India Inc may turn to green bonds to fund sustainable projects

In an emerging class of debt, India is set to see a flush of green bond issues in the months to come.

YES Bank and Export Import Bank of India (Exim Bank) were among the first to kick-start the green infrastructure bond market in India this year.

Private sector lender YES Bank has raised ₹1,000 crore ($160 million) through its green infrastructure bonds with a tenure of 10 years to fund renewable energy projects such as solar, wind and biomass projects.

State-owned Exim Bank raised $50 million (about ₹3,100 crore) through a five-year green bond issue in March. The Eurodollar Green bond issue was priced 147.50 basis points over the US Treasuries at a fixed coupon of 2.75 per cent per annum.

At present, Exim bank’s dollar portfolio is $9-10 billion.

The key difference between a ‘green’ bond and a regular bond is that the issuer publicly states it is raising capital to fund ‘green’ projects, assets or business activities with an environmental benefit, such as renewable energy, low carbon transport or forestry projects, according to a KPMG report on the subject.

Santhosh Jayaram, Director, Sustainability Advisory, KPMG India, said that the scope for green bonds goes beyond the corporate world. “The Environment Ministry has been talking of raising funding for clean technology. Green bonds are one way of doing this. A city municipality can use this route as well, for example, to deal with waste disposal.”

Clean power According to reports, the government has approached at least eight lenders, including Rural Electrification Corp Ltd (REC), to raise low-cost and long-term funds to help finance India’s plan to quadruple its renewable energy production, while also aiming to make it economically viable for debt-laden distribution companies to buy clean power.

In addition, the initiative towards renewable energy also seeks to minimise the country’s dependence on coal-fuelled electricity. The Ministry of New and Renewable Energy has set a target of adding 1,100 MW of solar power capacity in 2014-15. The Government ambitiously hopes to generate 100,000 MW of power through solar projects by 2022. The current installed solar power capacity is at a mere 3,062 MW.

Market players suggested that the dollar- or rupee-denominated green bonds may be raised by India Infrastructure Finance Co Ltd (IIFCL), Power Finance Corp (PFC), REC, IDBI Bank, Indian Renewable Energy Development Agency and ICICI Bank. Phone calls and e-mails to a few of these players remained unanswered.

Globally, the labelled green bond market tripled in size between 2013 and 2014, with $37 billion issued in 2014, according to the KPMG report.

One major caveat with these bonds is the risk of green-washing, where borrowers divert proceeds to activities that aren’t green enough.

To prevent this, annual green audits are conducted during the lifetime of the project and a penalty clause is written in case of failure to comply with terms of the bond.

Big scope David Rasquinha, Deputy Managing Director at Exim Bank, said, “The scope is huge….Banks in India do (fund) a lot of green projects and renewable energy, solar, wind and so on. So, a lot of banks and financial institutions will look at tapping this market. Also, a lot of actual players themselves like Suzlon Energy, Inox Wind and other such companies will look at tapping this market. We should see a flood of such issues.”

The benefit according to him is that the investors in such bonds are of a different asset class and they have a different focus window, which is always good from the viewpoint of diversification while existing investors can also widen their portfolios.

Explaining the increasing interest in these bonds, Jayaram of KPMG added: “There is a lot of money being pledged globally towards climate sustainability. These funds need to be deployed somewhere and green bonds are gaining attention for exactly this reason.”

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