The Securities and Exchange Board of India (Sebi) on Wednesday proposed a series of changes to the framework governing municipal debt securities (muni bonds). It includes allowing refinancing disclosures, capping the use of proceeds for working capital, enabling pooled financing structures with escrow safeguards, aligning norms with non-convertible securities regulations, and introducing provisions for environment, social and governance (ESG)-linked debt and investor incentives.
Under the proposals, municipal issuers seeking to refinance existing loans will be required to disclose details of current lenders, interest rates, repayment schedules, purpose of borrowings, and any past restructuring in offer documents.
Sebi said the disclosures would help investors assess the financial health and liquidity risks of issuers.
At present, the regulations do not specifically permit refinancing as an objective for raising funds by municipalities.
Sebi has also proposed restrictions on the utilisation of issue proceeds. It stated that not more than 25 per cent of the funds raised can be deployed towards working capital requirements.
The proceeds must be linked to project-specific working capital needs and cannot be used for general corporate purposes.
Issuers will also have to disclose the proportion of proceeds earmarked for such use.
The proposals are based on recommendations made by a Sebi working group, which were subsequently discussed by the regulator’s Corporate Bonds and Securitisation Advisory Committee (CoBoSAC).
For pooled financing involving multiple municipalities, Sebi has proposed a separate disclosure framework.
Municipalities participating in such issuances will have to enter into agreements with a pooled finance vehicle, which may be structured as a trust or a company.
The regulator has proposed a two-tier escrow mechanism requiring the maintenance of interest and sinking fund accounts at both the municipality and special purpose vehicle (SPV) levels.
The SPV would also be required to maintain funds equivalent to one year of interest obligations. Credit rating agencies would assess the financial position of each municipality forming part of the pool.
Sebi has further proposed aligning municipal debt regulations with the framework for non-convertible securities.
The changes include specifying face values of ₹1 lakh or ₹10,000 for privately-placed securities and linking trading lots to the face value.
Municipal issuers may also offer incentives such as additional interest or discounts to categories, including senior citizens, women, defence personnel, and retail investors.
The regulator has proposed allowing electronic modes for public issue advertisements, enabling issuers to publish notices through online platforms while mandating links and QR codes in print advertisements.
In addition, Sebi has proposed enabling municipalities to issue ESG debt securities in line with existing regulatory norms.
It has also proposed introducing a definition of “working day” to bring clarity to timelines related to issuance and listing.
The consultation paper follows a review of the 2015 municipal debt regulations amid changes in the debt market ecosystem. As of March 2026, 22 municipal corporations had collectively raised ₹4,540.34 crore through 31 issuances.