SEBI Proposes Allowing Municipalities To Refinance Existing Debt Through Bond Issuances

The Securities and Exchange Board of India (SEBI) on Wednesday proposed allowing municipal bodies to refinance existing debt through bond issuances, use part of the proceeds for project-linked working capital, and revise the framework for pooled municipal bond fundraising, as part of a review of the municipal debt securities framework.

The proposals form part of a consultation paper seeking amendments to the SEBI (Issue and Listing of Municipal Debt Securities) Regulations, 2015.

SEBI has proposed expressly permitting municipal bodies to raise funds through bond issuances to refinance existing loans or debt. Issuers would have to disclose details of the debt being refinanced.

These would include the type of existing loan, lender details, interest rate, repayment schedule, purpose of the original borrowing, and any past restructuring.

The regulator has also proposed allowing up to 25% of issue proceeds to be used towards working capital requirements directly linked to the project being financed.

However, the funds cannot be used for general purposes. Issuers would also have to disclose the percentage of proceeds proposed to be allocated toward the working capital component. The proposal would apply to municipal debt issuances under the amended framework, including refinancing issuances.

SEBI has also proposed a revised framework for pooled municipal bond issuances involving two or more municipalities through a pooled finance vehicle or special purpose vehicle (SPV). The existing regulations already permit such structures. However, the consultation paper proposes additional disclosure and operational safeguards.

Under the proposed framework, constituent municipalities would have to enter into an agreement with the pooled finance SPV. Detailed disclosures regarding the pooled structure would also need to be made in the offer document.

The proposal sets out an escrow-based payment mechanism for such issuances. The SPV would be required to maintain separate interest payment and sinking fund accounts. It would also have to maintain funds equivalent to one year's interest obligation in the interest payment account throughout the tenure of the securities.

As part of the review, SEBI has proposed aligning municipal debt rules with provisions under the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.

The proposals include prescribing face value and trading lot norms for municipal debt securities issued on a private placement basis. SEBI has also proposed permitting incentives such as additional interest or issue price discounts for specified investor categories.

SEBI has also proposed permitting incentives such as additional interest or issue price discounts for specified investor categories.

Separately, it has proposed aligning municipal debt rules with the non-convertible securities framework by allowing electronic advertisements for public issues, enabling ESG debt issuances by municipalities, and adopting a uniform definition of “working day.”

SEBI said municipal corporations play a significant role in urban infrastructure development and civic service delivery. It said increasing urbanisation is driving higher funding requirements.

As of March 31, 2026, 22 municipal corporations had accessed capital markets and raised ₹4,540.34 crore through municipal debt securities.

Public comments on the consultation paper have been invited until June 3, 2026.