Review of Public Issue of Green Bonds by Indore Municipal Corporation

Indore Municipal Corporation (IMC) is the chief municipal body of Indore city. Indore is the most populous and largest city in the Indian state of Madhya Pradesh. It serves as the headquarters of both the Indore District and the Indore Division. The IMC has started various green initiatives like 100% segregated door-to-door waste collection, processing of dry and wet waste, bioremediation of legacy waste, etc.

For the year 2022, IMC has also been a recipient of Swachh City of India and Garbage Free City from the Ministry of Urban Development, Govt of India. IMC has received several such awards over the last few years. In furtherance of this legacy, IMC is raising Green Bonds for an amount up to Rs. 244 crs for the installation of a 60 MW Ground Mounted Captive Solar PV Power Plant at Village Samraj & Ashukhedi, District Khargone in Madhya Pradesh. This issue is not backed by any guarantee of the State Government of Madhya Pradesh or the Central Government.

What Is a Green Bond?

Green Bonds are debt instruments issued by entities for financing projects that have a positive effect on the climate or the environment. Some green bonds carry tax benefits or exemptions with them. However, the current issue by IMC doesn’t have any tax benefit to the NCD holders with respect to interest income or capital gains.

About the Issue

STRPP Structure:

STRPP means “separately transferable and redeemable principal parts”. This structure enables to the division of a single security in multiple parts which can then be traded separately. In the current issue, once the bonds are listed, even though you purchased all four STRPPs – A, B, C and D collectively, you can later trade/transfer them separately.

About the project

IMC has been selected by the Ministry of New and Renewable Energy (MNRE) for setting up a solar photo voltaic power project with an allocated capacity of up to 100 MW with viability gap funding support. The Issuer proposes to install a 60 MW Ground Mounted Captive Solar PV Power Plant on identified land with a total area of 210.84 acres (an area of 165.2 acres and 45.64 acres, respectively, at Village Samraj and Ashukhedi, respectively). The said identified land has been allotted to IMC on a lease basis by the Collector, Khargone, for the purpose of setting up the Project on an annual land rent of Rs. 0.05 crores. The allotment of land shall remain valid till the duration of the operation of the said Project.

Total Project Cost:

Financial Performance

• The primary sources of revenue for a municipal corporation include taxes, grants and assigned revenue from the Government, other fees and charges, and income from investments.
• The expenditures of a municipal corporation include administrative expenses like salaries and wages, rent, and expenditures on public services, among others.

Key Financial Metrics are mentioned below:

Balance Sheet:

(Rs in crs)

Income & Expenditure:

(Rs. In crs)

Ratios:

• IMC has maintained a favourable debt/own funds ratio within the range of 0.09x to 0.14x over the last 3 years. 
• Further, the municipal corporation has been regularly reporting surplus, i.e. its income exceeds its expenditure, for the last 3 FYs with a cumulative surplus of Rs. 1,067.89 crs. 
• However, around 50% of its revenue comes from the various grants and compensations received from the Central & State Governments. Around 29% of the revenue receipts of IMC for the last 3 years received from the State Government of Madhya Pradesh comprises GST compensation.
• The tax collection ratio has been moderate in the last 3 FYs, with the current demand collection ratio being 68.34% in FY20, 54.53% in FY21, and 67.17% in FY22.

Borrowings

The borrowings outstanding as on December 31, 2022:

(Rs in crs)

Structured Payment Mechanism

IMC is following a structured payment mechanism (SPM) for its earlier issuance and is proposing the same for the current issue. 

SPM necessitates the IMC to create a first pari passu charge and escrow mechanism in favour of the bondholders on the own revenues of IMC along with the existing holders of 9.25% of Indore Municipal Corporation Series-I June 2028 bonds. The debenture trustee, on behalf of the bondholders, will have first pari passu charge (along with the existing bondholders) over the escrow account into which the own revenues/cashflows will be transferred for debt servicing. The escrowed revenues transferred in the escrow account will be available proportionately (140:244) for debt servicing requirements of the existing bond issue and the proposed bond issue.

Features of SPM include:

• Total amounts collected in the Escrow Account in any financial year shall be at least 2 times of the Annual Payments Amount, which includes interest and principal wherever applicable.
• The amount shall be transferred from the Escrow account to the interest payment account (IPA) for interest payments and the sinking fund account (SFA) for principal repayment, as mentioned below.
• For every half-yearly interest payment, 20% of the interest is to be transferred to the IPA created for this bond issuance, as follows:
  • 1^st half year – from 1^st to 5^th Month
  • 2^nd half year – from 6^th to 10^th Month
• For STRPP A, 3.33% of the principal amount will be transferred each month for 10 months in the 1^st, 2^nd, and 3^rd year to SFA to be created for this bond issuance.
• For STRPP B, C, and D, 5% of the principal amount will be transferred each month for 10 months in the 4^th & 5^th year, 6^th & 7^th year, and 8^th & 9^th year, respectively.

Comforts

• Strong Financials with consistency in reporting surplus
• Escrowed cash flows for debt servicing
• Structured Payment Mechanism

Concerns

• Possibility of untimely execution of project and cost overruns
• Timely receipt of grants and incentives from the Government
• Moderate tax collections
• Illiquidity of Green Bonds on the stock market
• Non applicability of SARFAESI
• Political risks