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
(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
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.
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
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
– The criteria, making the projects
eligible for using the Green Bond proceeds; and
– Environmental sustainability objectives.
3.   Management of proceeds
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
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
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
Re-course is only to the project’s assets
and balance sheet
Green Securitized Bond
Either :-
Projects, or
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
Rs. 1000 crore
Yes Bank
10 year
To fund solar, wind and biomass
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
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

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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