The government is making a fresh push for Tier-II and Tier-III cities to issue municipal bonds, as this would help in financing projects under the Smart Cities initiative. The starting point will be a project to issue a fresh round of such instruments in five or six months, Business Standard has learnt from senior government sources.

The finance and urban development ministries are trying to identify cities whose urban local or municipal bodies could issue such bonds to finance specific projects. Such cities must meet norms in this regard of the Securities and Exchange Board of India (Sebi) and of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM).

Under Sebi’s norms earlier this year, municipal bodies need to have a strong financial record. There should been no negative net worth in any of three immediately preceding financial years and no default in repayment of debt securities or loans from banks or financial institutions in the past year.

Under JNNURM (it was an important scheme of the previous government), urban local bodies to qualify needed to adopt a modern and accrual-based double entry system of accounting; their books have to be in order and audited regularly.

“A number of Tier-II and III cities have cleaned their books, switched to double accounting and have got audited. This puts them in a position where their bonds could get investment-grade ratings and be able to attract investors,” said a senior official.

Although officials declined to specifically name the cities whose names are being discussed, these are understood to be from Gujarat, Odisha, Andhra, Maharashtra, Tamil Nadu, Madhya Pradesh and Chhattisgarh. The first of such issuances is expected to hit the markets in five-six months.

According to Sebi guidelines, any municipal body issuing debt securities to public must have the bonds listed on an exchange and get a rating from at least one credit rating agency.