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Informist, Wednesday, May 13, 2026

 

--SEBI mulls review of municipal debt securities' issue, listing 

 

MUMBAI – The Securities and Exchange Board of India Wednesday proposed an overhaul of the framework governing municipal bonds, including allowing refinancing through bond issuances, enabling pooled financing structures for municipalities, and introducing incentives to attract retail investors to the segment.

 

The proposals were issued in a consultation paper by the market regulator reviewing the SEBI (Issue and Listing of Municipal Debt Securities) Regulations, 2015, and invited public comments for the same by Jun. 3.

 

Among the key proposals, SEBI suggested permitting municipalities to raise funds for refinancing existing debt, while mandating detailed disclosures in offer documents. These would include the type of existing loans, lenders, interest rates, repayment schedules, purpose of the debt and any past restructuring of the project being refinanced. 

 

The regulator also proposed capping the use of bond proceeds for working capital needs at 25% of the issue size, saying the funds should remain primarily linked to capital expenditure for infrastructure projects. It was also suggested that municipalities would have to disclose the portion of issue proceeds earmarked for working capital requirements.

 

SEBI also proposed a framework for pooled financing vehicles, allowing two or more municipalities to jointly raise funds through a special purpose vehicle. The regulator said the vehicle could be structured either as a trust or a company and would require agreements with constituent municipalities before raising funds. The proposed framework also envisages a two-step escrow mechanism for repayment obligations, with constituent municipalities maintaining escrow accounts and transferring funds to the pooled finance vehicle's interest payment and sinking fund accounts. The special purpose vehicle would have to maintain an amount equivalent to one year's interest obligations in its interest payment account. 

 

SEBI further proposed multiple credit enhancement measures for such pooled structures, including additional cash collateral, program equity support from state governments, access to state finance commission devolutions, and guarantees from development finance institutions or multilateral agencies. Credit rating agencies would also have to assess the financial strength of each municipality participating in the pool. 

 

To encourage retail participation in municipal bonds, the regulator proposed aligning several provisions with the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021. These include permitting municipal debt securities issued through private placement to have face values of either INR 100,000 or INR 10,000. Securities issued with INR 10,000 face value would need to have fixed maturity and no structured obligations. 

 

SEBI also proposed allowing issuers to offer incentives such as additional interest or discounted issue prices to categories including senior citizens, women, serving and retired defence personnel, widows and widowers of defence personnel, and retail investors. Such incentives would be available only to the original allottee.  

 

In another proposed relaxation, issuers would be allowed to publish advertisements for public issue of municipal bonds through electronic modes such as online newspapers, issuer websites and stock exchange platforms, in addition to print newspapers. 

 

The regulator also proposed enabling municipalities to issue Environment, Social and Governance-linked debt securities, including green, social, sustainability and sustainability-linked bonds, under a framework aligned with existing norms for non-convertible securities. 

 

The consultation paper follows recommendations of a working group constituted in August 2024 and discussions held by SEBI's Corporate Bonds and Securitisation Advisory Committee.

 

SEBI said municipal corporations play a critical role in infrastructure development and service delivery amid rising urbanisation, and need greater financial flexibility to meet growing funding requirements. The regulator noted that, as of March, 22 municipal corporations had raised INR 45.40 billion through 31 municipal bond issuances.  End

 

Reported by Kabir Sharma

Edited by Tanima Banerjee

 

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