Market-wary BMC holds bond issue

MUMBAI, April 1: The Brihanmumbai Municipal Corporation (BMC) has dropped its plans to float a Rs 25-crore bond issue citing "bad marke...

MUMBAI, April 1: The Brihanmumbai Municipal Corporation (BMC) has dropped its plans to float a Rs 25-crore bond issue citing "bad market conditions." Its decision not to take the plunge may have also been influenced by the lukewarm response that a bond issue floated by the Ahmedabad Municipal Corporation had recently received.

Though the BMC’s bonds were rated "AA-" by Crisil, indicating high safety on timely payment of interest and principal amount, the administration decided to look at alternative sources of finance. Senior officials, however, maintained that the bond issue would be introduced after market conditions improved and added that they had applied

for the rating to "test the waters." Till date, the BMC has been financing its projects mainly through concessional sources such as state government loans, internal loans and World Bank grants. If the BMC decides to borrow money from the market, it would end up paying a higher rate of interest to the bondholders vis-a-vis what it is paying on itscurrent loans.

Therefore, the BMC officials said, till the sources of concessional loans were available, there was no need for them to tap the retail capital market.

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"Currently, we are raising funds through our internal sources at 12 per cent interest, if we raise the same funds from outside we will have to pay an interest of 15-16 per cent," an official said.

Senior officials also said that the bond could have got a better rating had the Corporation reduced its dependence on Octroi and upgraded the existing tax administration infrastructure for property-based taxes. Crisil said that the outlook for BMC medium-term fiscal position was expected to remain stable, but suggested that BMC may have to review its existing tariff structure for water supply and sewerage services on a self-sustaining basis. "The BMC must extend water and sewerage services on full cost recovery basis for better fiscal discipline," a Crisil official said.

This was one of the conditionalities placed by the World Bank also beforeit extended funds to the BMC. Besides AMC and BMC, other municipal corporations which are planning bond issues are Pune, Bangalore, Nagpur and Hyderabad. In other countries, muni bonds (as they are referred to in the West) are one of the most favoured instrument used to raise funds by city administrations.