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India’s urban local bodies (ULBs) are struggling to keep up with the scale of the country’s urban expansion. By 2036, 600 million Indians (around 40 percent of the country’s population) are expected to live in cities. Cities will also contribute up to 80 percent to the national GDP by 2050, by which time, nearly half of India’s population is expected to have urbanised. Still, ULBs are struggling to finance existing service delivery obligations through own-source revenue. Lacking the institutional capacity, expertise, and financial autonomy to raise long-term capital independently, ULBs rely on state and central transfers to sustain their administrative, operational and maintenance expenditures.
Against this backdrop, the recent reforms to municipal bond regulations proposed by the Securities and Exchange Board of India (SEBI) hold enormous significance. The reforms aim to address long-standing structural weaknesses that have prevented municipal bonds from becoming effective instruments of urban finance. Notably, they include utilising municipal bonds for refinancing existing debt, lowering entry barriers to expand the investor base, and facilitating pooled financing for smaller municipalities.
If approved, SEBI’s reforms can revive investor confidence in the municipal bond market, which, despite policy support, has remained sporadic, fragmented, and underdeveloped.
Cities, given their pivotal role in achieving India’s Viksit Bharat 2047 vision, must therefore develop financing mechanisms capable of mobilising capital at a scale that public budgets alone cannot provide. If approved, SEBI’s reforms can revive investor confidence in the municipal bond market, which, despite policy support, has remained sporadic, fragmented, and underdeveloped.
Past Attempts to Strengthen Urban Finance
For the first time in 1992, the Constitution (74th Amendment) Act envisioned governance and fiscal decentralisation to ULBs, recognising them as local self-governments, the third tier of government in India. Subsequently, the Jawaharlal Nehru National Urban Renewal Mission (JNNURM – 2005), the Smart Cities Mission (SCM), and the Atal Mission for Rejuvenation and Urban Transformation (AMRUT)—both launched in 2015-16, also attempted to improve municipal governance and financial management. Central Finance Commissions, too, regularly emphasised the need to strengthen ULB finances. Municipal bonds figured intermittently within this national agenda. The Ahmedabad Municipal Corporation became the first Indian city to issue a municipal bond in 1998-99.
SCM and AMRUT further spurred the bond market. In 2017, they introduced incentives for municipal bond issuances and supported credit rating exercises for 94 mission cities. This push enabled several ULBs to access the debt market. Pune’s municipal bond was oversubscribed, while Indore and Ahmedabad pioneered green municipal bonds.
However, bond issuance has been sporadic, with the overall scale of issuance remaining small relative to the enormous financing needs of India’s cities. As of 30 April 2025, only 20 municipal corporations had accessed the capital market to raise ~INR 4540 crore (~US$476 million). Of these, the municipal bodies of Hyderabad (3), Indore (2), Ahmedabad (2), Surat (2), Vadodara (2), Chennai (2), Pimpri-Chinchwad (2) and Nashik (2) have issued municipal bonds more than once.
By contrast, the United States’ municipal bond market, valued at US$4.4 trillion, has evolved into a principal financing instrument for urban infrastructure and local services. Meanwhile, China’s local government bond issuance exceeded RMB 3 trillion (US$435 billion) in the first quarter of 2026 alone.
Why Municipal Bonds Have Struggled
Poor institutional capacity, rather than regulatory issues, has constrained India’s municipal bond market. Property tax collections remain inefficient, user charges are often subject to political expediency, and local governments possess limited fiscal autonomy. Heavily dependent on grants from state and central governments, cities not only have low credit profiles but also leave investors uncertain about repayment capacity. Compounding this problem is the absence of reliable and standardised municipal accounting systems, with different states and, often, ULBs within the same state following varying accounting formats and procedures.
Heavily dependent on grants from state and central governments, cities not only have low credit profiles but also leave investors uncertain about repayment capacity.
Project execution delays and inconsistent urban planning frameworks further dilute investor confidence. Furthermore, municipal bonds in India are typically not traded but held to maturity, limiting secondary-market depth. The lack of trading and price discovery discourages retail participation.
India’s uneven urbanisation poses another challenge. Smaller municipalities lack the administrative and financial capability of a few large municipal corporations, such as Pune or Ahmedabad, to tap into capital markets.
Why SEBI’s Proposed Reforms Matter
SEBI’s proposals aim to address several of these concerns. A critical proposal is to allow municipal bonds to refinance existing debt. Until now, municipal borrowing through bonds has been largely tied to new infrastructure financing. Refinancing would provide greater financial flexibility and help ULBs manage debt more efficiently.
Its proposal for pooled financing mechanisms through Special Purpose Vehicles (SPVs) is crucial for smaller municipalities that lack the scale or credit profile to issue bonds independently. This SPV-led aggregator model could be a game-changer, as pooled financing distributes risk and improves economies of scale for smaller cities, which, despite severe infrastructure deficits, remain excluded from formal debt markets.
Moreover, the proposal to lower face values will lower entry barriers, diversify the investor base, and improve market liquidity. At the same time, the proposed incentives for specific categories of investors, including women, senior citizens, and retail participants, will broaden participation.
These reforms also complement the Union government’s renewed emphasis on urban finance. The Union Budget 2026-27 announced INR 100 crore (~US$10 million) in incentives for large cities for a single bond issuance exceeding INR 1,000 crore (~US$104 million). This supplemented AMRUT’s incentives of up to INR 200 crore (~US$20 million) to smaller ULBs. The Union Cabinet also approved central assistance of INR 100,000 crore (~US$2 billion) for the Urban Challenge Fund (UCF), covering 25 percent of the total cost of urban infrastructure projects, subject to the ULBs or the implementing agency raising 50 percent from the capital markets. The UCF signals not only a move to reduce the ULBs’ reliance on grants but also a determined push towards diversified, market-oriented approaches to financing India’s urban transition.
Building Creditworthy Cities
However, while regulatory reform can provide momentum, the success of municipal bonds will ultimately depend on investors’ trust in city governance. The warning signs are already visible: The Pune Municipal Corporation (PMC) recently decided to return INR 200 crore mobilised through its first municipal bond in 2017 because it was unable to build the required institutional capacity and expertise to spend it on the intended new infrastructure projects for nearly a decade. The whole exercise was reduced to raising a corpus that merely earned interest for the PMC, without bringing any tangible benefits to the citizens. Pune’s experience underscores the imperative of strengthening project preparation, debt management, administrative accountability, and capital market expertise if ULBs are to improve their creditworthiness and address investor concerns.
Equally important is to strengthen the ULBs’ revenue base. Property tax, a primary source of revenue, remains significantly underutilised in India compared to many global counterparts. Improving property mapping and databases, digitising valuation systems, and reducing political resistance to necessary revisions are imperative towards this end.
Municipal bonds must increasingly be viewed through the lens of climate finance and environmental, social, and governance (ESG)-linked investment opportunities.
At the same time, municipal bonds must increasingly be viewed through the lens of climate finance and environmental, social, and governance (ESG)-linked investment opportunities. Municipal green bonds are practical tools for climate adaptation and resilience projects in cities that are increasingly confronting climate-induced vulnerabilities. Studies estimate that, with the right reforms, Indian municipal green bonds could mobilise up to US$2.5 billion by 2030. As global investors increasingly focus on integrating ESG into their investments, credible green infrastructure pipelines can attract long-term capital. Building such capacities is imperative if ULBs are to evolve into financially credible institutions capable of sustaining urban growth.
The current model of financial dependence on higher tiers of government is unsustainable and inadequate, given the enormous scale of India’s urbanisation.
Conclusion
India’s urban future depends not merely on how cities grow, but on how they finance that growth. The current model of financial dependence on higher tiers of government is unsustainable and inadequate, given the enormous scale of India’s urbanisation. Municipal bonds, thus, are not only a test of India’s commitment to fiscal decentralisation, but can also become an important pillar of urban finance architecture if supported by overarching, results-oriented institutional reform.
SEBI’s latest proposals represent a meaningful attempt to transition beyond random municipal bond issuances toward systemic market development. For municipal bonds to succeed in India, however, cities must become financially credible institutions capable of sustaining India’s urban century rather than merely grant-dependent administrative entities.
Dhaval Desai is a Senior Fellow and Vice President at the Observer Research Foundation.
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