5.8 Key Features ofTax-Free Municipal Bonds

194 Om Prakash Mathur

TABLE 5.8 Key Features ofTax-Free Municipal Bonds

Feature Description

Eligible issuers Local self-governments, other local authorities, or public sector companiesa duly constituted under an act ofparliament or state legislature; other local authorities constituted under relevant state government statutes such as a water supply and sewerage board; and groups oflocal authorities through a financial intermediary Use offunds Capital investments in urban infrastructure—that is, potable water supply; sewerage or sanitation; drainage; solid waste management; roads, bridges, and flyovers; and urban transport ifit is a statutory municipal function

Requirements

Project development An approved investment plan including phasing and a financing plan; benchmarks for commencement and completion, including the milestone dates for the proposed components ofthe project; completion ofthe process of prequalification ofbidders; initiation ofthe process ofland acquisition and other statutory clearances

Financial viability Generation ofa stream ofrevenues sufficient to finance the project; creation ofan escrow account for debt servicing; appointment ofan independent trustee for monitoring the escrow account

Other conditions Conformity with laws governing borrowing; maintenance ofa debt-service coverage ratiob of1.25 during the bond’s tenure

Project account and Maintenance ofa separate account and establishment ofa monitoring separate project implementation cell Investment, maturity, Minimum maturity offive years, with the option ofbuyback and buyback arrangements ofthe face value ofthe bonds Ceiling on amount Maximum amount as a percentage oftotal project cost: 33.3% or Rs 500 million, whichever is lower; debt-equity ratio not to exceed 3:1; contribution of20% ofproject cost from internal resources or grants Credit rating Investment grade rating mandatory Legal and administrative Adherence to guidelines issued by the Securities and requirement Exchange Board ofIndia

Source: Author’s classification based on Section 10(15) ofthe Income Tax Act 2001. a. Public sector company means any corporation established by or under any central, state, or provincial actor a government company as defined in section 617 ofthe Companies Act 1956. b. The ratio ofnet income after meeting all obligations and liabilities ofthe issuer (except long-term debt obligations) to long-term debt-servicing obligations.