As India steps up its pursuit of stiff climate change mitigation goals by focusing on energy transition, the demand for finance required to implement clean and green projects will not only grow but will also be dynamic.

Experts also agree that an innovative approach to raise capital is the need of the hour. ‘Green bonds’, they feel, is an important option to be actively pursued. In fact, as part of the Government’s overall market borrowings in 2022-23, Union Finance Minister Nirmala Sitharaman announced that ‘Sovereign Green Bonds’ will be issued for mobilising resources for green infrastructure. This is expected to positively stimulate India’s green bonds market.

Like any other bond, a green bond is a debt instrument. The proceeds of a green bond offering are earmarked for financing green projects like manufacturing electric vehicles , setting up mass rapid transport systems, managing water and irrigation and renewable energy. Monies can be raised either by financial institutions for further lending to green projects, or by developers directly for investment in their projects. Green bonds are issued in both unlisted and listed forms.

Persisting challenges

Since green bonds are relatively new, they have to overcome a few problems at the start. Says Deepto Roy, Partner, Shardul Amarchand Mangaldas & Co, “Despite the far-reaching benefits of green bonds, such as being a good alternative to conventional bank debt and attracting a larger pool of investors globally, there are still certain challenges that persist, given that this form of financing is seemingly at a nascent stage. Public and private sector project developers are still educating themselves on the utility of green bonds in infrastructure projects.”

From a regulatory perspective, too, there needs to be more crystallisation with some changes brought about in the last one year in India. The SEBI has acknowledged the growing need to regulate listed green bonds and has taken a proactive approach. Consequently, in 2021, it issued the ‘SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021’ for governance of listed green bonds. The NCS regulation was further modified at the end of the year and now provides an illustrative list of green projects which includes projects concerning renewable energy and clean transportation.

Revised SEBI circular

Explains Roy, “NCS regulation did not go into the granularity of how the issue of green bonds will be regulated, and simply stated that green bonds will comply with conditions that may be specified by SEBI. Therefore, SEBI notified a revised circular on December 17, 2021, wherein chapter IX of the operational circular specifically dealt with issue of green bonds, stipulating disclosure requirements in the offer documents for such bonds, which are over and above the disclosure requirements for non-convertible debentures under the NCS regulation, and included disclosure of statement of environmental objectives and details of procedure implemented for tracking deployment of proceeds from issue of green bonds.”

The operational circular also stipulated periodic disclosures to be made by the issuer of green bonds, which includes, audited details of utilisation of proceeds from green bonds along with quantitative/ qualitative performance indicators of the environmental impact of the projects. These disclosure requirement runs parallel to the disclosure requirements under the SEBI Regulations, 2015.

Cost deters investors

However, unlisted green bonds have no specific regulation governing the issuance of such bonds. As a result, unlisted green bonds are left to take on the characteristics of regular unlisted debt with minimal regulation. Pertinently, Roy says, “Much remains to be done from a regulatory aspect to make Indian green bonds market to be an attractive avenue for investors. Typically, green bonds have a higher cost for the issuer (due to higher coupon rate), which results in decreased participation of the private sector in the issue of green bonds. This can be addressed by regulators such as the Reserve Bank of India and SEBI.”

A few key listed green bonds issued in 2021 include: Ghaziabad Nagar Nigam, which raised ₹150 crore; JSW Hydro Energy which raised $707 million; India Clean Energy Holdings which raised $400 million and Adani Green Energy which generated $750 million through green bonds.

India’s untapped potential

Whilst India has the second largest bond market among emerging markets after China, its green bond market is roughly less than a tenth of that of China’s. This points to India’s untapped potential.

The latest push to promote sovereign green bonds signals the government’s seriousness in catalysing the domestic green bond market. It is high time to give these bonds a boost as such funding will help sharpen the focus on projects that aim at carbon intensity reduction.