Articles

Considerations for Financing Activities Given the fact that there is a deficit in spending on infrastructure, the following factors will shape the availability of money for these projects:

1. Government of India’s plans for raising huge amounts of funds towards capex for various projects, not to mention the expected demand from the private sector which together will take away a substantial part of the available funds in the market.
2. The oft-made comment by various experts for the need to reduce the cost of logistics to around 8% to 9% of the GDP from the present 12% to 13% which would have a Issue of Municipal Bonds and the Emerging Dimensions bearing on the availability of the funds since investments will be required on a large scale.
3. The positive effects of the efforts put in by the Government of India for enlarging the bond market in India and The acceptance of India by the international financial community as an investment destination.While commercial entities and the Governments both Central and State have been issuing bonds by way of raising funding, municipal bonds are beginning to find acceptance and becoming attractive from an investor-perspective. As regards the reference to the U.S.Treasury’s role and the involvement, it is a logical step to plug into the U.S. experience considering the role played by the municipal bonds in the development of infrastructure in the United States of America.
4. Having given the outline of the news item, this article expands on the various aspects of the above proposal.Municipality Per Article 243P(e) of the Constitution of India, a municipality means an institution of self-government constituted under Article 243Q which goes on to describe the constitution of municipalities.The role of Securities and Exchange Board of India (SEBI) SEBI has been active in creating the necessary ecosystem for an effective financial market for funding municipal projects. About a decade ago, SEBI took the first steps in this process. On 15 th July, 2015, SEBI issued the ‘SEBI (Issue and Listing of Municipal Debt Securities Regulations, 2015’ (‘ILDM Regulations’) and further amended the regulations on 21 st August, 2019, relaxing certain provisions in the Regulations and at the same time introducing further discipline into the framework to help smart cities and other entities engaged in city planning and urban development work.
5. The ILDM Regulations defined “municipal debt securities” to mean non-convertible debt securities which create or acknowledge indebtedness, and include debenture, bonds and such other securities of an issuer.Issue of Municipal Bonds and the Emerging Dimensions SEBI, in November 2022, clarified that a municipalities under the ILDM Regulations may issue a ‘green debt security’ or ‘Green Municipal Bonds’, falling within the definition of ‘green debt security’ per Regulation 2(1)(q) of the SEBI (Issue and Listing of Non-convertible Securities) Regulations, 2021. SEBI also by Gazette Notification dated February 02, 2023 amended the definition of green debt security to include among others ‘blue bonds’(i.e. those activities that would fall within the marine ecosystem). SEBI is also suggesting that tax-breaks may be granted to retail investors. However, this may not find favour with the Central Government since the present thinking is to simplify the tax system by eliminating allowances and deductions.It may be noted that these regulations will apply only when the securities are proposed to be listed on stock exchanges.
6. Accounting and Audit Requirements According to a news item dated 2 nd October, 2024, only issues by 12 out of a total of 4,000 municipal bodies are currently listed amounting to Rs.2,700. The President of the Institute of Chartered Accountants of India (ICAI) was also quoted as having said that there are 2.65 lakhs of Panchayats and 4,000 Municipal Bodies and that there is a need to strengthen the accounting and auditing ecosystem in order to pave the way for raising finance from the markets. The President made the observation that these bodies which prepared their accounts traditionally in the ‘single entry’ mode would need to shift to the ‘double entry’ mode.
7. While both the private and public sector companies have come under a well regulated system of accounting and auditing in the past decade, municipalities have fallen behind them in certain respects as mentioned in the preceding paragraph. Recognising the need to ensure the widening of the bond market for municipal issues, the Institute of Chartered Accountants of India had been active in formulating accounting standards. The following is an extract from the ICAI’s publication ‘Accounting for Local Bodies (ASLBs) – At a Glance’. ‘ICAI, being a partner in nation building, is also involved in on-going accounting reforms in Government including Local Bodies. Accounting Standards for Local Bodies (ASLBs) are being formulated by the ICAI which are based upon the International Public Sector Accounting Standards (IPSASs) since March 2005. Till date, 27 ASLBs have been issued including one cash based ASLB to facilitate transition from cash to accrual system of Issue of Municipal Bonds and the Emerging Dimensions accounting. As of now, ASLBs issued by the ICAI are recommendatory in nature and will become mandatory from the date specified in this regard by the concerned State Government’.
8. Where finance is involved, audit of financial books and statements has become mandatory and completing the cycle of accounting and audit based on the accepted commercial principles. This is also recognised universally as a firm foundation for bringing about a greater governance which would be the basic premise before issuing securities to the public.This system of audit is also enhanced by an oversight by the Governments in ensuring the systems of governance are in place. While these audits and oversight cover the financial propriety, in appropriate cases social audits concentrating on impact assessment i.e. ensuring the end results are achieved would be highly desirable. The ICAI has issued in the recent past 16 Social Audit Standards covering aspects such as hunger, poverty, malnutrition etc. These standards can be made applicable for examining the social impact assessment of the projects by specially trained social auditors.Thus, it is heartening to note that a very important segment of the economy is now beginning to enter the mainstream of commercial markets. Some of these activities will no doubt attract investors who are into ‘green investing’.