Last month, after an absence of nine months, India entered the global green bond market. Two Indian companies — Greenko and Adani Green — stormed into the international market for green bonds to raise $950 million and $500 million, respectively. (Green bonds are debt instruments in whose cases a third party has certified that the proceeds will be used only for clean projects.) The previous time an Indian company raised funds through a green bond issue was in September 2018, when the State Bank of India scooped up $650 million.

Feel like saying ‘wow? Hold on.

Greenko and Adani Green are exceptions. Indian companies have generally been cold to the green bond market, as the following statistics show.

In the last nearly seven years, green bonds worth half a trillion dollars have been issued. Of this, India’s contribution is $8.6 billion — around 1.7 per cent.

In the current calender year so far, green bonds worth $137.3 billion have been issued. From India, only the $1.45 billion by Greenko and Adani Green, and that too, only in July. In the six months to June, there were 625 issues, including 363 of US companies, 51 Swedish and 32 Chinese, but none Indian. Also, only in 2019 did green bond issuances cross the $100 billion mark in the first six months.

Why are Indian companies so cold to green bonds?

“There is absolutely no price advantage,” says Sunil Jain, Executive Director and CEO of Hero Future Energies, one of the leading renewable energy companies. This view is (only) slightly at variance with an Observers Research Foundation’s Special Report on the subject in January this year, where the authors noted that “anecdotal estimates suggest that pricing advantage for Indian issuers has been between 7 and 14 basis points.” Which is not significant.

Clearly, there is a lot of green fund sloshing about in the international financial markets, but Indian companies are unable to tap into the pool. Delve a little deeper, the reasons become clear. In India, either due to lack of awareness or other structural issues, about 80 per cent of the green funds raised have been applied to renewable energy. Most of the rest has gone into transportation.

Now, the singular problem with wind and solar companies is the health of their main customer, the various state electricity distribution companies.

Poor financial health of the customers results in low rating of the developers, which raises the cost of finance everywhere, including in the green bond market. Greenko, market watchers point out, was able to raise $950 million despite some 40 per cent of its projects being in the problematic State of Andhra Pradesh, because of the strength of its promoters — sovereign funds of the government of Singapore and Abu Dhabi own 76 per cent of the company. Adani Green is also backed by the Adani group. Not many other developers enjoy such a backing. Again, in spite of solid promoters, Greenko got its (Ba1 rated) bonds at a price of 5.5 per cent — with hedging costs it works out to the same as a domestic loan.

Currency fluctuation is an important factor too, as the volatility of the rupee raises the cost of hedging.

Besides, bond investors don’t put in money for issues that are meant to finance projects under construction. This means, developers have to take domestic loans for putting up projects and then refinance them with bond proceeds. For this, again, the issuer must get a price advantage — which is not there always.

Government can help

The discoms are at the bottom of the problems with the Indian renewable energy sector. They own some ₹10,000-12,500 crore (industry estimates) to wind, solar and small hydro companies. They don’t pay on time, threaten to re-open signed-and-sealed power purchase agreements and often stop purchasing power under some technicality or the other. In a research finding last year, Climate Policy Initiative, a US-based think-tank, noted that discoms not paying on time adds 1.07 percentage points to interest costs to the developers.

Last heard, the Ministry of New and Renewable Energy is leaning hard on State governments to get the discoms in line, but the success of the helpful shoulder is yet to be seen. Discom-related problems show up as higher cost of finance. If the Centre has no control over state-owned discoms, can it at least help in lowering cost of finance for developers? It can, say industry insiders.

One is that it could tweak the ‘guarantee mechanism’, or, a system that gives confidence to the creditor, that if the borrower doesn’t pay (because his customer, the discom, hasn’t paid his dues), a third party ‘guarantor’ will pay the creditor. Since usually nobody gives a complete blanket guarantee (or it is very costly to do so), the more prevalent method is to provide a ‘partial guarantee’. But in India, partial guarantee mechanisms, such as those offered by government-owned NBFCs like IIFCL and IREDA, have not taken off because the fee they charge the developer is high — some times, as high as 1.25 percentage points.

Hero Futures’ Sunil Jain says that the government could reset rules so that more of pension capital can flow into Indian debt instruments — some of it as guarantee support.

Another suggestion is for the government to go in for sovereign green bonds. This suggestion has come from Sean Kidney, the CEO of Climate Bonds Initiative, a body created by several banks (HSBC, Bank of America), foundations (Rockefeller, Oak, Frederick Mulder, Moore) and some philanthropic organisations, for the purpose of deepening the green bonds market. The idea is like this: if the Government of India – which has decided to go in for its first sovereign bond issue – could opt for ‘green bonds’, the proceeds could be used for funding green projects, which can also be in terms of ‘credit enhancement mechanisms’, such as full or partial guarantee systems. Kidney says that in any case, there are international guarantee providers whom Indian companies can tap. A sovereign bond issue from a country like India, which has a clean track record of honouring international debt, adequate foreign exchange reserves and low international debt-to-GDP ratio (but relatively high fiscal deficit) can get a good price from bond investors and can pass on the benefit to the developers.

Of course, India can also access the green bond market more by widening the applications base domestically. Today, it’s mostly wind and solar projects. Other sectors, such as e-mobility and water, and other bodies such as State governments or municipalities could also enter the market.

The ORF Special Report, authored by Neha Kumar, Prashant Vaze and Sean Kidney, calls for an overarching ‘national green investment strategy’ which would include “smart, time-bound incentive structures and institutional ownership and strategies to build bankable pipeline.”

Overall, one unanswered question sticks out: why is it that Chinese companies haul truckfuls from the green bond market and Indian companies can’t — when China’s external debt-GDP ratio is much higher (14 per cent against India’s 2.6 per cent), and the country’s currency is also volatile, more so given the recent trade tensions with the US?