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New norms for bonds issue by municipalities

Our Bureau

NEW DELHI, Feb. 25

THE Centre has allowed municipalities to issue tax-free bonds up to Rs 50 crore for financing urban infrastructure projects, barely three days before the Union Budget.

The guidelines issued to all State Governments and Union Territories provide for exemption from income tax by way of interest rate up to 10.50 per cent on bonds, which will have a maturity period of five years, an official release said here.

The maximum amount of tax-free bonds as a percentage of the total project cost will be 33 per cent or Rs 50 crore, whichever is lower, the release said.

The issuer should at least contribute 20 per cent of the project cost either from internal sources or from grants or a mix of the two.

The guidelines are expected to motivate the urban local bodies and development agencies to develop commercial viable projects, which will instill confidence in the investors in the projects, the release said, adding this would ensure compulsory credit ra ting of the debt instrument.

It will be mandatory for the issuer to obtain an investment grade rating from a Reserve Bank of India approved and reputed grade rating agency before issuance of the bonds. The issuer should also create an escrow account for debt servicing of bonds proce eds with earmarked revenue.

The proposals for floating the bonds will be placed before a committee constituted by the Ministry of Urban Development and Poverty Alleviation, which is the nodal agency for processing the proposals.

The committee will forward its recommendations on the proposals to the Department of Economic Affairs, the release said.