Introduction

The increase in urban population all over the world started putting strain on urban infrastructure, leading to an increase in demand for urban services including roads, transportation, water supply, sanitation, healthcare, etc. India was also no different. In order to tackle the situation, urban planners are required to formulate appropriate plans and execute them.1

In order to facilitate and regulate the issue and trade of Municipal Bonds, which can be utilised for finding funds for the development of urban infrastructure, the Securities and Exchange Board of India (SEBI), in the year 2015, promulgated the regulation on the issue and listing of Municipal Securities — developing the framework and regulating the issuance and listing of the municipal debt securities.

The regulation enabled municipalities coming under Article 243Q of the Constitution of India to raise funds for their developmental activities. The regulation gives an opportunity for the general public to participate in the trading of Municipal Debt Securities, which would be of less risk than those issued by companies. Since the securities are issued by municipalities and other institutions covered under the regulation, they hold the strength of ones issued by a constitutional institution, while enabling the public to gain income from the money invested in a socially beneficial manner.

SEBI (Issue and Listing of Debt Securities by Municipalities) Regulation, 2015 — hereinafter referred to as SEBI-ILDMR — regulates the issue and the listing of municipal securities through the stock exchange. The regulation, since promulgated in the year 2015, has been substantially amended in the year 2019 (with effect from September 2019), broadening the arena of institutions covered under the regulations, further strengthening the protection to investors, and simplifying the process of the issuance and listing of securities.

Eligibility of the Issuer

Not all entities which fall under the definition of "issuer" can issue and list their securities on the stock exchange. SEBI-ILDMR has formulated certain eligibility criteria, so as to entitle an issuer to issue and list the securities.

An issuer shall not be eligible to issue and list the debt securities if it is not authorised to do so by its constitution (Regulation 4(a)). The Regulation further provides that the accounts of the issuer shall be prepared in accordance with the National Municipal Accounts Manual, or the Municipal Accounts Manual of the respective State Governments, or as per the Accounting Standards applicable to issuers under the Companies Act, or as per the Accounting Standards/policies specified in the constitution document of the issuer (Regulation 4(b)).

Further, the issuer shall not be a loan defaulter or defaulter in the payment of debt securities during the preceding 365 days (Regulation 4(c)), and neither the issuer nor its promoter(s), group company, or director(s) shall be declared a wilful defaulter (Regulation 4(e)).

Under Regulation 4(d), the issuer or its promoter, group, or directors shall not be barred from accessing the securities market by SEBI, and no promoter(s) or director(s) of the issuer shall be declared a fugitive economic offender (Regulation 4(f)).

Thus, the SEBI has taken adequate precautionary measures to ensure the creditworthiness and fitness of the issuer, its promoter(s), group company, and director(s), so as to safeguard the interests of investors.

Issuance and Listing of Securities

The regulation permits the issuance and listing of securities in two types: (1) Public Issue and (2) Private Placement.

Though the process of issuance and listing of these securities is not as strict and cumbersome as that of companies, the SEBI ensures adequate disclosure of information about the issuer, its creditworthiness, the object of raising funds, detailed project utilisation plans, expected cash flow and redemption of the securities, etc.

The regulation requires the issuer of a Public Issue to publish offer documents containing true, fair, and material disclosures necessary for the subscribers of the municipal debt securities to make an informed investment decision (Regulation 6). In case of issue by Private Placement, a Placement Memorandum detailing the aspects of the issue and the issuer shall be placed before the SEBI (Regulation 14A).

The offer document and the placement memorandum shall cover particulars of the issuer including: general information, capital structure, object of the issue, issue-specific information, financial information, pending legal matters, risk factors, tax benefits, government approvals, etc.

The issuer is also required to appoint merchant bankers registered with SEBI as intermediaries to the issue (Regulation 6A), and the merchant banker owes the duty to ensure compliance with the regulation by the issuer (Regulation 27). The lead manager is required to conduct due diligence and shall issue certificates to SEBI at various stages of the issue and listing process (Regulation 27(5)).

The issuer shall execute a trust deed in favour of the Debenture Trustee for securing the securities (Regulation 20), and the Debenture Trustees owe the duty to protect the interests of the holders of the municipal debt securities (Regulation 26).

Other Aspects

Conclusion

The regulation of the issuance of municipal debt securities makes the issuance process transparent to the public, thereby helping to gain the confidence of investors to subscribe to the debt securities. The requirement of disclosure as well as the securing of assets with the debenture trustees protects the funds of the public from being otherwise used.

SEBI-ILDMR is certainly an impetus for the municipalities and other body corporate performing functions under Article 243W of the Constitution of India, to design, develop and implement various prestigious projects beneficial to society. However, it is saddening that only a very few municipalities or other bodies have reaped the benefits of this salutary regulation.

The substantial amendment of the provisions of SEBI-ILDMR has further broadened the arena and has simplified and eased the regulations to such an extent that it is expected more and more municipal or other bodies may utilise the advantage of the Regulation — for implementing projects which are kept under cold storage due to the shortage of funds, or to formulate projects intended for the benefit of the public at large.

1 Concept paper on Proposed Regulatory Framework for Issuance of Debt Securities by Municipalities and the Draft SEBI (Issue and Listing of Debt Securities by Municipality) Regulations, 2015, dated 30.12.2014.