A recent article in HT Mint highlighted how municipalities in India are awaiting clarity from the central government on end-use guidelines for bond issues. In the FY27 union budget, the government announced a new perk: municipalities that raise more than ₹1,000 crore through municipal bonds can receive a ₹100 crore incentive. While the numbers are clear, what’s not clear is the government’s guidelines on how the funds can be deployed.
Earlier, the government ran a scheme called AMRUT (Atal Mission for Rejuvenation and Urban Transformation), a flagship urban infrastructure scheme that aimed to improve basic urban infrastructure like water supply, sewerage, drainage, urban transport, green spaces etc. Under AMRUT, municipalities received incentives when they issued bonds, with the government approving specific sectors, like water supply sewerage and transport. In addition, there were monitoring rules and defined frameworks.
However, after the latest budget, the government hasn’t issued any rules explaining how municipalities are allowed to use the money they’ve raised via bonds — and several cities that were planning large bond issues are stuck, and some investors are looking for further clarity.
But what exactly are municipal bonds? How do they work? Who buys them and who benefits? Here’s a look at municipal bonds and how they are used to make urban living better for citizens.
What are municipal bonds?
Municipal bonds are debt instruments (loans) issued by ULBs (urban local bodies) or municipal corporations to raise funds for infrastructure projects like water supply, sanitation, roads, transport, parks, and other municipal infrastructure. Most bonds come with a maturity period of three to ten years, after which the municipalities/corporations provide returns on these bonds, usually from taxes collected (like property and professional tax); from the revenues generated from the projects financed, or both. Municipal bonds fall into two categories in India: General Obligation bonds (used to fund public welfare and civic infrastructure projects) and Revenue Bonds (used to finance self-sustaining infra projects that generate a direct income, like toll roads).
Who issues municipal bonds, and who buys them?
In India, municipal bonds are issued by municipalities across the nation and regulated by SEBI (Securities and Exchange Board of India). The municipality must meet the eligibility criteria as listed by SEBI:
- Legal permission to raise funds: The municipality must be legally authorised under its governing framework to raise money through bonds.
- Proper financial records: The municipality should have maintained accounts using approved municipal accounting standards for at least the previous three financial years.
- Financial stability: The municipality should have reported a surplus income in at least one of the last three financial years. Additionally, the municipal entity should not have had a negative net worth during the previous three years.
- Good repayment track record: The municipality should not have defaulted on repayments of loans or debt raised from banks, financial institutions or earlier bond issuances in the past year.
- No regulatory restrictions: There should be no active SEBI orders preventing the municipal entity or its directors from participating in capital markets.
- Clean credit history: The municipality and related entities should not be listed as wilful defaulters by the RBI or have a history of failing to repay investors.
On the investor side, these bonds can be purchased by a range of participants:
- Individual citizens/retail investors
- Mutual funds
- Banks and insurance companies
- Pension funds and institutional investors
- HNI (High-net-worth individuals)
Municipal bonds can be purchased either during their initial public offerings (IPOs) or later through stock exchanges where they are listed.
How do they work?
The process begins when a municipality identifies a need for funding — for example, constructing a sewage treatment plant or upgrading a city transport system. And it’s pretty straightforward. Instead of waiting for the central government to disburse funds for an urban infra project, the concerned municipality seeks funds from the public by issuing municipal bonds. Then:
→ The municipal corporation prepares a project proposal and determines funding requirements.
→ Credit rating agencies assess the municipality’s financial health and repayment capability.
→ The municipality issues bonds through public markets.
→ Investors buy these bonds and provide funds.
→ The municipality uses the money to execute infrastructure projects.
→ Over the bond period, investors receive regular interest payments known as coupons
→ Upon maturity, which is anywhere from three to ten years, the principal amount is repaid to whoever purchased the bond.
For example, if a city needs ₹1000 crore for a water infrastructure project, it may issue municipal bonds instead of waiting for the central government to disburse funds. Investors buy municipal bonds and provide the capital upfront and the city repays them over time.
The benefits and risks of municipal bonds
Municipal bonds can benefit both municipalities and investors, but they also come with certain risks and limitations. Here are some of the key advantages and challenges for both sides:
- Access to large-scale funding: Municipal corporations can raise substantial capital for infrastructure projects without relying entirely on state or central government grants. It also allows cities to diversify their funding sources and gain more financial autonomy.
- Faster project implementation: Access to debt financing allows cities to execute projects quicker, without waiting for budget allocations.
- Improved governance and financial discipline: Bond issuances require disclosures, credit ratings and financial reporting, which encourage municipalities to be more transparent and adopt better accounting practices.
- Fixed-income investment opportunity: Municipal bonds provide investors with periodic interest payments and principal repayment at maturity.
- Portfolio diversification: They offer an alternative investment avenue beyond equities, corporate bonds and government securities.
- Potentially stable returns: Bonds issued by financially strong municipalities may offer relatively stable returns.
- Challenges and risks: Municipal bonds offer opportunities for both cities and investors, but they also come with challenges. For municipalities, weak finances, strict compliance requirements and dependence on investor confidence can make raising funds difficult. For investors, concerns around credit risk, limited market liquidity, lack of transparency, and changing policy frameworks can create uncertainty. Ultimately, the success of municipal bonds depends on strong financial health, transparency, and a stable regulatory environment.
Projects funded via municipal bonds
A few projects in the last decade that have been financed via municipal bonds include Pune for 24×7 water supply. The city successfully issued municipal bonds in 2017, raising roughly 200 crore, using the funds for continuous water supply infrastructure, pipeline upgrades and smart water management systems.
In 2025, under the Swachh Bharat Mission-Urban, Ghaziabad became the first Indian city to issue a Certified Green Municipal Bond, raising ₹150 crore to fund the development of an advanced Tertiary Sewage Treatment Plant (TSTP). The project is aimed at improving wastewater treatment and reuse, while supporting the city’s broader goals of sustainable infrastructure development and urban resilience.
India’s urban population is expanding rapidly, and cities require enormous investments to build and maintain infrastructure. Municipal bonds provide a way to raise these funds directly from investors while reducing dependence on traditional government financing, while also giving investors an opportunity to participate in and benefit from urban development. As India’s municipal bond market continues to evolve, stronger frameworks and greater transparency could help unlock more investment and build better cities for the future, financing the roads, transport systems and public services that millions rely on every day.
Sources
Municipal Bonds – Definition, Types and Benefits of Muni Bond