Monday, January 4, 2016

India Plans to Tap into Green Bonds

[The following guest post is contributed by Arundhuthi Bose, who is an Executive at Vinod Kothari & Co.]


Issuing bonds to raise funds from investors is not a novel concept. A bond, in common parlance, is an instrument evidencing indebtedness of the bond issuer to the bondholders. Here, a debt instrument is issued by the issuer to the investor, under which the issuer owes the investors a debt based on the terms of the bond, pays them interest (the coupon) and/or repays the principal at maturity date.

A more recent concept in this genre is that of “Green Bonds”. These bonds are akin to other bonds with the difference in the fact that the proceeds out of issuance of Green Bonds are used towards financing of ‘green’ projects.

What are “Green Bonds”?

As of now there is no internationally acknowledged definition with regard to Green Bonds. But, a paper released by PACE-D[1] (Partnership to Advance Clean Energy- Development) in December 2014 defined Green Bonds: “Green Bonds are standard, fixed-income financial instruments (bonds) where the proceeds are exclusively utilized for financing climate change mitigation or adaptation related projects or programmes.

Principles to be adhered to

There exists no specific guideline with regard to the issuance of Green Bonds. However Green Bond Principles (GBP), a document issued by the International Capital Market association (ICMA) sets forth certain guiding principles on the same, which are followed as standard industrial practice. 

The components can be briefly explained as:

1.   Use of proceeds

The issuer shall define and disclose in their offer document the criteria for identification as ‘green’. It will also state the amount of funds to be spent on the projects/assets/activities.

For assigning bonds with the tag  “Green”, the following indicative areas of investments may be considered-

i.             Renewable and sustainable energy (wind, solar etc.)

ii.            Clean transportation (mass transportation)

iii.           Sustainable water management (clean and/or drinking water, water recycling)

iv.           Climate change adaptation

v.            Energy efficiency (efficient and green buildings)

vi.           Sustainable waste management (recycling, waste to energy etc.)

vii.          Sustainable land use (including sustainable forestry and agriculture, afforestation etc.)

viii.         Biodiversity conservation

The proceeds may also be used for financing of existing green assets but only if it is clearly stated in the offer document.

2.   Project evaluation and selection

The issuer shall provide the details of the decision-making process on the basis of which it selects to utilize the proceeds from issue of Green Bonds. Some indicative guiding factors could be:

- Process followed/ to be followed for determining how the project(s) fit within the eligible Green Projects categories;

- The criteria, making the projects eligible for using the Green Bond proceeds; and

- Environmental sustainability objectives.

3.   Management of proceeds

The proceeds from issuing bonds shall be only towards the purposes stated in the offer document. The proceeds shall be kept in an escrow account and the use of the proceeds shall be tracked as per an approved internal policy of issuer and such policy shall be disclosed in the offer document/placement memorandum. Report of an external auditor or a third party to verify the internal tracking method and the allocation of funds towards the projects may be used.

4.   Reporting

In addition to reporting on the use of proceeds, issuers shall also provide, at least on  an annual basis, a list of projects to which Green Bond proceeds have been allocated. This may also include the details of the expected environmental impact of such projects. However, where confidentiality agreements or competition issues limit the amount of detail that can be made available, information can be presented in generic terms.

Evolution of Green Bonds and the Global Scenario

The dawn of Green Bond markets occurred in June 2007 when the European Investment Bank (EIB) issued the first “Climate Awareness Bond”, following which the term “Green Bond” was attached to these instruments. On Earth Day in May 2012, International Finance Corporation (IFC) issued the first $500 million benchmark Green Bond. By March 2013, the Green Bond market had its grip over the investors – IFC’s first $1 billion Green Bond was sold within an hour of issue. This was the extent of enthusiasm of the investors in Green Bonds.

A growing market appetite may be seen from the fact that the market has almost tripled in size between 2013 and 2014, with around US$37 billion issued in 2014.
The Green Bonds are divided into certain types on the basis of use of proceeds and debt recourse. They are shown below:[2]

Use of proceeds towards
Debt re-course
Green “Use of proceeds” Bonds
Green Projects
Standard/ full re-course to issuer
Green “Use of proceeds” Revenue Bonds
Green Projects
Revenue streams from issuers though fees, taxes etc are the collateral for the debt
Green Project Bond
Ring-fenced for specific underlying Green Projects
Re-course is only to the project’s assets and balance sheet
Green Securitized Bond
Either :-
·      Green Projects, or
·      Go directly into underlying Green Projects
Re-course is to a group of projects that have been grouped together

Indian Scenario on Green Bonds

There are humungous developmental tasks at hand in the form of infrastructural projects. The finance for these projects have been traditionally been supported by banks, NBFCs and Financial Institutions but are not sufficient to meet the needs and do capacity addition. Thus there is a need to explore new opportunities of getting finance. Corporate bonds have been aiding in bridging the needs.

India’s Intended Nationally Determined Contribution (INDC) document puts forth the stated targets for India's contribution towards climate improvement and following a low carbon path to progress. A preliminary estimate suggests that at least USD 2.5 trillion (at 2014-15 prices) will be required for meeting India's climate change actions between now and 2030. In this regard the document talks about the introduction of Tax Free Infrastructure Bonds of INR 50 billion (USD 794 million) for funding of renewable energy projects during the year 2015-16.

A concept paper on the issuance of Green Bonds had been issued by SEBI on 3 December 2015 for soliciting comments from public by 18 December 2015. It is expected that the existing regulations for issuance of corporate bonds, SEBI (Issue and Listing of Debt Securities) Regulations, 2008 along with disclosure in the offer document the additional information about the Green Bonds on the basis of the Green bond Principles, 2015, are apt to regulate the bonds effectively.

The following issues of Green Bonds have been made in India so far:

Yes Bank
10 year
To fund solar, wind and biomass projects
Rs. 1000 crore
Yes Bank
10 year
To fund solar, wind and biomass projects
Rs. 315 crore
CLP India
In three series of equal amounts and will mature every April in 2018, 2019 and 2020
Rs. 600 Crore
Exim bank
5 years
To fund eligible green projects in countries including Bangladesh and Sri Lanka
$500 million
5 years
US$350million priced at Treasuries plus255bp

Among the above-mentioned names, CLP India was the first corporate issuer to come up with such bonds. Further, the issue of Yes Bank of Rs. 315 crore was fully subscribed by International Finance Corporation.

Why Green Bonds?

Raising finance through issuance of Green Bonds has a host of advantages. These range from development of positive public relations due to display of commitment towards development and sustainability of the environment to having cost benefits by attracting a strong mass as consumers. Also, some investors tend to invest simply because the host of environmental benefits associated with it. Normal bonds fail to tap these investors. A wide investor base may also act as a pricing advantage and in turn lowering project costs. With increasing concern for the environment, issuance of Green Bonds is a notion that is likely to appeal to investors due to the positive environmental implications.



Though framed wholly on the basis of the Green Bond Principles, the initiation to regulate issuance of Green Bonds is a welcome step. This will be a move towards aiding India to develop and yet be on a low carbon-emitting path. The developed countries have already begun acting on this path and achieving success at desired rate, as depicted in the chart above.

- Arundhuthi Bose

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