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(Municipal Bonds, REITs, InVITs etc.)

SHORT SUMMARY - Indian Financial Market Products:

Capital market in any country plays a pivotal role in the growth of economy and meeting the country's socioeconomic goals. They are an important constituent of the financial system given their role in the financial intermediation process and capital formation of the country. The importance of financial products cannot be under-emphasized for a developing economy like India which needs significant sources of financing for development of strong infrastructure, to reduce the gap of socio- economic standards between people of India and world and to meet the fund requirements for smart cities developments in India.

Indian households have traditionally preferred safety of bank deposits and government saving schemes and much less than 10% of the their investments in financial assets is in shares, debentures and mutual funds, which is very low as compared to some of the developed economies. The need to mobilize savings into productive channels and the opportunity for financial intermediation, emerging financial products like; Municipal Bonds, REITs and InVITs etc. will be an opportunity of a lifetime for Indian investors and a challenge to financial market regulators. The Government, the Regulators and the financial institutions have an important role to play in building a strong, robust financial products that will be easy to invest and shall have no major red- tapes of various clearances. It shall be in harmony with government vision of less government maximum governance.

The growth trajectory of a country's financial products is significantly influenced by the actions of these stakeholders. Concerted efforts of the Government and the Regulators supported by a long- term vision and clarity in action can significantly help in fostering a climate that is conducive to growth and investments. Before diving deep into finance, it may be useful to pause and better understand emerging financial products.

Few emerging financial Products which can be major sources of funding for various projects in future and in today's scenario are as follows:

  1. Municipal Bonds,
  2. REITs ( Real Estate Investment Trusts),
  3. INVIT (Infrastructure Investment Trust).


 A Municipal bond is a debt security issued by a State, Municipality or County to finance its capital expenditures, including the construction of highways, bridges or schools etc. Municipal bonds are mostly exempt from federal taxes and from most state and local taxes, making them especially attractive to people in high income tax brackets.

Example: A City Corporation wants to construct a new Cricket Stadium. It can issue municipal bonds to fund the project. Institutional investors as well as the public can buy these bonds. Revenues from cricket stadium will then be used to repay the interest and principal on these bonds.



Revenue bonds are bonds supported by the revenue from a specific project, such as a water supply project or a sewer systems project. Such bonds finance income-generating projects and are secured by a specified revenue source. For example, if a revenue bond is issued to upgrade a water supply network, the water charges collected from users would be used to pay off the bond.


General obligation bonds are issued in the belief that a municipality will be able to repay its debt obligation through taxation or revenue from projects. Unlike revenue bonds, general obligation bonds can be paid through a variety of tax sources. These therefore may not be for specific revenue-generating projects.


Municipal bonds have been in existence in India since 1997. Municipal corporations of cities such as Ahmedabad, Bengaluru, Nashik and Madurai have issued them; mostly privately placed with institutions and not tradable. As a result, the municipal bond issues only touched Rs.1,353 crores and there have been no new issues since 2010 till 2016 .


In March 2015, SEBI issued guidelines for the issue and listing of municipal bonds and clarified their regulatory status. The new rules that will allow these instruments to be offered to the public, listed and traded on stock exchanges will hopefully rekindle the appetite for them. After notification of these guidelines; Pune Municipal Corporation (PMC) first Municipal Corporation in the country in recent years to raise funds through municipal bonds by raising Rs 200 crore in the first set of a proposed Rs. 2,264 crore offer, it is a ten- year bond offer carrying a coupon of 7.59 per cent rate at the Bombay Stock Exchange (BSE).


As with any investment, investing in municipal bonds entails risk. Investors in municipal bonds face a number of risks, specifically including:

Call risk. Call risk refers to the potential for an issuer to repay a bond before its maturity date, something that an issuer may do if interest rates decline -- much as a homeowner might refinance a mortgage loan to benefit from lower interest rates. Bond calls are less likely when interest rates are stable or moving higher. Many municipal bonds are 'callable,' so investors who want to hold a municipal bond to maturity should research the bonds call provisions before making a purchase.

Credit risk. This is the risk that the bond issuer may experience financial problems that make it difficult or impossible to pay interest and principal in full (the failure to pay interest or principal is referred to as 'default'). Credit ratings are available for many bonds. Credit ratings seek to estimate the relative credit risk of a bond as compared with other bonds, although a high rating does not reflect a prediction that the bond has no chance of defaulting.

Interest rate risk. Bonds have a fixed face value, known as the 'par' value. If bonds are held to maturity, the investor will receive the face value amount back, plus interest that may be set at a fixed or floating rate. The bond's market price will move up as interest rates move down and it will decline as interest rates rise, so that the market value of the bond may be more or less than the par value. If they move higher, investors who hold a low fixed-rate municipal bond and try to sell it before it matures could lose money because of the lower market value of the bond.

Inflation risk. Inflation is a general upward movement in prices. Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest. It also can lead to higher interest rates and, in turn, lower market value for existing bonds.

Liquidity risk. This refers to the risk that investors won't find an active market for the municipal bond, potentially preventing them from buying or selling when they want and obtaining a certain price for the bond. Many investors buy municipal bonds to hold them rather than to trade them, so the market for a particular bond may not be especially liquid and quoted prices for the same bond may differ.


According to an advisor associated with ministry reported that to convince investors in giving money to these municipalities would be difficult. Therefore, many of the smaller municipalities are going for total Greenfield projects inviting private parties. In normal course, it would be a public private partnership.

According to the National Institute of Securities Market (NISM), SEBI'S Investor Education Arm, raising capital from a domestic municipal bond market can start as a supplement to funding from central and state governments, borrowings from financial institutions such as LIC, HUDCO and commercial banks. The revenue generated from various sources would be cost-effective and reasonably equitable form of infrastructure financing. 

'As the market develops, there is enormous potential to scale up the level of investment much more rapidly than that can be achieved by the traditional sources of financing alone,' NISM said in a paper.

Going forward, India needs a well-developed Municipal bond market for numerous reasons. Municipal bonds help the urban bodies to bridge funding gap. With implementation of GST, the revenues of various states are likely to take a hit. For example, BMC secures nearly 33% of its revenues through the octroi tax. In such an event, Municipal bonds will prove to be an alternative source of funding. As per the estimates of the Rating agency CARE, large municipalities could raise Rs. 1,000 to Rs. 1,500 crores every year through such bonds. Besides offering tax saving advantage, they also come up as safe positions to invest in for low risk appetite members of the public looking for products beyond the conventional fixed deposits. The demand side is constrained by the conservative sentiment of institutional investors. However, the supply side faces the heat due to a few municipal bodies with good creditworthiness and reliance on old and established methods of project financing by government entities. The urban bodies issuing municipal bonds can be incentivized through additional grants based on their creditworthiness to enable more and more issuance of such bonds.

Safeguarding the municipal bonds market, plugging the existing loopholes and increasing their penetration will go a long way in improving the efficiency of this market and thus help the government fulfill massive investment requirements for improving urban infrastructure.


REITs (Real Estate Investment Trusts) are similar to mutual funds. While mutual funds provide for an opportunity to invest in equity stocks, REITs allow one to invest in income- generating real estate assets.


REITs is a process to generate funds from a lot of investors to directly invest in profitable real estate properties like offices, residential units, hotels, shopping centers, warehouses and more. All trusts with REIT will be listed with stock exchanges as they would be structured like trusts. Consequently, REIT assets will be held with independent trustees for unit holders.


A REIT's objective is to provide the investors with dividends that are generated from the capital gains accruing from the sale of the commercial assets. The trust distributes 90% of the income among its investors via dividends. Apart from minimum entry level, a REIT is supposed to provide diversified and safe investment opportunities with reduced risks, and under a professional management to ensure the maximum return on investments.


Trustees with REIT have defined duties which typically involve ensuring compliance and adherence to all applicable laws that protect the rights of the investors.


REITs, as a concept, have been on the horizon for a while now. India's regulations in 2014 for the sector have not been able to attract investor interest. REITs obtained exemption from dividend distribution tax in the Budget, a step towards making them attractive for the investors. A report by real estate consultancy firm Cushman and Wakefield estimates that Indian commercial real estate (like office, retail assets) offers investment opportunities for REITs worth $43 billion – $54 billion (Rs, 2.88 lakh crore - Rs. 3.60 lakh crore) across top cities.

India's REIT market is just about opening up with a number of developer-investors partners acquiring and consolidating rental assets and firming up plans.

DLF, which is in the last leg of selling a 40% stake in its rental portfolio to Singapore sovereign fund GIC Pte, has said it will list its office and retail properties in the form of REIT.

Global private equity firm Blackstone Group LP, the largest owner of office real estate in the country, may list two separate REITs for its office assets with developer partners. One of them is with Bengaluru-based Embassy Property Developments Pvt. Ltd, which is valued at around Rs22,000 crore with more than 22 million sq. ft of space.

'While this will increase the number of institutional investors like banks coming in, we would also like to engage with retail investors and assure them good returns on the basis of rent income and appreciation,' said Embassy chairman Jitu Virwani. Embassy filed an application seeking approval for its REIT offering from Sebi in October and is expecting a go-ahead soon.

Other companies acquiring and consolidating their office assets and moving towards a REIT structure are RMZ Corp. and K. Raheja Corp.

The Competition Commission of India (CCI) in March approved Blackstone's plan to acquire a stake in K. Raheja Corp's commercial office portfolio.


SEBI introduced its draft REIT regulations in 2007. Over the years, the regulator has done a commendable job of structuring these regulations by closely partnering with important stakeholders, government bodies, investors and real estate developers in the country, and bringing them in sync with globally recognized norms. After considerable modifications, REIT regulations were finally enacted in India on 26 September 2014.

SEBI has devised detailed guidelines governing the markets for investments, covering the following:

  • Eligibility of the sponsor (the person who sets up the REIT or InvIT), the manager of the trust and the trustee
  • Investment conditions such as the ratio of the value of income-generating assets as well as other assets.
  • Policies and requirements with respect to distribution of dividends, minimum capital required for an initial public offer (IPO), listing requirements, key responsibilities of the parties to the trust, etc.


  • REITs units are listed on, and are subject to the vagaries of the stock exchanges, resulting in negative or lower returns than expected. The MSCI US REIT index crashed from over 1300 points in 2007 to under 350 points in 2009. As in mutual funds, retail investors in REITs have no control over investments and exits being made by the trust.
  • Investing in real estate may be a big winner for an Indian in India (in nominal terms), but with the repeated de-valuations of the rupee, for an NRI, the returns [at best] work out to a compounded yield of 7% per annum , more than which could be earned even through index investing in countries like the USA. If India needs to attract more FDI in the right sectors, then it needs to manage its finances in a way that it does not have to repeatedly de-value the rupee.


PWC in its report stated that In the near future, we expect REITs to increase the depth of the Indian property market through a sound regulatory framework which ensures transparency and high governance standards, and promotes regular monitoring of their performance.

According to Forbes Asia Real Estate advisor Mr. Alex Frew McMillan, it looks set to be a bumper year for India in 2017 when it comes to real estate and the economy as a whole. That makes a marked turnaround for a persistent underperformer in Asia – India. The nation has shot to the top of the list of preferred destinations for real-estate investment in the eyes of major institutional investors.              


InvITs are similar to mutual funds. While mutual funds provide an opportunity to invest in equity stocks, an InvIT allows one to invest in infrastructure projects such as road and power.


InvITs raise funds from a large number of investors and directly invest in infrastructure projects or through a special purpose vehicle.


Two types of InvITs have been allowed:

  1. Which invests in completed and revenue generation infrastructure projects; the other, which has the flexibility to invest in completed or under-construction projects. InvITs which invest in completed projects take the route of public offer of its units.
  2. Those investing in under construction projects take the route of private placement of units.

NOTE: Both forms are required to be listed on stock exchanges.


InvITs are registered as trusts with SEBI and there are four parties - Trustee, Sponsors, Investment Manager and Project Manager. In the case of IRB InvIT, IRB Infrastructure Developers Ltd. is the sponsor, IDBI Trusteeship Services Ltd. is the trustee, IRB Infrastructure Pvt. Ltd. is the investment manager and the project manager is Modern Road Makers Pvt. Ltd.


As per present regulations, InvIT investments are not open for small and retail investors. The minimum application size for InvIT units is Rs.10 lakh. The main investors could be foreign institutional investors, insurance and pension funds and domestic institutional investors (like mutual funds, banks) and also super-rich individuals.


According to SEBI rules, at least 90% of funds collected, after paying for expenses, taxes and repayment of external debt, should be passed on to investors every six months. IRB InvIT is expected to pay about 12% as returns to investors. Dividend income received by unit holders is tax exempt. Short-term capital gain on sale of units is taxed at 15%, while long-term capital gains are tax exempt. Interest distributed to unit holders is taxed.                      


  • InvITs are listed on and are subjected to the vagaries of the stock exchanges, resulting in negative or lower returns than expected. An economic downturn or project delays may hit infrastructure projects and result in lower returns. As in mutual funds, investors in InvITs have no control over investments and exits being made by the trust.
  • With more domestic fund houses coming in, the demand for InvITs would drive yields lower in the secondary market.
  • Risk free interest rates have been declining for quite some time. This is why investors keep on searching for new investment avenues to get better returns. But InvITs are not risk-free in any way.


  • Many experts feel conservative investors should play the waiting-game for InvITs. "Despite the general dip in the interest rates in the market, the incremental yield on InvITs is not commensurate with the incremental risk involved in InvITs. Given this, the retail investors, on the look-out for risk-free returns, may still not be completely inclined to invest in InvITs, of PWC India.
  • InvITs are innovative new vehicles that can play a crucial role in meeting India's huge infrastructure requirements, estimated to be Rs 4.3 lakh crore (Rs 43 trillion) over the next five years said CRISIL on 2/12/2016.
  • Ajay Saraf, Executive Director, ICICI Securities, ICICI Securities was lead managing an InvIT public offer in Feb 2017. Said, Infrastructure is an emerging asset class in India that is garnering much attention among investors worldwide and some describe it as the perfect asset for pension plans seeking to match long-term liabilities, diversify portfolio holdings, lower the risk of capital loss and, in some cases, hedge inflation as well.
  • Kranti Mohan, Partner, Cyril Amarchand Mangal Das, said while you're getting to invest in a stable cash-generating asset, you're also getting rights similar to shareholders in a company. Other debt products won't give an investor any say in the way a company should run. 


Just giving tax-free status to municipal bonds may not be enough. Some policy innovations may be needed till a proper market for bond insurance is in place. Municipal bonds should thus be seen as only one part of a larger package to strengthen city finances. Cities need to generate more revenue as well as get more untied funds from the money collected through the new goods and services tax. And to pull this all together will require city administrations that are empowered. In the near future, we expect the REIT vehicle to increase the depth of the Indian property market through enhanced transparency and governance standards along with monitoring of the REIT's performance on a regular basis by the financial media. The introduction of InvIT is a positive move and we believe that this model of investment under InvIT mechanism will have positive impact on the Infrastructure projects in India. However, it will inter-alia depend on credibility of sponsor/investment manager and substance and commercial income of underlying assets of InvIT to incite the investors to invest in this new exciting product.


Published by

CS Divesh Goyal
(Practicing Compnay Secretary)
Category Others   Report

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