington D.C. from 2003 to 2006, and a Member of the Eminent Persons Group (EPG) of the Asian Development Bank, which submitted its report, “Towards a New Asian Development Bank in a New Asia” in May 2008.
Dr. Ahluwalia received her B.A. from Presidency College, Calcutta University, M.A. from the Delhi School of Economics, and Ph.D. from the Massachusetts Institute of Technology (MIT), all in economics. Her research
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has focused on industrial development, macro-economic reforms, and issues in social sector development in India. She has contributed articles to professionally refereed journals and also engaged in policy debates through the print and electronic media. She is author/co-author/editor of several books including India’s Economic Reforms and Development: Essays for Manmohan Singh (OUP), which she co-edited with Prof. I.M.D Little in 1998 and which has just been reprinted (March 2012) in an updated second edition by OUP as an Oxford India Perennial.
PROF. O P Mathur
Prof. Mathur is Vice-President and Distinguished Professor of Urban Economics National Institute New Delhi. He is truly one of the pioneer thinkers of urban economy & has drafted policies and authored many research papers and books that form the backbone of contemporary urban planning in India. He has chaired several committees, participated in Planning Commissions. Currently Prof. Mathur is researching Fiscal Federalism, Decentralization and Local Government Finance and continuing with his path-breaking work on Infrastructure Financing of Urban Poverty Reduction Strategies.
MS. ADITI NAYAR Ms. Aditi Nayar is Assistant Vice President of ICRA Limited. She holds a BA in Economics and Psychology from Indiana University, Bloomington (USA), and an M.Phil in Economics from University of Oxford (UK).
Ms. Nayar has an aggregate work experience of eight years out of which she has been associated with ICRA for six years, focusing on macroeconomic and fiscal issues. She has been involved in the rating exercises of several sub- sovereign entities, including State Governments, State-level enterprises and Urban Local Bodies. Prior to working with ICRA, Ms. Nayar was a research analyst with the World Bank.
MR. SHAMEEK RAY Mr. Shameek Ray heads a team of investment bankers at ICICI Securities Primary Dealership which structures and executes debt funding for corporate in Indian Bond markets. He has fifteen years of experience working with institutional and corporate clients in debt markets. He has particular interest in the development of corporate bond markets and has regularly participated in institutional initiatives including the SEBI Corporate Bond and Securitisation Advisory Committee.
Mr. Ray is a MBA from IIM Bangalore and has also completed the CFA program of the CFA Institute USA.
MR. NAGARAJAN NARASIMHAN
Mr. Nagarajan Narasimhan, Senior Director - Ratings, CRISIL Limited joined CRISIL in 2000 and is presently responsible for Corporate Ratings. In this role, he leads a team of analysts that rates large and mid-sized issuers in manufacturing and financial sectors. His
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key responsibilities include ensuring quality and consistency in ratings, managing client relationships, and formulating business strategies.
In his earlier role, Nagarajan has led the Industry Research vertical at CRISIL Research, involving a team of over 100 research analysts and associates who cover more than 50 sectors. This team supported the research needs of the financial and corporate sector clients through research reports and customised assignments.
He holds a B.Tech degree in Mechanical Engineering from Kakatiya University, Warangal, and an MMS in Finance from Narsee Monjee Institute of Management Studies, Mumbai University.
MR. MADAN SABNAVIS Mr. Madan Sabnavis is a post graduate in economics from Delhi School of Economics, and graduated in Economics Honors from St Stephen’s College Delhi University. He has 27 years of experience as corporate Economist and worked in the Economic Department of erstwhile ICICI Limited for 12 years, as chief Economist of ICICI Bank for 3 years, Chief Economist Larsen and Toubro for 2 years, Chief Economist and Head Knowledge Management, NCDEX Limited for 6 years and now with CARE Ratings as Chief Economist for 3 years.
In CARE, he is responsible for the sub-sovereign ratings, which includes ratings of state governments and urban local bodies, besides the conduct of economic research.
He is also an author of 2 books: Macroeconomics Demystified and Eco Quirks. He has also authored over 1500 articles on various economics subjects since 1988 in newspapers such as financial express, economic times, business standard, Hindustan times and mint besides e-newspaper firstpost.com. He does book reviews for Business World and Financial Express. All his publications since 2007 can be viewed on blogpsot: www. madansabnavis.blogspot.com
In course of career he has been Chairman and Co-Chairman of Economic Committee of Bombay Chamber of Commerce for 5 years, and Co-Chairperson of IMC’s Economic and business committee.
MR. ANANTA BARUA
Mr. Barua has been with the Securities and Exchange Board of India (SEBI) since 1992 till date as Executive Director, Securities and Exchange Board of India (SEBI). He is currently holding charge of the Investment Management Department – Division of Funds, Debt Markets, Alternative Investment Funds (AIF), Portfolio Management Schemes (PMS), Investment Advisory Services, Mutual Funds, Foreign Institutional Investors and Custodians (FIIC), Collective Investment Schemes (CIS), Parliamentary Affairs and Regional Offices.
Mr. Barua has been associated with various responsibilities including the development of policy, framing of regulations on securities market. He is also associated with developing the regulatory framework governing the capital market in India (SEBI-1992-2011) and Bahrain Monetary Agency (BMA), Kingdom of Bahrain (BMA/CBB-2004-2006).
Mr. Barua is a member of various committees such as;
• Member of Working Group on Retail Structured Products under IOSCO Task Force on Unregulated Markets and Products (TFUMP) from 09.03.2012.
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• OECD Corporate Governance Committee for in-depth peer reviews of the United State, Korea, Netherlands and Indonesia on compliance with OECD Principles of Corporate Governance, relating to board nomination and election & discussion on Competitive Neutrality and Public Enforcement. • Chairman of Working Group to suggest measures for promoting RMBS and other alternative capital market instruments such as Covered Bonds etc. constituted by National Housing Bank on 4th.July 2011. Prior to joining SEBI in 1992, Mr. Barua worked with the Industrial Finance Corporation of India from 1990. Mr. Barua holds Bachelor's degree in Commerce and a Bachelors degree in Law (LLB) both from the University of Delhi. He has also acquired a Diploma in Management from Delhi.
MR. ASHISH SABLE
Mr. Ashish Sable is currently working as Sr. Vice President, Debt Capital Markets in SBI Capital Markets Ltd., a wholly owned Investment Banking subsidiary of SBI.
He is responsible for syndicating funds for corporate from institutional investors like banks, mutual funds, foreign institutional investors, insurance companies, etc. as well as from the public debt markets. The fund are raised for the corporate through various debt structures like credit enhanced bonds, structured obligations, securitized debt, bonds with fiscal benefits like capital gains bonds/tax-free bonds, etc. In SBICAP, over the years he was associated with number of bond issuances aggregating over Rs.1,00,000 crores.
Earlier, as Vice President (Corporate Relations & Business Development) in SBI Capital Markets Ltd. he was responsible for procuring Investment Banking business from large Corporate clients like large Public Sector Undertakings (BPCL, HPCL, NALCO), Govt. bodies (like NHAI, IRFC, Nuclear Power Corporation), Municipal authorities, State utities and Private Sector Corporate entities (such as HINDALCO, L&T, Tata Motors, etc).
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ICRA Limited
Importance of Credit Rating and Financial Management in Accessing Capital Markets
September 19, 2013 Aditi Nayar‐ ICRA Limited
An Associate of Moody’s Investors Service
Rapidly Growing Cities and Rising Urban Population
ICRA Limited Fueling Need for Enhancing Urban Infrastructure
• 50% of rise in India’s population from 2001 to 2011 was in urban areas. • Metropolitan cities with population >1 million rose from 35 in 2001 to 50 in 2011. • Physical expansion of existing urban agglomerations, redefining of existing habitations as urban. • However, coverage and standard of basic services provided by urban local bodies (ULBs) have not improved along with rapid growth in urban population base. • Inadequate infrastructure raises costs of doing business, improvements required to create enabling environment for sustained economic growth.
Million Urban Population in India 700 600 600 500 377 400 295 300 217 200 100 0 An Associate of Moody’s Investors Service 1991 2001 2011 2030 (est)
Page 47 Need for Credit Rating and Financial Management Reforms in JnNURM Cities
September 19, 2013
Alok Shiromany, Team Leader, Technical Cell, JnNURM, MoUD
1
Outline
Need for Credit Rating
MoUD Initiative
Status of Credit Rating under JnNURM
Ground Issues
Municipal Finance Agenda
JnNURM- Municipal Financial Reforms
Page 48 Need for Credit Rating • Independent and credible evaluation of credit quality; • Independent financial analysis of city finances; • Benchmarking/Comparative analysis with other municipal entities - highlights strengths and weaknesses; and • External credit assessment encourages financial discipline amongst rated cities. Access to wider set of investors: 1. Increased accessibility to capital markets-helps investors in pricing the debt offer; 2. Increased marketability of debt issues by municipal entities; 3. Improved visibility-attracts international capital; and 4. Eases risk identification and diversification for investors.
MoUD Initiative
MoUD Initial Ratings commissioned • January 2008- February 2011; 4 agencies • Initial credit rating exercise completed for 65 cities (8 UIG cities not rated; UA cities included). •CRISIL Surveillance Rating •FITCH • January 2010-February 2012; •ICRA • Surveillance rating undertaken for 62 ULBs.
• CARE Ratings • Ratings are generally live for 12-15 months from the date on which rating is assigned;
• 36 ULBs have received investment grade rating (BBB- and above).
Page 49 Status of Credit Rating under JnNURM Rating Category No of Cities Cities Investment Grade AAA Nil AA 4 Greater Mumbai, Navi Mumbai, New Delhi Municipal Corporation, Surat AA-6 Delhi,,y Hyderabad , Nashik, Pune, Thane , Pimpri-Chinchwad A+ 3 Ahmedabad, Chandigarh, Kolkata A 4 36 Kalyan-Dombivili, Nagpur, Vadodara, Vishakhapatnam A- 3 Mira-Bhayandar, Rajkot , Vijayawada BBB+ 5 Chennai, Coimbatore, Jaipur, Madurai, Mysore BBB 4 Bhubaneswar, Indore, Panaji , Raipur BBB- 7 Ajmer, Bhopal, Dehradun, Faridabad, Kochi, Ludhiana, Trivandrum Non-Investment Grade BB+ 5 Amritsar, Jabalpur, Kanpur, Kulgaon-Badlapur , Nanded BB 7 Asansol, Guwahati, Ujjain, Shimla, Lucknow, Meerut, Puducherry BB- 6 29 Agartala, Agra, Howrah, Jammu, Ranchi , Srinagar B+ 4 Allahabad, Haridwar, Shillong, Varanasi B 5 Bengaluru, Bodhgaya, Jamshedpur, Kohima , Mathura B- 1 Imphal C1 Puri
Ground Issues
Though empowered by the Constitution, Cities are not self reliant
Depend on grants from Central/State Governments, (grants are reducing)
• GhiGuwahati, Kolkata, SSirinagar, Mysore, Bh hlopal, Agra
Cities lack financial viability and internal accruals are insufficient (Bengaluru, Nagpur, Srinagar)
ULBs’ revenue sources inadequately capture the economic Generating buoyancy in the local area - leading to overall weak credit Less Revenue worthiness (Bengaluru, Bhubaneswar, Faridabad) Low equilibrium cycle
Absence of exchange relationship Inadequate infrastructure in Less Spending less between taxes levied and services, cities; cities unable to meet Infrastructure on large capital expenditure on non- rising demand for services and Facility Infrastructure revenue generating projects - leading to under investment and unable to raise resources deteriorating service levels (Kolkata, Jabalpur, (Bengaluru, Kolkata, etc.) Srinanagar) (Faridabad, Kolkata)
Page 50 Municipal Finance Agenda (1/3)
Resources are available in the capital market and FIs: o Essential to expand the investment envelope by mobilizing long-term debt financing from the financial markets; o Needhld to increase the overalll ffdffbunding for infrastructure by lileveraging varied sources against one another; and o Improved credit-worthiness shall help create interface between capital market/FIs and municipal finance. Need for Capital Investment Planning and better Financial Management. Need to develop bankable projects and leverage from market: o Develop a commercially viable projects with detailed engineering, costing, procurement plan, etc.; and o Attempt reducing capital cost through appropriate credit enhancement measures to facilitate leveraging.
Municipal Finance Agenda (2/3)
Need for better expenditure management like – o Reduction in non-revenue water; o Appropriate costing of services and better targeting of subsidies; o Revenue rationa liza tion; and o Asset management helping mobilize resources - translating to better services . Urgent need for improving revenue mobilization/ innovative use of assets: o Considerable scope for increasing revenue especially from property tax ; o Levyyp Development Charg g;es; o Non-tax sources such as use of land monetization may be used; and o Commercial utilization of land/property through PPP.
Page 51 Municipal Finance Agenda (3/3)
There is an urgent need for supplementing institutional capacity by capacity building measures
Several JnNURM reforms, such as accounting reforms, property tax system, user charges on basic services and reengineering and computerization (e-Governance) of key municipal functions are important initiatives that will help enable the local bodies to access the capital market.
Timely progress in the implementation of reforms under JnNURM such as the oItIntrod ucti on of an accrua l base d accoun ting system; oSelf-assessment of property tax; o100% cost recovery of key urban services; oPublic private participation; and oImplementation of e-Governance.
Municipal Accounting
State Preparation of State 21 Accounting Municipal Accounting Manual States Manual
Manual Approval & Adoption 32 Accrual by the Local Body ULBs based DEAS Listing the Assets and Liabilities at ULB level
Assists in accountability & transparency; Valuation of Assets Better financial management helps decision-making; Preparation of Opening Balance Sheet Necessary to raise finance from the market, banks & FIs thus improved infrastructure availability; and Migration to DEAS
Assists in policy formulation, e.g., tax Appointment of Audit rates, service charges, etc. Officers/CA/Cadre
Page 52 Property Tax
Notification/Amendment of Act on Collection of Property Tax
Extending of property tax to all properties
42 85% Posting of tax details in the public Coverage domain & migration to ULBs standardized self-assessment system of property taxation on the basis of periodic revisions and review of rates
Setting up non-discretionary 29 90% Collection method for determination of ULBs efficiency property tax (unit area method or capital value method)
Coverage (85%)
Collection Efficiency (90%)
User Charges
Formulate & Adopt a Policy on User Charges
Separate Accounting System for User Charges –(Water Supply ) Collecting more than 40 50% O&M Cost ULBs recovery in Water Supply Separate Accounting System for User Charges- (Solid Waste)-
Collection O&M Charges (WS) 23 Collecting more than 50% O&M Cost ULBs recovery in SWM
Collection O&M Charges (SWM)
Page 53 Thank You
Slide 13
Key steps of the Strategy
Standard financial statements reporting formats be followed
Appropriate Accounting Standards should be developed
Capacity of municipal finance officials to be upgraded
Page 54 Huge Financing Requirement as compared to Existing
ICRA Limited Sources of Funding poses a Challenge
• Urban infrastructure financing requirement large: – 12th Plan capital expenditure projected by HPEC at Rs. 3.9 trillion. – Works out to annual average per capita spending of ~Rs, 2,100. • Municipal finances weak: Per capita revenue base of municipal bodies low at Rs. 1,430 in 2007‐08. • State Government support: – SFC mandated/formula based transfers uneven across States. – Regularity of transfers crucial. • Government of India support: – Notwithstanding sharp rise, grants recommended by 13th Finance Commission small as compared to capex requirements. – Budgetary provision for JNNURM‐1over7years. • Public private partnership (PPP) initiatives. • Debt from Banks and Financial Institutions. • Bond issues: stand‐alone or pooled. An Associate of Moody’s Investors Service
Accessing Capital Markets Critical to Meet Funding
ICRA Limited Requirement
• Diversification of sources of funds. • Structure can entail long repayment period, suitable for infrastructure projects. • Flexibility to enhance credit quality of proposed issuance through appropriate structuring. • Openinguptomarketscrutiny,whichinturnshouldstrengthenULB’smanagement information system (MIS) capabilities. • Ability of even smaller ULBs to raise funds through pooled issuances.
An Associate of Moody’s Investors Service
Page 55 Obtaining a Credit Rating is a Prerequisite for Raising
ICRA Limited Funds through Bonds
• SEBI regulations require proposed bond issuances that are to be listed, to be rated by a credit rating agency (CRA) registered with SEBI.
A Credit Rating is a simple and easy to understand symbolic indicator of the opinion of a credit rating agency about the risk involved in a borrowing programme of an issuer with reference to the capability of the issuer to repay the debt as per terms of the issue. This is neither a general‐purpose evaluation of the entity nor a recommendation to buy, hold or sell a debt instrument.
– Ratings are assigned on a scale from AAA to D. – Suffix + or ‐ may be used with the rating symbol to indicate the comparative position of instrument within group covered by the symbol. – Ratings of BBB‐ and above considered investment grade.
An Associate of Moody’s Investors Service
Long‐Term Rating Scale and Definitions
ICRA Limited [ICRA]AAA Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk. [ICRA]AA Instruments with this rating are considered to have high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk. [ICRA]A Instruments with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such instruments carry low credit risk. [ICRA]BBB Instruments with this rating are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk. [ICRA]BB Instruments with this rating are considered to have moderate risk of default regarding timely servicing of financial obligations. [ICRA]B Instruments with this rating are considered to have high risk of default regarding timely servicing of financial obligations. [ICRA]C Instruments with this rating are considered to have very high risk of default regarding timely servicing of financial obligations. [ICRA]D Instruments with this rating are in default or are expected to be in default soon. An Associate of Moody’s Investors Service
Page 56 Credit Rating: Independent Opinion on Relative Ranking
ICRA Limited of Credit Risk, Incorporating Strengths and Weaknesses
• Advantages for Investors: – Simple, objective indicator of relative fundamental position. – OiiOpinion bdbased on an analtilllyticallyrigorous process. • Advantages for Issuers: – Wider access to capital. – Unbiased feedback from an independent agency. – Overall, prepares ULB for market scrutiny.
• RtiRatings bidbridge the ifinforma tion asymmetry btbetween the ldlender and borrower: – Low familiarity of capital markets with ULBs given limited number of issuances so far. – Lack of scientific approach in budgeting and weak accounting systems of ULBs. – Monitoring of ratings over the life of the instrument.
An Associate of Moody’s Investors Service
Criteria for ULB Ratings ICRA Limited
• Legal and administrative framework. • Inter‐Governmental fiscal relationship. • Service area characteristics ‐ economic and social profile. • Level of service provision. • Management quality, systems & controls. • Municipal finances. • Future cash flow adequacy including project risk.
An Associate of Moody’s Investors Service
Page 57 ICRA’s Recent Experience with Rating ULBs under
ICRA Limited JNNURM
• Assigned Issuer Ratings to 15 ULBs under JNNURM. ICRA’s Issuer Ratings provide an opinion on the general creditworthiness of the rated entities in relation to their senior unsecured obligations. ICRA’s Issuer ratings are not specific to any particular debt instrument issued by the rated entities. • Concentration of ratings in moderate‐credit‐quality bracket, with almost 60% of ULBs rated under JNNURM having an investment grade credit profile (Issuer Rating of IrBBB‐ and above). • However, ULBs covered by JNNURM are of high strategic importance, with relatively favourable service area characteristics. • It is likely that Corporations in many other Indian cities would have a somewhat weaker credit profile.
An Associate of Moody’s Investors Service
Credit Enhancements can Assist in Obtaining a Better
ICRA Limited Credit Rating
• Guarantee/Partial Guarantee from Bilateral/Multilateral Agencies and Financial Institutions. • Letter of Commitment/Undertaking (typically from State Government) to meet Shortfalls in Debt Servicing. • Pre‐default Structured Payment Mechanism with Escrow Account, on which Trustee/Lenders have exclusive charge. • Bond Service Fund: Upfront cash collateral, interest accrued usually kept exclusively for debt servicing. • Pooled Finance: Joint mobilization of funds by a number of relatively small ULBs by issuing bonds. The bonds can be further credit enhanced by way of a guarantee, cash collateral or a combination of different credit enhancements.
An Associate of Moody’s Investors Service
Page 58 Improving Financial Management is Crucial to Boost
ICRA Limited Confidence of Market Participants • ICRA's experience shows that transaction recording, efficient MIS and budgeting/forecasting are among major vulnerabilities of ULBs. • The importance of sound and efficient financial management can not be over‐ emphasized: – For better allocation of scarce resources to enable efficient service provision. – For estimation of costs of services, so that appropriate level of user charges can be imposed. – This in turn would enhance revenue surpluses that can be invested in augmenting urban infrastructure and also used to service debt. • Timely dissemination of appropriate information is critical. • Evidence of sound financial management would instill greater confidence of market participants... • … paving the way for greater penetration of capital markets by ULBs.
11 An Associate of Moody’s Investors Service
ICRA Limited
THANK YOU
12 An Associate of Moody’s Investors Service
Page 59 Improving access to capital markets to Municipals :Role of credit rating ‐ Madan Sabnavis Chief Economist, CARE Ratings
1
The ULB Conundrum
‐Rate of urbanization increased: 31% Demand for funds is ‐Will add 200 mn by 2031 ‐ Migration contributes 20% high ‐Investment of up to Rs 70 lkh cr over 20 years
‐Revenue earned is almost fixed and low at 2‐3% of combined revenue of Supply of funds government constrained ‐ Substantial support from Governments ‐ O&M expenses higg,h, new development restricted
… result is it that cities and towns go on with existing infrastructure
2
Page 60 How is the financing being done?
‐Being pursued by some ULBs Institutional finance ‐ Absence of too many viable such projects ‐Constraints on collateral
‐Not widely used ‐Only 28 issuances since 1997, none since 2010 Bond finance ‐Rs 3000 cr so far, most private placements ‐Usually linked to user charges in water and sewerage services
‐ JNNURM Funding from above ‐Normally 50‐70% grant ‐Several incomplete projects
… Limits to which this equilibrium can prevail
3
Why don’t ULBs borrow?
‐Use existing sources of funds ‐ Rely on support from the governments Motivation ‐Use institutional finance to an extent
‐Perceived to be risky ‐Need credit enhancements like guarantees ‐ Accounting systems not always in order Creditworthiness ‐ Often linked with the status of respective state government
‐ Not in habit of raising money and hence cut out from market Absence of experience ‐ Investors too not aware of such options ‐Credit history unavailable, risk perception high
… all this has combined to keep the market stunted
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Page 61 JNNURM and credit rating culture
‐Future cash flows Unbiased external ‐Current state of finances assessment ‐Debt ratios and debt service ‐Other qualitative parameters
‐Issuer rating and surveillance helps audit regularly Tracking of progress ‐Enhances efficiency in collections ‐Enhances creditworthiness of ULB ‐Signals when to access market
‐Governance and accountability ‐ Improvement in accounting practices Change in mindsets ‐ Better management practices ‐ Collection and maintenance of data
… there is value in continuous monitoring of the state of ULBs through rating surveillance systems…must be forced to borrow in market as FRBM will put a limit
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Getting in the bond culture
‐Link grants with raising of resources either through ‘own revenue’ or borrowings Conditional finance ‐ Governments will not be able to provide funds from government ‐ULBs will be forced to increase collections/use charges
‐Tax benefits necessary to get retail Make Bonds attractive participation ‐Provide guarantees to bonds for enhancement to investors ‐Make them SLR bonds
‐ Given tenure of these bonds, insurance, pension funds would have interest Get in more buyers
… ULBs should first stand on own legs, and aim to work like corporate entities in next decade
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Page 62 Thank you
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Page 63 Page 64 Page 65 Page 66 Page 67 Page 68 Page 69 Page 70 Page 71 Page 72 Experi ence of ULBs in Secur ing Good Rating in Accessing Bond Market
Presented By: Mr Rahul Joshi
Municipal Bond Financing in India
Traditionally financed through mix of: o budgetary allocations from Municipality’ s own revenues o grants from state government o borrowing from insurance companies and specialized national level institutions like HUDCO and state level financial institutions o limited borrowings from banks/FIs
Access to capital markets commenced in 1998 with Ahmedabad Municipal Corporation (AMC) issuing the first municipal bond in India without a state government guarantee. It was also the first public issue of municipal bonds.
Encourages several ULBs to explore credit ratings for accessing the debt capital market. Only a few manage to secure credit ratings acceptable to investors and even fewer issue municipal bonds.
As of 2008, total value of municipal bonds - Rs 1250 crore
The experience of the early issuers like AMC and Vishakhapatnam Municipal Corporation (VMC) assumes importance for understanding the municipal bond markets in India even today.
Page 73 Municipal Bonds in India
City Projects Amount (Rs. Million) Bangalore (1997)* City road / drainage projects 1,250 Ahmedabad (1998)* Water supply & Sanitation projects 1,000 Ludhiana (1999)* Water supply & Sanitation projects 100 Nagpur (2001)* Water supply & Sanitation projects 500 Nashik (1999)* Water supply & Sanitation projects 1,000 Indore (2000)* City road projects 100 Madurai (2001)* City road projects 300 Ahmedabad Municipal Water supply & sewerage projects 1,000 Corporation (2002) Nashik Municipal Underground sewerage scheme & storm-water drainage 500 Corporation (2002) projects
* Taxable Issues
Municipal Bonds in India
City Projects Amount (Rs. Million) Hyderabad Municipal Corporation (2003) Road construction & widening projects 825 Hyderabad Metropolitan Water Supply and Drinking water projects 500 Sewerage Board (2003) Chennai Metropolitan Water Supply & Water supply projects 420 Sewerage Board (2003) Visakhapatnam Municipal Corporation Water supply projects 200 (()2004)* Visakhapatnam Municipal Corporation Water supply projects 500 (2004) Ahmedabad Municipal Corporation (2004) Water supply, storm-water drainage, road & bridges 580 and flyovers projects Chennai Metropolitan Water Supply & Water supply projects 500 Sewerage Board (2005)
Page 74 Municipal Bonds in India
City PjtProjects AtAmount (Rs. Million) Chennai Municipal Corporation (2005) Road projects 458 Ahmedabad Municipal Corporation (2005) Road & Water supply projects 1,000 Nagpur Municipal Corporation (2007) Water supply & Sewerage projects 212 TNUDF – Pooled Issue (2003) Water and Sanitation projects 304 Karnataka Water and Sanitation Pooled Greater Bangalore Water Supply & Sewerage Project 1,000 Fund (()2005) TNUDF-Pooled Issue (2008) Tamil Nadu TownsWater Supply and Sewerage 65
The Ahmedabad Experience
Page 75 The Ahmedabad Experience
Key Terms Of January, 1998 Issue
Issue Size : Rs 100 crore Purpose : To part finance Water and Sewerage projects of Rs 489 crore Interest : 14% p.a. (G-Sec yield 13.35%) Tenor : 7 years Redemption : At end of 5, 6 and 7th years Security : o First mortgage and charge on corporations property subject to minimum 1.25 times cover o Structured Payment Mechanism by way of Escrow Listing : National Stock Exchange Credit Rating: CRISIL AA(SO)
The Ahmedabad Experience
CRISIL AA(SO) rating secured because:
o In 1996-97, 80% of total revenues comprised Octroi and Property Tax, grants were less than 10%: o Octroi: 56% of total revenues (11.5% p.a. Rate of Growth) o Property Tax: 24% of total revenues (15% p.a. Rate of Growth)
o Reform of Property Tax was underway – groundwork for move to unit area method of assessment from ARV method was being laid
o Revenue surpluses had been rising for the last three years
o AMC had a well defined vision regarding future provision of civic amenities backed by a well defined capital investment plan for water, sewerage, roads and street lighting (TCE, AIC Watson). It had also fleshed out in detail the financing plan for its investment plan with the assistance of US Aid, IL&FS and national and international experts.
o The senior management of AMC was highly motivated, market savvy and technically competent.
Page 76 The Ahmedabad Experience
o Bombay Provincial Municipal Corporation Act, 1949 allowed creation of mortgggageonAMCppproperty including commercial property as well as escrow of all taxes, duties and cess
o Credit enhancement through escrow of Octroi revenues from 10 collection points. Prioritized municipal cash flows in favor of bond holder debt service. Monies went directly to no-lien ‘Designated Interest Account’ and ‘Designated Principal Account’ rather than the municipal general fund.
Subsequent issues in 2002 – 9% p.a. (AA(SO), Rs 100 cr), 2004 – 6.4% p.a.a (AA(SO), Rs 58 cr) and 2005 – 6% p.a. (((),AA(SO), Rs 100 cr) had tenors of 10 years each and were ppyrivately placed. They were also credit enhanced through escrow of a mix of Octroi and Property Tax revenues. The collections in the escrow accounts were distributed pari-passu amongst existing and new bonds.
To curb growth of revenue expenditure concerted efforts to reduce establishment and administrative expenditures from 2003, resulted in their reduction from 72% of total revenues in FY 02-03 to 52% in FY 06-07.
The Ahmedabad Experience
Frequent issuances of municipal bonds has had the following salutary effects:
o AMC has successfully implemented reforms in Property Tax, e-governance applications and double entry accrual based accounting. o AMC management has gained considerable experience in project execution, treasury management and general administration since the issue of the first bond.
This has further strengthened the confidence amongst investors that AMC’s bonds have low credit risk and allowed AMC to use bonds as a means to bridge its capital investment financing ggpap in any given year.
Capacity development at AMC has been supported by institution building by the state in the form of GSFS Capital & Securities Ltd., acting as an intermediary to facilitate market access by ULBs and state government entities. GSFS Caps has been the lead arranger for the subsequent three issues.
Page 77 The Ahmedabad Experience
Investor Class Issue Retail investors consciously targeted in first bond issue to encourage residence to participate in city development. 5196 I II III IV subscribers of which12 are financial institutions. Public Sector Banks √√ √ √ 1998 issue underwritten to the extent of 25% - the retail public Private Sector Banks √√subscribers part.
Foreign Banks √ Public issue route discarded subsequently because of high cost
Insurance Co. √√Second bond issue – 15 subscribers. Attracted public and private sector corporates. The third issue was entirely subscribed by five Mutual Funds √ public sector banks. Public Sector Undertakings √ The fourth issue was limited to five banks and one insurance Private Sector Companies √ company.
Individuals √√ AMC had an impeccable debt servicing track record:- o First issue: fully redeemed o Second and Third issues: prepaid.
The Ahmedabad Experience
Lessons Learnt
Rating agencies look at:
Economic Parameters – nature of economic base and its growth prospects;
Financial Parameters – large, stable own revenue base, high tax and user charge collection efficiencies, low growing revenue expenditures which are significantly less than revenues, low debt and good debt management practices, capital expenditures which are predictable with a proper financing strategy ;
Service Delivery and Managerial Assessment Parameters – infrastructure availability, capital investment trends, reform track records;
Legal and Administrative Framework – taxing powers, borrowing powers, including, ability to charge assets and cash flows, functional domain.
Page 78 The Ahmedabad Experience
Lessons Learnt
The key parameters influencing ratings are: Financial Performance and Service Delivery and Managerial Assessment
Also, conceptualizing and detailing an investment plan and its financing as well as reviewing municipal accounts and practices to present them in a SEBI format are time consuming affairs hence, a ULB going in for its first bond issue needs to provide sufficient time for the same. For instance, it took AMC 22 months from the date of the first resolution of AMC’s Standing Committee (March 3, 1996) to the date of issue opening (January 16, 1998) to bring out its first bond issue.
The Vishakhapatnam Experience
Page 79 The Vishakhapatnam Experience – Issue at a Glance
1) The minimum trading lot to trade through the Wholesale Debt Segment of The National Stock Exchange of India mechanism is Rs. 10 Lakhs and multiples of 10 thereafter. 2) The trading in these Bonds would be allowed only in 'demat' form.
The Vishakhapatnam Experience
The bond was issued to part finance the Rs 100 crore Godavari Drinking Water Supply Scheme. The AA-(()SO) rating by CARE was influenced by several factors, the prime being:
o In 2002-03, 71% of total revenues comprised Property Tax, Other taxes and Water Charges. grants were less than 20%: Property Tax: 17% of total revenues (15% p.a. Rate of Growth) Water Charges: 32% of total revenues (14% p.a. Rate of Growth) with metering and increase in water charges in the offing.
o Negligible outstanding debt (Rs. 9.73 crore from LIC) with repayment liability assumed by Government of Andhra Pradesh.
o Positive and growing revenue surpluses over the last four years
o VMC had a well defined water supply project detailed in a DPR for which tendering was underway. It had also fleshed out in detail the financing plan for it’s the water supply project with the assistance of IL&FS.
Page 80 The Vishakhapatnam Experience
o The Municipal Commissioner, Deppyuty Municipal Commissioner and the Mayor were ppyositively inclined towards a bond issue with the Municipal Commissioner acting as champion.
o Vishakhapatnam Municipal Corporation Act, 1979 allowed creation of mortgage on VMC property including the water supply project assets being created as well as escrow of all taxes, duties and cess
o Credit enhancement through escrow of Property tax revenues and 30% of water charge revenues aggregating to 27% of total revenues of VMC.
VMC also applied for tax-free status on its bonds in FY 03-04 from the Government of India, Ministry of Finance through Ministry of Urban Development and Poverty Alleviation. It received tax-free status on only Rs 50 crore on the total issue size of Rs 70 crore on December 29, 2003.
The delay in obtaining tax-free status meant that the bond issue was delayed till the fourth week of March, 2004. the delay resulted in only Rs 63 crore of the bond being placed with the entire shortfall being experienced in the tax-free bond category.
The Vishakhapatnam Experience
Lessons Learnt
The process of issuing a municipal bond is long drawn particularly for the first bond issue taking anywhere from 18- 24 months from date of council resolution to the date of bond issue. Reasons are:
o Municipal accounts are on a single entry, cash basis. Also, very often they are in local language and need to be translated into English which takes time. o The account figures particularly cash balances do not tally from one year to the next for example, closing balance of cash in previous year can be different from opening balance of cash in the current year. o As there is no balance sheet, the outstanding debt picture has to be built from journal entries. o The capital investment plan and its financing need to be fleshed out in detail. o The process of getting approvals from state governments, central governments, in case of tax-free status, is time consuming. o Appointing merchant bankers, bond trustees etc takes time. o Preparation of prospectus, credit rating and getting SEBI approval is also a time consuming process.
Page 81 The Vishakhapatnam Experience
Lessons Learnt
For instance, VMC embarked on the process on 7th Feb, 2003, GoAP approval was received on 20th March, 2003. However, tax-free status from MoF was received on 29th December, 2003 with MoUDPA approval on 12th January, 2004. As a consequence the entire process of rating, appointing investment bankers, due diligence, SEBI approval and listing agreements with NSE was squeezed into a period of 2 months.
Further, the short period of time left for expiry of the tax-free status meant that there was no flexibility in timing the market to attract the maximum interest from investors looking for tax breaks.
Recommendations
Page 82 Recommendations for ULBs Planning to Issue Bonds
Start the process early (18 – 20 months in advance) with the preparation of a CDP and a business plan based on it.
The business plan should have projects identified for investments and a preliminary financing plan.
Appoint a rating agency and show them the municipal accounts, investments undertaken and to be undertaken, projections if any. o The ULB should consider municipal bonds only when its credit rating is at least A+ and Rs. 100 crore of capital expenditure in envisaged in the next 18 months (initial issue expenses get reduced as they are defrayed over a larger amount). o Further, it should consider municipal bonds only if it is confident that proceeds can be deployed to finance project expenditure within the next 18 months (otherwise negative interest arbitrage may ensue) o AA-(SO) rating is possible for an A or A+ rated ULB provided it has stable and growing own revenue sources; is willing to ESCROW these stable resources; and provide tangible assets as security.
As far as possible municipality should obtain credit rating and approvals for issue of tax-free municipal bonds in the early part of the financial year – gives sufficient time to place the issue under favorable market conditions and/or when large institutional investors are planning their tax investments for the fiscal year.
Recommendations for ULBs Planning to Issue Bonds
DPRs for projects identified for bond financing should be ready and recent.
Soon after appoint investment/merchant bankers as lead arrangers to prepare the offer document, do due diligence, facilitate SEBI Approvals, sourcing and appointment of trustees, bankers and registrars to the issue, facilitate in entering into listing agreements with NSE and other stock exchanges, assist in entering into demat agreements with NSDL/CDSL, undertake road shows and the entire placement process.
Availability of audited accounts for the last three years, projections, investment plans and financing strategies, credit rating and DPRs will greatly aid the arrangers in undertaking their due diligence exercise and complying with SEBI and stock exchange disclosure regulations.
Page 83 Thank you
Page 84 NAGPUR EXPERIENCE ON ACCESSING BOND MARKET
S. S. HASTAK NMC, Nagpur 19th September 2013
Name of the Bonds : Municipal Bonds Purpose of Raising Bonds : Nagpur Water Supply Scheme Pench‐III, Part‐I Issue of Bonds : Rs. 100.00 Crores Date o f RiiRaising BdBonds : January 2001 Rate of interest : 13% (P.A.) Repayment period : 7year Amount raised : Rs. 50 Crores Actual Subscription of Bonds : Rs. 31.12 Crores Interest Payment : Half Yearly Trustee Bank : Bank of Maharashtra, NMC Civil Lines Branch, Nagpur
Page 85 Consultant : M/s Artefact Software Ltd., Nagpur Registrar and Coordinator : Vidharba Holding Corporation, Nagpur Sole Arranger : SBI Caps. Limited Rating agency : M/s ICRA Ltd. Mumbai Credit Rating of NMC : `AA` ( June 1999) Repayment Position : Fully repaid by NMCN.M.C. Principal Repayment / Redemption :
At 5th year 30% Rs. 9.34 Crores 31.03.2006 At 6th year 30% Rs. 9.34 Crores 31.03.2007 At 7th year 40% Rs. 14.44 Crores 31.03.2008 Total Rs. 36.12 Crores Premature Reppyayment : Nagpur Municipal Cor poration made `Pre‐maturely` repayment of Municipal Bonds of Rs. 24.12 Crores out of total Bond Rs. 31.12 Crores because of High rate of interest of MPL Bonds.
Name of the Bonds : Tax Free Municipal Bonds Purpose of Raising Bonds : Augmentation of Nagpur Water Supply Schemes Pench‐IV Issue of Bonds : Rs. 128.30 Crores Date of Raising Bonds : March 2007 Rate of interest : 7.75% (P.A.) Repayment period : 7year Amount raised : Rs. 50 Crores Actual Subscription of Bonds : Rs. 21.70 Crores Interest Payment : Half Yearly Trustee Bank : Bank of Maharashtra, NMC Civil Lines Branch, Nagpur
Page 86 Registrar and Transfer Agent : M/s Mennen Financial Services Ltd. Mumbai Sole Arranger : SBI Caps. Limited Rating agency : M/s Fitch Rating India Pvt. Ltd. Credit Rating of NMC : `AAAA` (Feb. 2007) Repayment Position : Regular repayment by NMC Principal Repayment / Redemption :
At 5th year 30% Rs. 6.51 Crores 31.03.2012 At 6th year 30% Rs. 6.51 Crores 31.03.2013 At 7th year 40% Rs. 8.68 Crores 31.03.2014 TtlTotal Rs. 21.70 Crores
Experience : Experience of Raising of Tax Free Municipal bonds by NMC was not encouraging owing to following: 1. Poor response from subscribes/ investors for making investment in Municipal Bonds 2. Absence of guarantee of State Govt. for repayment of MPL Bonds 3. Low trend of revenue increase in ULB 4. Lack of aggressive marketing 5. Absence of relationship of trust 6. Lower rate of interest available in capital market
Page 87 Raising of loan through Nationalized Bank
• In 2010, ULB raised a loan of 200 Crores through nationalized banks for meeting its 30% share under JNNURM projects. • Repayment period 7 years • Rate of interest 8.5% ‐9.5% • Financial Management through escrow mechanisms • Daily transfer of 20Lakhs from ULB revenue to the escrow account • Bank allowed 19 months moratorium period in which ULB required to pay interest only • Loan amount availed as per the requirement of releasing payment to the agencies
Page 88 Fund raising through Municipal Bonds Investors response to constraints in issuing municipal bonds
A presentation by SBI Capital Markets Ltd. September 19, 2013
FLOW OF PRESENTATION
Overview of Municipal Bond Markets
Profile of Target Investors
Constraints
Suggested Actions
SBICAP Credentials
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Page 89 Overview of Municipal Bond Market
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Municipal Bond Market Market Scenario • Since 1997, 25 municipal bond issues have been issued in India. These include taxable and tax‐ free bonds and pooled financing issues raising around Rs. 1400 crores • All Municipal Bonds issued by ULBs have been more in nature of general obligation bonds, financed by escrowing property tax or other internal ULB revenues • Municipal Bonds in India have been raised to finance water supply, sewerage projects and road projects. This is because user charges in such infrastructure projects are easier to enforce. • Strong Municipal Corporation can access market directly, whereas small & medium ULBs are likely to remain alienated from capital markets due to ‐ 9 Weaker financial profile 9 Inadequate infrastructure agreements 9 Lack of commercial viable projects
Typical Urban Funding methods Funding in India • User Charges/Municipal Taxes • ULB’s (Urban Local Bodies) internal accruals • Grants from Governments • Soft loans and Government grants • Private participation • Credit available from HUDCO & LIC • Monetization of land • Limited borrowings from banks/FIs • Borrowings from the debt markets • Bond markets 4
Page 90 Parameters for bond issuance Framework for bond issuance Process of bond issuance • Identifying viable projects • Means of finance Project development • Approval for raising funds from the market • Structuring of debt issuance • Obtaining third party credit enhancement for the Project debt instrument implementation, timely Project appraisal, repayments to bond structuring and credit • Obtaining approvals for fiscal benefits, if any holders and post‐project rating of project • Appointment of external agencies including project monitoring monitoring agencies, bond trustees, etc. • Pre‐marketing with prospective institutional Structure of Bond Working with the State investors issuance and Government and MoUD Appointment of for obtaining credit • Issue opening for subscription External Agencies enhancement • Post issue formalities • Creation of security
External Agencies • Panel of independent experts/agencies • Merchant bankers and related service providers • Credit rating agencies • Legal services
Typical features of bonds
Long term (10-15 years) with fixed coupon Instrument Structure Bonds are issued in dmat form to facilitate secondary market activity
SdiththFidAtSecured with the Fixed Assets Security Security is monitored by Bond Trustees Creation of charge over fixed assets
Listed on Stock Exchanges Listing Compliance with Listing Agreement Periodical disclosures
Debt instrument is rated based on cash-flows Credit Rating Rating can be improved based on credit enhancement
External Agencies Trustees to the bondholders Registrars to the issue
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Page 91 Target Investors and their profile
Aggregate bond issuances have crossed Rs.3,00,000 crores in FY13. While Central PSUs continued their strong presence through large issuances, the share of private sector issuers has increased significantly over the past few years. With increasing number of investors and limited number of high rated issues, appetite has moved from AAA to AA‐ over the last three years. Insurance companies and PFs/Pensions are major investors for providing long term investment for infrastructure sector Most of the fund raising is offered through private placement targeted at institutional investors
AA‐ A BBB or Likely Appetite for Muni Bonds 5% 5% below AA 2% 7% 5% Insurance 20% Companies 25% PF/Pension Funds AA+ 15% 17% 35% Banks AAA 64% Non‐institutional
Retail/HNI/Non‐institutional investors are mainly targeted through public issuance mode. 7
Challenges for bond issuance
Structure of Municipal Corp Regulatory framework • Incorporation • Scope of Municip al Bonds • Overlapping Jurisdiction • Disclosure Standards • Security creation • Listing guidelines • Enforceability • Grievance redressal • Guidelines for floating SPVs • Borrowings from the debt • Financial Autonomy markets
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Page 92 REGULATORY FRAMEWORK
SEBI definition of SEBI Regulations “issuer” As per SEBI debt regulations 2008, issuer is defined as a i. Company Eligible for Listing ii. Statutory Corporation iii. PSU Hence, as per these regulations, debt securities issued only by the entities enlisted above can be listed on the exchange. Statutory Public Sector Company Corporation Undertaking Options for issuance of NCD i. Listing approval from SEBI a) Approach SEBI for getting a Listing approval b) Listed Bonds are well accepted with all investor classes. Options for c) Disclosure norms to be followed as per Listing Issuance Agreement.
ii. Issuance through a Company Issuance Approach Unlisted a) Well accepted with all investor classes. through a regulator for Issuance b) No separate approvals required from the regulator. getting Company “Listing” iii. Unlisted Issuance Approval a) Market for Unlisted Bonds is quite limited and shallow b) Pricing and structure will depend on single/few investors c) Disclosure norms are not applicable
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Investors concerns & suggestions No Parameter Issues Suggestions 1Framework • Incorporation • Standard framework across India • Corporate Municipal Entity • Project Specific SPVs • Emppgowering Cities‐ Empowered city governments are financially independent 2Security creation • Power to create security • Create a bankruptcy code that • Adequate assets for would provide comfort to potential creation of security investors
3Creditworthiness• Tax bases have remained • Identifying commercially viable narrow, inflexible and lack projects buoyancy. • Identifying/Escrowing credible • Not being to levy user cash‐flows charges for services to • Gap funding cover operations, • Credit enhancement from third maintenance and party institutions depreciation costs • Projects on a PPP basis • Financial Profile of State Government
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Page 93 Investors concerns & suggestions
No Parameter Particulars Suggestions
3Disclosure • Financial reporting as per SEBI • Standard accounting systems requirements guidelines • Suitable disclosure norms for • Periodical audited financial Municipal Corporations statements • On‐going disclosure requirements for listed bond issuance
4Project Monitoring • Regulations permit only body • Ensuring financial discipline corporates to issue securities • Specific end use • Project Monitoring Agencies
5 Bonds with • Pension Funds and Insurance • Additional Fiscal benefits fiscal/other benefits companies are major under sections under IT for investors in long term bonds investment in Municipal Bonds • Through fiscal benefits, • Separate provisions under possible to target large non‐ PFRDA/IRDA for investment in institutional appetite form Muni Bonds Muni bonds
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Past Bond issues by Municipal Bonds Municipality / Year Rating Amount Coupon 10 year G‐Sec Local Body (Rs Crore) (%) Ahmedabad Jan, 1998 AA (SO) 100.00 14.00 13.3 Bangalore Nov, 1998 A (SO) 125.00 13.00 12.2 Ludhiana Sep, 1999 LAA (SO) 17.80 14.00 11.6 Nasik May, 1999 AA (SO) 100.00 14.75 11.7 Bangalore Water Aug, 2000 Not Available 10.00 12.90 11.4 Supply Bd.
Kanpur Dec, 2000 LA+(SO) 50.00 13.50 10.9 Madurai Mar, 2001 LA+(SO) 30.00 12.25 10.3 Ludhiana Jun, 2001 LAA‐(SO) 2.00 13.50 9.3 Tamil Nadu Urban Aug, 2001 LAA+(SO) 106.10 11.85 8.9 Dev Fund Nagpur Nov, 2001 LAA‐(SO) 31.30 13.00 7.8 Ahmedabad Mar, 2002 AA+(SO) 100.00 9.00 7.4 Hyderabad* Mar, 2002 AA+(SO) 82.50 8.50 7.4 Chennai* Mar, 2005 AA (SO) 30.15 5.38 6.6 Nagpur* Mar, 2007 AA (SO) 21.70 7.75 8.0 Vishakhapatnam Sep, 2010 AA‐ (SO) 30.00 9.50 7.9
* Tax Free Bonds 12
Page 94 Highlights of a few Municipal Bond Issues •Escrow of Octroi Nashik • Inability to implement security structure led to rating downgrade ‐ AA (SO) subsequently restored
Ludhiana • Escrow of non‐tax revenues like water charges LAA (SO)
Hyderabad • Combination of escrow and cash collateral AA+ (SO) • Replicable model for corporations with substantial revenue surpluses
Bangalore • Guaranteed by State Government A+(SO) •Non‐utilisation of proceeds resulted in negative carry on bond interest
Madurai •Credit enhancement by GoTN Guarantee LA+(SO) •Escrow of Toll collections on Madurai Inner Ring Road
Ahmedabad AA(SO) •Escrow of Octroi from 10 collection point
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To conclude..
• Municipal bonds have a potential in India • Development of market would depend on – – effective management their Municipal finances and adopting standard accounting practices – Improved institutional arrangement between of state government and Municipal corporations
Most of the investor concerns are related to framework of Municipal Corporations and need to be addressed to create vibrant Municipal Bond Market in India.
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Page 95 SBICAP Credentials
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CREDENTIALS
Deepak Fertilizers PHL Finance Pvt HDFC Ltd Torrent Power Ltd and Jindal Saw Ltd. Air India Ltd. Ltd. Petrochemicals INR 750 crs. INR 300 crs. INR 300 crs. INR 300 crs. INR 7,400 crs. INR 100 crs. Mar ‐ 2013 Mar‐2013 Dec‐2012 Dec‐2012 Nov‐2012 Mar‐2013
SBI Cards Adani Ports and Business JSW Steel Ltd. Century Textiles Bonds Special Economic Broadcasts News and Industries Ltd. Reliance Capital Zone Pvt Ltd. INR 1000 crs. INR 500 crs. INR 2000 crs. INR 50 crs. INR 300 crs. 100 Cr Jun ‐ 2013 Oct‐2012 Jun ‐ 2013 Sept ‐ 2012 Sept ‐2012 Jun ‐ 2013
We have executed 38 private placement deals in FY13 aggregating to INR 56,741.28 crs SBICAP is ranked 1st on the Prime Database League tables for number of issues handled in public Issues of debt for FY13 The only Indian investment bank to act as an arranger in Foreign Currency Bond Issuances. SBI Caps was mandated as a Lead Arranger for all the Tax‐Free Public Bond Issuances of FY2012 & FY2013 aggregating to a total of INR 90,000 Crs.
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Page 96 CREDENTIALS Municipal Bonds
Nagpur Municipal Ahmedabad Municipal Banglore Municipal Corporation Corporation Corporation INR 31 crs. INR 105 crs. INR 125 crs. Nov 2001 Jan 1998 Nov 1998
SBICAP successfully executed maiden Municipal Bond issue in the country
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Thank You
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Page 97 Status of Credit Rating of ULBs
Sr. No. Municipal Corporation Rating Rating Agency 1 Ahmedabad A+ CRISIL 2 Banglore B ICRA 3 Bhopal BBB‐ India Ratings 4 Chandigarh A+ ICRA 5 Chennai BBB+ ICRA 6 Cochin BBB‐ ICRA 7 Delhi AA‐ India Ratings 8 Mumbai AA India Ratings 9 Hyderabad AA‐ CARE 10 Kalyan‐Dombivali A India Ratings 11 Kolkata A+ CRISIL 12 Mira Bhayander A‐ FITCH
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Status of Credit Rating of ULBs Sr. No. Municipal Corporation Rating Rating Agency 13 Mysore BBB+ ICRA 14 Nagpur ACRISIL 15 Nashik AA‐ CRISIL 16 Navi Mumbai AA India Ratings 17 New Delhi AA India Ratings 18 Pimpri Chinchwad AA‐ FITCH 19 Pune AA‐ India Ratings 20 Rajkot A‐ CRISIL 21 Surat AA CRISIL 22 Thane AA‐ India Ratings 23 Vadodara A CRISIL 24 Vijayawada A‐ CARE 25 Vishakhapattanam A CARE
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