With climate change and environment, social and governance (ESG) themes dominating the investor landscape, the interest in green bonds is increasing in India. Recently, the Indian government announced plans to issue green bonds for the first time. Du­ring the speech for the Union Budget 2022-23, Nirmala Sitharaman, finance mi­nister, Government of India, stated that “As part of the government’s overall market borrowings in 2022-23, sovereign green bonds will be issued for mobilising resources for green infrastructure. The proceeds will be deployed in public sector projects, which help in reducing the carbon intensity of the economy.”

The main rationale behind the government’s move towards green bonds is to tap the growing investor base in this space. Today, there are several investors that have dedicated funds to invest in green bonds, and the Indian government in­ten­ds to heighten the participation of inter­na­tional investors in the domestic bond market. It is expected that the government’s green bonds will set a precedent and are likely to open up the local market further. The issuance will be part of the government’s overall market borrowing of Rs 14.95 trillion in 2022-23, tho­ugh the issue size for the green bonds has not been specified yet.

REGlobal takes a look at the key trends and developments in the Indian green bond market…

Key trends

Green bonds are bonds issued by any so­v­ereign entity, inter-governmental group or alliance/corporate with the aim that the proceeds of the bonds are utilised for projects classified as envi­ron­mentally sustainable. These bonds were first issued in India in 2015 when Yes Bank Limited raised Rs 5 billion to enhance long-term resources for funding renewable energy infrastructure projects. These green bonds were listed on the BSE with a tenor of 10 years and a coupon rate of 8.85 per cent per an­n­um. It is estimated that green bonds worth $625 million (Rs 41 billion) were issued in the country in 2015.

So far, India has issued green bonds worth about $8 billion since January 1, 2018, which constituted about 0.7 per cent of all the bonds issued in the Indi­an financial market as per the Reserve Bank of India’s (RBI) bulletin (January 2021). The article notes that though the value of green bonds issued in India since 2018 have constituted a very small portion of the total bond issuance, India has maintained a favou­rable position compared to several advanced and em­erging economies.

In 2021, the size of the green bon­ds market increased manyfold, with Indian corporates issuing $6.11 billion in green bonds during the January-Novem­ber period, making it the strong­est year since 2015, as per the UK-based green bond tracking agency Climate Bonds Initiative. In 2021, companies such as JSW Hydro, Greenko, ReNew Power and Adani Green were key issuers of green bonds.

Around 76 per cent of the green bonds issued in India since 2015 have been de­nominated in US dollar. The RBI bulletin further notes that most of the green bonds issued since 2015 have had maturities of five years or above, but less than 10 years. However, some issuers such as Yes Bank (2015), the Indian Renewable En­­er­­gy Development Agency (2017, 2019), REC Limited (2017), the Power Fi­nan­ce Cor­po­ration (2017), the Indian Railway Finance Corporation (2017) and Adani Renew­able Energy Limited (2019) have issued green bonds with maturities of 10 or more ye­ars. Besides corporates and the governm­ent, the World Bank has occasionally iss­ued green bonds for several projects in India.

Recent issuances

In January 2022, ReNew Energy Global raised $400 million by issuing senior secured dollar notes, recognised as gr­een bonds by the Climate Bonds Initia­tive, at a rate of 4.5 per cent. The bon­ds were listed on the Singapore Exchan­ge. The tenor of the green bonds is 5.25 years. The funds will be used to restructure current high-cost debt and fund capital expenditure in renewable energy assets. Around 40 per cent of these notes were subscribed by investors from Asia and the US, with the remaining notes being subscribed by investors from Eu­rope, the Middle East and Africa. The ma­jority of the notes were purchased by pension funds and long-only fund managers. So far, the renewable energy pro­vider has raised about $3.5 billion throu­gh its subsidiaries in eight green bond issuances, seven of which are still outstanding. In November 2021, the State Bank of India listed its $650 million green bonds simultaneously on the In­dia Interna­tional Exchange and the Luxembourg Stock Ex­change. The state-owned bank has raised $800 million in the green bond market so far.

In September 2021, Adani Green Energy Limited (AGEL) issued its first ListCo senior green bond, raising $750 million. The bonds have a three-year tenor at a rate of 4.375 per cent. The funds will be used to pay the equity part of the capex for renewable energy projects that are currently under construction by AGEL.

In July 2021, ACME Solar raised $334 million in debt investment through the issuance of offshore green bonds. This amount has been raised for 12 of its solar projects and will be funded by US-denominated green bonds. The proceeds of the bonds will be used for subscription to non-convertible debentures issued by ACME’s projects. The bonds have a tenor of five years and a coupon rate of 4.7 per cent. The bonds have been listed on Singapore Exchange Securities Trading Limited, and have received green certification from the Climate Bonds Initiative.

Also in July, Adani Electricity Mumbai Limited raised $300 million through green bonds as part of its $2 billion glo­bal medium-term note programme. This was the first-ever global medium-term note programme by an energy uti­lity player in India. The bonds also generated massive global interest, as they were oversubscribed 9.2 times. Inves­to­rs from Asia formed the majority with 49 per cent, followed by Europe, the Mid­dle East and Africa with 27 per cent, while North America comprised 24 per cent.

Challenges and the way forward

In the coming years the issuance of green bonds is expected to grow as the country inches meeting the goals of COP26. The Bank of America expects that Indian companies will raise $25 billion via green bonds between 2022 and 2024. However, there are a few challenges as well.

At present, there is no dedicated law governing the issuance of these bonds. Certain features of green bonds were covered by the Securities and Exchange Board of India (SEBI) in a memorandum. Subsequently, in 2017, SEBI issued a circular on the disclosure requirements to be followed for green bonds listed on domestic bourses. Before this circular was notified, issuers primarily relied on global standards to classify their bonds as green bonds.

The Indian market does not have a pool of funds dedicated to sustainability without any significant rate differential. The market is still at a nascent stage, and commercial banks and institutional investors need to be encouraged to invest in green bonds by being mandated to earmark a portion of their funds for sovereign green bonds.

Net, net, though the green bond market is currently nascent in India, it is expected to grow at a fast pace in the near term, thereby helping domestic companies access long-term funds at a competitive rate.