A bond refers to a high security debt instrument which allows an entity to raise funds and meet its capital requirements. In consideration for the capital paid by an investor, the company pays interest at pre-determined rate and intervals. On the maturity date, the entire amount is paid back to the investor, thereby terminating the bond.

Introduction

A green bond, unlike the general bonds, is a type of a bond issued by a company to finance environment friendly projects. The major difference between a green bond and a regular bond is that the capital offered by an investor is designated to fund a ‘green’ project. A ‘green’ project could be of a nature like sustainable waste management, clean transportation, renewable energy, biodiversity conservation etc.

The Securities and Exchange Board of India (“SEBI”) in its circular[1] dated May 30, 2017 defined green debt security as

A debt security shall be considered as “Green‟ or “Green Debt Securities‟, if the funds raised through issuance of the debt securities are to be utilised for project(s) and/or asset(s)falling under any of the following broad categories:

  • Renewable and sustainable energy including wind, solar, bioenergy, other sources of energy which use clean technology etc.
  • Clean transportation including mass/ public transportation etc.
  • Sustainable water management including clean and/or drinking water, water recycling etc.
  • Climate change adaptation.
  • Energy efficiency including efficient and green buildings etc.
  • Sustainable waste management including recycling, waste to energy, efficient disposal of wastage etc.
  • Sustainable    land    use    including    sustainable    forestry    and    agriculture, afforestation etc.
  • Biodiversity conservation.”

The International Capital Market Association issued guidelines on green bond principles in June 2021 (“GBP 2021”) wherein it has defined “Green Bonds are any type of bond instrument where the proceeds or an equivalent amount will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible green projects and which are aligned with the four core components of the GBP 2021.”[2]

Evolution of Green Bonds in India

The government of India, under the Paris Agreement[3], committed to reduce greenhouse gas emissions intensity and to achieve 40 percent of installed electric power capacity from non-fossil sources by 2030[4]. In this line, the government of India has been driving a vibrant renewable energy programme aimed at achieving energy security, energy access and reducing the carbon footprints of the national economy.

With an increased focus on green infrastructure and sustainability, Indian investors are seeking projects focused on attaining environmental sustainability to invest in. Green bonds, in this regard, provide a means to the investors to invest into projects that support such purposes.

India entered the green bond market in February 2015 with the Yes Bank issuing the first green bond for financing the renewable and clean energy projects particularly, for wind and solar.[5] The issue was oversubscribed almost twice and the issue proceeds will be utilised towards funding renewable energy projects such as solar, wind and biomass projects. Further Yes Bank came out with another issue of green bond in August 2015.

Apart from Yes Bank, Exim Bank came out with a dollar denominated green bond issue in March 2015.[6] Later, CLP India too came out with an issue of green bonds wherein it raised INR 600 Crore.[7] IDBI Bank, Axis Bank, SBI, Ghaziabad Nagar Nigam, Yarrow Infrastructure Private Limited, are few more examples of institutions which have successfully issued green bonds in India.

Indian market has witnessed a positive effect on account of investor diversification after the issuance of green bonds by Indian corporates. There is an increased capital inflow from global investors and thereby access to finance at various stages of the project lifecycle. The issuance of green bonds enhances issuer’s reputation as it helps showcasing their commitment towards sustainable development.

Regulation of Green Bond in India

In India, the issuance of green bonds is regulated by the SEBI under (a) SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (“SEBI ILDS Regulations“); and (b) Disclosure Requirements for Issuance and Listing of Green Debt Securities 2017 (“Green Debt Regulations”).

The SEBI ILDS Regulations govern public issue of debt securities and listing of debt securities issued through public issue or on private placement basis, on a recognized stock exchange. For public issue and listing of Green Debt securities and listing of privately placed Green Debt securities, the SEBI has, in addition to the requirements as prescribed under the SEBI ILDS Regulations, issued the Green Debt Regulations.[8] According to the Green Debt Regulations:

The issuer of Green Debt securities is required to make following disclosures:

  • Statement on environmental objectives of the issue of Green Debt securities;
  • Brief details of decision-making process which the issuer has followed/would follow for determining the eligibility of project(s) and/or asset(s), for which the proceeds are being raised through issuance of Green Debt securities;
  • System/procedures to be employed for tracking the deployment of the proceeds of the issue;
  • Details of the project(s) and/or asset(s) or areas where the issuer, proposes to utilise the proceeds of the issue of Green Debt securities, including towards refinancing of existing green project(s) and/or asset(s), if any.
  • The issuer may appoint an independent third-party reviewer/certifier, for reviewing /certifying the processes including project evaluation and selection criteria, project categories eligible for financing by Green Debt securities, etc[9].

Once an issuer has listed its Green Debt securities, it is required to provide following disclosures along with its annual report and financial results:

To be provided along with the half yearly and annual financial results:

  • Utilisation of the proceeds of the issue. The utilisation of the proceeds shall be verified by the report of an external auditor; and
  • Details of unutilized proceeds.

Additional disclosures to be provided along with annual report:

  • List of project(s) and/or asset(s) to which proceeds of the Green Debt securities have been allocated /invested including a brief description of such project(s) and/or asset(s) and the amounts disbursed.
  • Qualitative performance indicators and, where feasible, quantitative performance measures of the environmental impact of the project(s) and/or asset(s).
  • Methods and the key underlying assumptions used in preparation of the performance indicators and metrics.[10]

An issuer of Green Debt securities shall be responsible for the following:

  • Maintaining a decision-making process which it uses to determine the continuing eligibility of the project(s) and/or asset(s). This includes, without limitation, a statement on the environmental objectives of the Green Debt securities and a process to determine whether the project(s) and/or asset(s) meet the eligibility requirements.
  • Ensuring that all project(s) and/or asset(s) funded by the proceeds of Green Debt securities, meet the documented objectives of Green Debt securities.
  • Utilising the proceeds only for the stated purpose, as disclosed in the offer document.[11]

Further, in case an issuer of Green Debt securities or any agent appointed by the issuer, follows any globally accepted standard(s) for the issuance of Green Debt Securities, the issuer shall disclose the same in the offer document/disclosure document and/or in continuous disclosures.

Benefits of issuing Green Bonds[12]

  • Positive public relations: Green bonds can help in enhancing an issuer’s reputation, as this is an effective way for an issuer to demonstrate its green credentials. It displays the issuers commitment towards the development and sustainability of the environment. Further, this may also generate some positive publicity for the issuer.
  • Investor diversification: There are specific global pool of capital, which are earmarked towards investment in green ventures. This source of capital focuses primarily on environmental, social and governance related aspects of the projects in which they intend to invest. Thus, green bonds provide an issuer the access to such investors which they otherwise may not be able to tap with a regular bond.
  • Potential for pricing advantage: The green bond issuance attracts wider investor base and this may in turn benefit the issuers in terms of better pricing of their bonds vis-a-vis a regular bond. Currently there is very limited evidence available in this regard, however as demand of green bonds increases it is likely to drive increasingly favourable terms and a better price for the issuer. Further, with increasing focus of the global investor community towards green investments, it is expected that new set of investors will enter into this space leading to lowering the cost of funding for green projects.

Challenges and way forward

The issuance of green bonds by Indian companies has created some positive impact in terms of increased capital inflow from global investors and investor diversification.

One of the major challenges which subsist in the issuance of green bonds in India is the high cost of issuance. According to a bulletin issued by the Reserve Bank of India in January 2021[13],” the cost of issuance of Green Bonds is generally higher than other corporate bonds or government bonds and green bonds are typically issued by public corporations or private sector companies with better financial health.”

Green bond financing continues to focus on mature infrastructure sectors such as energy and is yet to have significant impacts on non-traditional sectors such as climate change technologies and reforestation etc. Other sectors still have to rely on financing through grants, banks, and corporate social responsibility initiatives. Therefore, there is a far-reaching opportunity for Indian law-makers to devise strategies in order to provide access to private sector to larger capital resources for funding green initiatives.


[1] Disclosure Requirements for Issuance and Listing of Green Debt Securities, May 2017, https://www.sebi.gov.in/legal/circulars/may-2017/disclosure-requirements-for-issuance-and-listing-of-green-debt-securities_34988.html

[2] International Capital Market Association, Green Bond Principles, June 2021, https://www.icmagroup.org/assets/documents/Sustainable-finance/2021-updates/Green-Bond-Principles-June-2021-140621.pdf

[3] United Nations, Paris Agreement (2015), https://unfccc.int/files/essential_background/convention/application/pdf/english_paris_agreement.pdf

[4] United Nations, Paris Agreement (2015), https://unfccc.int/files/essential_background/convention/application/pdf/english_paris_agreement.pdf

[5] National Investment Promotion & Facilitation Agency, Renewable Financing, Green Bonds and the IFSC GIFT City Opportunity, https://www.investindia.gov.in/team-india-blogs/renewable-financing-green-bonds-and-ifsc-gift-city-opportunity

[6] Securities and Exchange Board of India, Concept paper for issuance of Green Bonds, 2015, https://www.sebi.gov.in/sebi_data/attachdocs/1449143298693.pdf

[7] Securities and Exchange Board of India, Concept paper for issuance of Green Bonds, 2015, https://www.sebi.gov.in/sebi_data/attachdocs/1449143298693.pdf

[8] Disclosure Requirements for Issuance and Listing of Green Debt Securities, May 2017, https://www.sebi.gov.in/legal/circulars/may-2017/disclosure-requirements-for-issuance-and-listing-of-green-debt-securities_34988.html

[9] Disclosure Requirements for Issuance and Listing of Green Debt Securities, May 2017, https://www.sebi.gov.in/legal/circulars/may-2017/disclosure-requirements-for-issuance-and-listing-of-green-debt-securities_34988.html

[10] Disclosure Requirements for Issuance and Listing of Green Debt Securities, May 2017, https://www.sebi.gov.in/legal/circulars/may-2017/disclosure-requirements-for-issuance-and-listing-of-green-debt-securities_34988.html

[11] Disclosure Requirements for Issuance and Listing of Green Debt Securities, May 2017, https://www.sebi.gov.in/legal/circulars/may-2017/disclosure-requirements-for-issuance-and-listing-of-green-debt-securities_34988.html

[12] Securities and Exchange Board of India, Concept paper for issuance of Green Bonds, 2015, https://www.sebi.gov.in/sebi_data/attachdocs/1449143298693.pdf

[13] Green Finance in India: Progress and Challenges, January 2021, https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/04AR_2101202185D9B6905ADD465CB7DD280B88266F77.PDF