Green Bonds – Use them to clean up

Amit Vyas January 17, 2016

The corporate sector has been very keen on helping the Government of India in its various initiatives whether it is the Swach Bharat Abhiyaan or the introduction of the Corporate Social Responsibility Norms, there have been efforts by the corporate sector to take these missions forward. In continuation to the same, there have also been discussions since November 2015 for the introduction of the Green Bonds and the process with regards to the issuance of such bonds.

A Green bond is similar to any other bond, where a debt instrument is issued by an entity for raising of funds from the investors. However, the difference between a regular bond and a green bond is the proceeds of such issuances are earmarked for “green” projects. As per the projections of the Indian Government there is a plan to build a capacity of 175 gigawatt of renewable energy by the year 2022 and the same requires an investment of USD 200 billion. The Government in addition to the regular routes of raising the funds such as from the financial institutions and banks has plans of tapping the investors’ base not only in India but outside India, the prime targets being the pension funds, sovereign wealth funds and insurance companies respectively.

The Securities and Exchange Board of India (“SEBI”) had in the month of December 2015 issued a concept paper on the issuance of the Green Bonds in India which had recommended quite a few measures for the entities willing to raise funds through this route and had also invited comments from the public. In a recent development, the SEBI at its meeting held on January 11, 2016 came out with the broad parameters for the issuance of such Green Bonds.

The parameters to be followed for the issuance of Green Bonds are as follows:

* The issuance and listing of Green Bonds shall be governed by the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 and such issuer of Green Bond shall also have to make certain incremental disclosures/follow procedures.

* The definition of Green Bonds shall be as specified by SEBI from time to time.

* Requirement of independent third party reviewer / certifier / validator, for reviewing/certifying/validating the pre-issuance and post-issuance process including project evaluation and selection criteria shall be mandatory.

* Escrow account is not mandatory, however the issuer is required to provide the details of the system/procedures to be employed for tracking the proceeds of the issue including the investments made and/or investments earmarked for eligible projects and the same has to be verified by the external auditors.

* Issuer is also required to make disclosures including use of proceeds, list of projects to which Green Bond proceeds have been allocated etc. in the annual report/periodical filings made to the Stock Exchanges.

While the above parameters are in line with the concept paper issued by SEBI, one key change which looks interesting is that in the concept paper the amount raised by the entity was required to be kept in an escrow account and the usage would be decided as and when the opportunity to invest arose, however, as stated above, the requirement of escrow account has been made non mandatory as long as the usage of funds is in line with the offer document.

As mentioned in the concept paper the Green Bonds appear to an interesting way of tapping funds from a different set of investors for the renewable energy sector, and improve the issuer’s image, the success of the same would lie in implementation of the projects and how quickly one would be in a position to give a healthy return to the investors, given the timelines this sector is subject to. There have been couple of banks who have tried this route and we need to see many more entities come forward to raise investment and be part of changing the renewable energy sector.