Grey areas in green bonds

At a time when global investors are pouring funds into green projects, it appears India may be unable to take advantage of the windfall. Reason: the perception that investing in India is risky.

Global investors are increasingly routing their investments to green projects through a new instrument called ‘green bonds’— debt instruments, moneys collected from which can be used only for funding environment-friendly projects. A ‘green bond’ culture seems to have taken root in the developed West. Funds collected through issue of green bonds tripled in 2014 to $36 billion, and are set to triple yet again this year.

The trend has also given birth to a new class of fund backers, christened ‘socially responsible investors’. Sumant Sinha, Founder-Chairman & CEO of ReNew Power Ventures, one of the larger wind and solar companies in India, notes that there are “specialised pools of liquidity set up (in the developed countries) for the explicit purpose of investing in green bonds and other social causes.”

Lesser yield is acceptable

These investors do not mind lower returns. “In our experience we have seen that these investors are prepared for lesser yield,” says Santhosh Jayaram, who heads sustainability advisory at KPMG India. “The green fund kitty is becoming bigger by the day,” he observes. And, investors are thirsting for more green bond issues. In fact, globally there are fewer green bond issues than the funds chasing them. “The issues are very scarce whereas the funds awaiting such issues are numerous,” observes an Exim Bank of India spokesperson.

So, that is the global scenario. The Indian story, however, is unfolding differently. The country has a massive renewable energy programme that calls for investments of $180 billion over the next seven years. One would expect that Indian companies or Indian financial institutions would rush to the western financial markets to tap into the green pool. But that is not happening. Thus far, there have been only two green bond issues from Indian entities — Yes Bank and Exim Bank of India.

Many Indian financial institutions are itching to tap into the growing green fund pool, but there is little action on the ground. Both Yes Bank and Exim Bank want an encore. IIFCL, a state-owned non-banking finance company, says it will float a mutual fund that would invest in green projects. Others are not open about their plans, but “every financial institution I speak to is looking at a ‘green bonds’ issue,” says Jayaram.

Too many risks

Then, what is holding them back? “The fact that green bonds are not a cheaper source of financing,” explains Sunil Jain, CEO and Executive Director, Hero Future Energies. Add up company risk, country risk and counterparty risk (or, the risk of the ultimate buyer of the green product not being able to pay for it) and then add hedging costs, that makes green bonds not cheap, he says.

Investors may wave away ‘company risk’ if the issuer is a large conglomerate, but still the other risks are priced. The ‘counterparty risk’, or the concerns over the paying capacity of the electricity distribution companies which buy the green power, is a big price factor, says S Chandrasekhar, power industry veteran and Managing Director of the renewable energy company, Bhoruka Power Corporation.

The ‘hedging cost’ too is something to reckon with. The rupee has depreciated seven per cent against the dollar in one year, points out Jain, contrasting it with the Chinese currency, which is “controlled and stable”.

“Green bonds can work only if there is enough underlying activity on green projects and if these projects start becoming profitable,” says Sinha, who nevertheless sees “increased activity in the green bond space” over time.

Government help sought

Given these ground realities, the industry calls for government’s help to facilitate tapping into the global green fund markets. Jain suggests that the government could come out with a ‘partial guarantee scheme’ to assure investors of repayment.

Others suggest incentives. “As things stand now, there are no incentives either for the issuers or the investors,” points out the spokesman of Yes Bank.

In agreement with this, Exim Bank calls for (at least) abolition of the 5 per cent withholding tax.

Until the road bumps are cleared, India may not benefit much from the global green mania, says Jain.

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