Issuing draft regulations for such municipal bonds, also known as 'muni bonds', SEBI said that that issuing authorities would need to contribute at least 20 percent of the total project cost for which they wish to raise funds.
Besides, these municipal authorities would need to have a strong financial track record and such bonds should have a minimum tenure of 3 years.
"Conservative Indian investor mainly invests in fixed deposits, small saving schemes or gold. Bonds issued by municipalities having good financial track record would be an good alternative investment opportunity for such conservative investors, as it provides reasonable return with less risk, which in turn may accelerate the capital markets," SEBI said.
Commonly known as 'muni bonds', these investment products are very popular among investors in many developed nations, especially the United States, where muni bonds have attracted investments totalling over USD 500 billion and are among preferred avenues for household savings.

Comments have been invited on the SEBI (Issue and Listing of Debt Securities by Municipality) Regulations, 2015, till January 30.
Further, the capital market regulator said that municipal bonds would add to instruments where provident funds, pension funds and insurance companies can put in their money.
While such bonds have been issued by various municipal authorities in the country, the total funds raised through them stand at only about Rs 1,353 crore.
The Bangalore Municipal Corporation was the first municipal corporation to issue a municipal bond of Rs 125 crore with a state guarantee in 1997.
However, the access to capital market commenced in January 1998, when the Ahmedabad Municipal Corporation (AMC) issued the first municipal bonds in the country without state government guarantee for financing infrastructure projects in the city. AMC raised Rs 100 crore through its public issue.

Among others, Hyderabad, Nashik, Visakhapatnam, Chennai and Nagpur municipal authorities have issued such bonds, however, there is no provision as yet for listing and subsequent trading of muni bonds on stock exchanges in India.

As per guidelines of the Urban Development Ministry, only bonds carrying interest rate upto maximum 8 percent per annum shall be eligible for being notified as tax-free bonds.
However, SEBI's Corporate Bonds and Securitisation Advisory Committee is of the view that having a fixed rate of 8 percent might not attract investors. There can be "flexibility in setting interest rate cap by linking it to a benchmark market rate," the concept paper said.

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