SEBI – Concept Paper on Green Bonds
The Securities and Exchange Board of India (SEBI) has come up with a concept paper on green bonds (here). A ‘Green Bond’ is just like any other bond i.e. a debt instrument issued by an entity for raising funds from investors. The key difference between a ‘green’ bond and a ‘regular’ bond is that the issuer provides information about green’ projects, assets or business activities to be funded with these bonds such as renewable energy, low carbon transport etc.
The paper provides information about the background, need and benefits of green bonds, experience so far and procedure to be followed by green bond issuers in India. A summary of the concept paper is as follows:
- Need of Green Bonds
- The paper talks about Intended Nationally Determined Contribution (INDC) document issued by India to highlight nation’s commitment towards sustainable development. This includes introduction of Tax Free Infrastructure Bonds of INR 50 billion for funding of renewable energy projects during the year 2015-16. Further, green bonds will also play a key role in supporting India’s 175 GW of renewable energy targets by 2022.
- Benefits of Green Bonds:
- Positive public relations – Green bonds enhances issuer’s reputation by demonstrating its green credentials and commitment towards promoting sustainable development.
- Investor diversification – Green bonds also provides the issuer with access to new class of investors not available for regular bonds. This includes but is limited to investors focusing on primarily on environmental, social and governance related aspects of the projects in which they intend to invest.
- Potential for pricing advantage – Furthermore, attracting such wider investor base results in better pricing of bonds vis-à-vis regular bonds.
- International and Indian experience
- Internationally, around US$58 billion worth fresh green bonds have been issued since their launch in 2007. The Corporate sector participation has been a game changer for green bonds as the market almost tripled in size between 2013 and 2014, with around US$37 billion issued in 2014 as compared to US$10.99 billion in 2013.
- In India, a handful of banks and corporate sector companies have issued green bonds. This includes Yes Bank (INR 1315 Crore), Exim Bank of India (US$500 million), IDBI Bank (US$350 million) and CLP India (INR 600 Crore).
- Principles to be followed for issuance of Green Bonds:
- Use of proceeds
- Issuers to define and disclose define and disclose the criteria for identification ‘green’ projects in their offer document.
- In case of utilizing the proceeds of the issue of Green Bonds, towards refinancing of existing green assets, the same will also be clearly provided in the offer document along with asset details.
- Project evaluation and selection
- Provide details of decision-making process followed for determining the eligibility of projects for using Green Bond proceeds.
- Management of proceeds
- Proceeds of Green Bonds to be credited to an escrow account, and to be utilised only for the stated purpose, as in the offer document.
- Use of proceeds to be tracked as per an approved internal policy of issuer and such policy to be disclosed in the offer document/placement memorandum.
- Utilization of the proceeds may also be verified/supplemented by the report of an external auditor, or other third party,
- Provide a list of projects to which Green Bond proceeds have been allocated, at least on annual basis.
- May also include the details of the expected environmental impact of such projects.
- Use of proceeds
As can be inferred, the paper is just a fundamental framework issued by SEBI without any details on incentives to be available under the green bond umbrella. No doubt, this a step in right direction, but with stringent monitoring framework and absence of any special concessions. it would be difficult for green bonds to attract corporate houses.