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Mohan Padmanabhan

KOLKATA, Dec. 24

THE Chennai Metropolitan Water Supply and Sewerage Board (CMWSSB) has planned to raise tax-free municipal bonds for urban infrastructure development works in city to benefit Chennai residents.

According to high-level sources at CMWSSB, Srei Capital Markets Ltd, a member of the Srei International Finance Group, is expected to make a detailed presentation before the Managing Director of the Metro Water Board on the entire concept of fund raising through such bonds and the structuring of the instrument on Thusday at CMWSSB's office in Chennai.

It is learnt that the Commissioner of Chennai Municipal Corporation has also called for a presentation on floating of low interest bonds by the Chennai Corporation. Sources said the municipal body, after getting itself credit-rated, was keen to phase out its high cost loans by swapping it with the low-interest bonds.

Sources said the concept paper presented by Srei Capital to CMWSSB has recommended certain essential steps, including restructuring of the financial statements of the Board and adoption of some policy measures. Proper structuring of the instrument, it is pointed out, would be needed for obtaining a better rating from the credit rating agencies. Funds are raised through hypothecation of fixed assets of the corporation, which are usually revalued.

The three fundamental steps suggested are: Obtaining an irrevocable guarantee from the State Government, evolving an escrow mechanism whereby the State Government's current account can be debited and the annuity amounts for repayment of principal tranferred to the designated Principal Payment Account maintained by the trustee bank/bankers, and adopting a similar methodology which will ensure payment of interest by opening of designated interest payment accounts.

It is pointed out that for raising funds through infrastructure bonds, under Section 10 (23G) of the Income-Tax Act, an application has to be made to the Central Board of Direct Taxes (CBDT) three months before the issue in a prescribed format. The Board allows organisations to float such bonds for three assessment years.

Some of the matters which need to be dealt with upfront before taking on the assignment, according to the Srei concept paper, are, use of funds raised, essential pre-conditions relating to project development, financial viability and maintenance of a specified debt service coverage ratio. Contribution of 20 per cent of the project cost has to either from internal resources and/or grants received.

The ceiling on the amount of such tax free bonds is 33.3 per cent of the project cost or Rs 50 crore, whichever is lower. It is also subject to approvals from the Department of Economic Affairs (DEA, Government of India, and the Ministry of Urban Development and Poverty Alleviation, GOI, is said to be the model agency for processing the proposal for bonds.

As per the path-breaking, 74th Constitutional Amendment, municipal corporations planning to raise funds through such vehicles have to do it on a self-sustainable basis, as repayment of the amount is the key element.

Recovery of costs by the municipal bodies for services rendered (operational and developmental expenditure) is important, and corporations always look for additional resources outside the service area for this purpose.

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