Topic:-Green bonds in India-Performance, Scope and future scenario in the country

Climate change is one of the biggest challenges of the 21 st century. Climate scientists agree that
limiting CO2 emissions is essential to reduce temperature rises. Governments, communities and
individuals need to play their part to address the issue of climate change. Now, a new financial
product is making it easier for companies and investors to do their part, which are the green bonds.

Green bonds work a lot like regular bonds. A company or government issues a bond with a promise
to repay at a future date with interest in exchange for money that can be used today to invest in
income generating activities. Green bonds work the same way but instead of investing in any activity
they only fund businesses or projects that are green. For example: - a company might issue green
bonds to finance the latest solar power plant, clean technology investments or climate adaptation
projects. The market for green bonds has been growing rapidly.

Green bonds are fixed-income financial instruments (bonds) linked in some way to climate change
solutions. Climate bonds are a relatively new asset class and are growing rapidly. The total volume of
climate bonds was estimated at 160 billions of dollars on 2016; of which 70 billion were issued in
2016.

History

2007

 The first green bond was issued by the European Investment Bank (EIB) in 2007 to finance its
climate-related projects which was listed on the Luxembourg Stock Exchange (LuxSE).

2014

 The development of the voluntary Green Bond Principles in 2014 by a consortium of

investment banks to promote disclosure, transparency and integrity in the development of
the green bond market by clarifying the approach for issuance of a green bond. The
International Capital Markets Association serves the GBP secretariat which handles its
administative issues and provides guidance on green bond issues.
 IFC issued RMB 500 denominated green bond(approx USD 80.29M) listed on London Stock
Exchange issued by a multilateal in offshore Chinese markets
 Toyota brought to market the first green asset backed securities (ABS) finance new Toyota
and Lexus gas-electric hybrid or alternative fuel powertrain vehicles. [See Climate Bonds’
Briefing Paper on Green Securities ]
 South Africa pioneered its green bond in 2014 and has continued to drive the sustainability
agenda by issuing green municipal and retail bonds.
 2015
 IFC issued 5 bond in offshore rupee markets (dubbed the first green masala bond) and raised
31.5B rupee for private sector investments to address climate change in India. According to
London Stock Exchange, the bond issued under IFC’s USD 3B offshore rupee masala bond
program whose proceeds will be invested a green bond issued by Yes Bank, one of India’s
largest banks to fund renewables.
 India had issues a total of USD 1.1B done a number of private sector pioneers (Yes Bank,
Export-Import Bank of India, CLP Wind Farms and IDBI Bank). Securities and Exchanges
Board of India (SEBI) explicitly mentioned using the Indian green bond market as a key tool
to help raise finance need to meet their ambitious intended nationallu determined
contributions (NDCs) as stipulated by COP 21.
  People’s Bank of China (China’s Central Bank) published its Green Financial Bond Guidelines
for green bond issuanced by financial institutions. Green Finance Committee of China Society
of Banking and Finance(supervised by PBOC) issued Green Bond Endorsed Project Catalogue
[2015 Edition] that defined China’s definition of a green bond
 Total issued labelled green bonds USD 47.8 B with issuance occurring in 14 out of the G20
countries

2016

 In June, updated Green Bond Principles are released. They include new definitions and
guidance on external reviews, references a wider universe of environmental and climate-
themed bonds and suggested the adoption of GBP best practices were applicable
 Securities and Exchange Board of India (SEBI) proposed new framework for its official green
bond requirements
 Luxembourg Green Exchange (LGX) was launched in September as the first platform
exclusively for green instruments under the Luxembourg Securities Exchange (LuxSE).
Prospective issuers will have to comply with a strigent eligibity criteria that required them to
dedicated 100 percent of the raised funds to green investments.
 Apple became the first technology company to issue a labelled 7 year green bond of USD
1.5B backing projects on renewable energy for data centres, energy efficienct and green
materials
 China emerged as a leader in green bond issuance. Within the first 7 months of 2016, it had
reached USD 18.5B issuance in both local and oversear markets according for about 42
percent of global issuance during the same period (Reference: G20GFSG).
 Against the backdrop of Marrakech COP22, Morocco Agency for State Energy (Masen), a
state owned solar power energy firm issued 1.15 billion dirhams ($118 million) green bond
to finance renewable energy. Mexico city, Mexico becomes the first city in Latin America to
issue a 5 year municipal bond of 1B Mexican Pesos (USD 50M) to fund climate-resilient
infrastructure and mobility projects.
 Poland issued the first green sovereign bond of EUR 750Mn in December 2016, which was
quite surprising given its coal-based economy and lukewarm attitude to overall climate
change issues.

Green bond in India:-

1. The green bond market can play an important role in meeting the financial needs to achieve the
ambitious goal of the prescribed national contribution under COP-21.

2. Presently, the need for funding to take India's renewable energy capacity from 30 Gigawatt to 175
Gigawatt in 2022 can be fulfilled through this.

3. The funds allocated through the market for the promotion of renewable energy have been
unfinished. More investment can be made in the field of renewable energy by the financial
institutions. Therefore, the role of Green Bond market in India is very important for promoting
renewable energy sector. India entered green bond market in 2015 with the issuance of green bonds
worth $ 110 million by major banks like Yes Bank, Indian Import-Export Bank, CLP Pawan Mill
Machinery and IDBI.

4. In March 2015, the EXIM Bank issued $500 million worth of green bonds in overseas at a coupon
rate of 2.75%, which is the first green bond of India. It was subscribed by 3.2 times showing
tremendous interest among investors. Proceeds from green bonds are given by EXIM Bank to
companies to finance renewable energy projects.

Importance of Green Bonds in the Indian Economy:-

Introduction of Green Bonds sets to resolve the issue of funding in the evolving renewable energy
sector. India has set an ambitious target of 175 GW of renewable energy by 2022 and reduce its
carbon footprint. An estimated investment of USD 200 billion is required to achieve that capacity.
The delay in these ‘green’ projects has largely been due to lack of capital funding. Green Bonds, is a
fast emerging investment for clean energy. Some key benefits for issuing green bonds are:

 Investor diversification: These bonds help the issuer to amplify funding sources and limit the
dependency on specific markets by such issuers. Particularly, Green bonds have been quite
popular with investors focused on sustainable and responsible investing (SRI), investors that
come under the ESG criteria (Environmental, Social and Governance) etc.
 Potential for Pricing Advantage: The green factor to these bonds brings with it, pricing
advantage. The green bonds have high prospects to bring domestic and foreign capital for
renewable energy on better financing terms, including lower interest rates, and longer
repayment schedules.

Procedure for Issue of A Green Bond:-

 To issue a green bond, the compliances laid down in Securities And Exchange Board Of India
(Issue And Listing Of Debt Securities) Regulations, 2008 (“ILDS Regulations”) and the Green
Bond Guidelines (“Circular”) issued by SEBI (“Board”) on 30th May 2017 are required to be
complied with:
 The issuer has to make an application to a recognised stock exchange has been made for
listing of securities. The issuer has to appoint merchant bankers registered with the Board,
one of whom should be lead merchant banker. It also has to obtain in-principle approval for
listing of green bonds on the stock exchange, obtain a credit rating from a credit rating
agency. The issuer also has to enter into an arrangement with a depository for
dematerialization of the green bonds.
 It will also appoint one or more debenture trustees in accordance with the appointment of
debenture trustees and duties of debenture trustees of the Companies Act, 1956 (“Act”) and
SEBI (Debenture Trustees) Regulations, 1993. Issuer cannot issue green bonds for loans or
acquisition of shares of anyone for people who are part of the same group or who are under
the same arrangement.
 The offer document has to contain all material disclosures which are needed by the
subscribers to take an informed decision. The issuer and lead merchant have to make sure
that the offer document will contain – which talk about matters to be specified in prospectus
and reports to be set out. And disclosures such as last three years annual report,
undertaking from the issuer etc. The objective of the green bond, brief details of how the
issuer has determined the eligibility of the projects, procedure to be used for deployment of
the proceeds of the issue. Details of the projects where the green bonds will be utilised,
appointment of third party reviewer for certifying things such as project evaluation,
selection criteria, project categories eligible for financing by green bonds.
 The draft and final offer document has to be displayed on the websites of stock exchanges.
Advertising for public issues would include advertisements in the national dailies, no
misleading material should be included, it should be truthful, fair and clear, it should only
 talk about the relevant subjects. Any other product or advertisement issued by the issuer
during the subscription should not make any reference to the issue of green bonds.
 The issuer proposing to issue green bonds online through the website of the designated
stock exchange has to comply with the relevant requirements which may be specified by the
Board. The price will be determined by the issuer and the lead merchant banker together or
through the book building process. The issuer can decide the minimum subscription which it
seeks to raise by the issue of green bonds, disclosing the same in the offer document.
 A trust deed will be executed by the issuer in favour of the debenture trustee in three
months of the closure of the issue. The trust has to contain clauses as maybe prescribed
under Section 117A of Act, and those in Schedule IV of the SEBI (Debenture Trustees)
Regulations, 1993. The debenture redemption reserve will be created by a company for
redemption of green bonds in accordance with the Act, and any circulars issued by the
central government. The trust should will not contain limiting obligations and liabilities of
the issuer in connection with the rights and interests of the investor.
 There should a proposal to create a charge or security in respect to secured green bonds
which have to be disclosed in the offer document, the issuer is supposed to give an
undertaking about the assets on which charge is created are free from any burden. The
proceeds from the issue will be kept in an escrow account till the documents for creation of
security as stated in the offer document are executed.
 Responsibilities of the issuer – The issuer will maintain a decision making process which
determines the eligibility of the projects/assets. Including, without any exception, a
statement on the environmental objectives of green bonds and a way to determine whether
the projects or assets are eligible to be considered. He will ensure that all projects or assets
are funded by the proceeds of the green bonds, and meet its objectives. The utilisation of
proceeds is well established in the offer documents. The issuer or any agent of the issuer, if
following any globally accepted standard for measuring environmental impact on the project
or has a process of identifying projects or assets, or utilising of proceeds will disclose all the
details in the offer document, disclosure document and in continuous disclosures.

Literature review:-

1. “Currently, the Indian green bond market is $7 billion—that is a lot in the Indian bond
market but globally, it is just a drop in the ocean. But India is the 8th largest green bond
market—which is a reflection of just how vast the market is in China and the USA in
comparison.”
2. “You can look at the 100GW solar target in India, up from the earlier 20GW target. The
ambition behind the transition has translated into action in India and if you’re not betting
on that, you are missing out. I think that is the critical lesson for investors around the world.
Green bonds are simply a short cut to getting into the market, allowing investors to take the
time to understand it and evaluate the risks before going deeper and perhaps into equities.”
3. “Seventy to 80 per cent of the investments on mitigating climate change risks are directed at
cities— transport, buildings, manufacturing and productivity. It is about the resilience of
cities. Mumbai is a disaster waiting to happen. We had the first cyclone in the Arabian Gulf.
It is going to become like Hong Kong, facing intense cyclones and consequently huge storm
surges. How does Mumbai cope with this? A large chunk of the cities everywhere now have
to cope with severe climate impacts, especially in emerging markets like India. We need
municipal bonds and all sorts of green bonds.”

-Source: - economic times

Objectives:-

1. To understand and measure the performance of green bonds in India.

2. To compare their performance with bonds and see how do they differ from these bonds.