On January 25, 2023, the Government of India launched and sold its first-ever Sovereign Green Bond issuance for Rs80 billion ($1 billion); with half in five-year bonds at a coupon rate of 7.1% and the other half in 10-year bonds at a coupon rate of 7.29%. The auction for the second issuance took place on February 9, 2022, and raised an equivalent amount, for a total of Rs160 billion, or $2 billion.
Sovereign green bonds are issued by state governments, using money from investors in climate-related projects. Through this first for the Indian market, the Indian Government has established a new means of facilitating high-value investments to accomplish its climate targets.
The Sovereign Green Bond Framework, launched by the Indian Government on November 9, 2022, discusses and specifies the project categories for which the proceeds of green investments will be used. This framework has received a medium green rating by Cicero (the Second Party Opinion). The funds raised from the recent Sovereign Green Bond issuances will be applied in accordance with this framework. Project categories under the framework include: a) increasing energy efficiency; b) clean transport; c) reduction in carbon emissions and greenhouses; d) promoting climate change adaptation; e) improving natural biodiversity; and f) water and waste management. Financing such projects will help massively reduce the economy’s carbon footprint.
The five-year sovereign bonds went to 32 investors and the 10-year sovereign bonds went to 57 investors, who collectively offered bids worth more than four times the amount of bonds on offer. After engaging with international and domestic investors, the regulatory authorities procured some key steps with the aim of attracting a strong market response before the issuance took place. International ESG investors are currently subject to a foreign participation investment cap for specified securities. The Reserve Bank of India (RBI) has provided an exemption from this cap in the case of the green bonds, as an incentive for such international investors.
For local investors, the Insurance Regulator and Development Authority of India allowed the investments to be treated as infrastructure investments, which is an investment category required for insurers. For banks, the RBI has allowed investments in these bonds to constitute part of the mandatory holding of liquid assets such as government securities.
As local investors and banks have been the majority of investors in this issuance, there has been some curiosity over why more foreign investors did not take part. A possible reason could be the fact that foreign ESG bond investors generally have a preference for dollar debt and may have been sceptical on a rupee-designated debt. Although there are currently no investment funds in India with a dedicated green mandate, international investors who do may wait to review the outcome of the first few auctions of the sovereign green bonds. In general, market commentators say that global investors are interested in India’s green bonds, but perhaps want to see how the markets react to such issuances before making key investment decisions. Measures such as the RBI’s exemption will do much to encourage international ESG investors. As India’s commitments at recent COP summits have made clear, large-scale funding is required in order to meet its stated objectives. The issuance of these sovereign green bonds, along with other investment in green technology and renewable energy from both the public and private sectors, will go some way to help India fund these ambitious but critically important plans.