The need for financing for renewable energy, coupled with supportive policies, are driving interest in green bonds in India. However, more clarity for issuers on green bond certification and project evaluation is needed to further drive the growth of green bonds.

The Climate Bonds Initiative ranks India at number seven for the cumulative issuance of green bonds in 2016 at $2.7 billion, a 30% increase compared to 2015. In November 2016, India signed the Paris Agreement, an agreement within the UN Framework Convention on Climate Change. Through the signing of the Paris Agreement, India has set intended nationally determined contribution targets to lower emissions intensity and to increase non-fossil based power generation capacity. The creation of green financing through the bonds market dovetails well with the country’s energy and climate change policies and targets. Of the green bonds that were issued in India in 2016, 62% by volume went towards funding renewable energy projects in 2016. Indian lawyers are enthusiastic about the potential of the market for green bonds, but told Asialaw it won’t develop if more robust measures on green bond certification and project evaluation are not put in place.

Ameya Khandge

“There is huge commitment towards renewable energy and the deployment of wind and solar projects means there needs to be a platform for the finance and refinance of projects,” says Ameya Khandge, partner at Trilegal.

Green bonds guidelines

The Securities and Exchange Board of India (SEBI) issued guidelines on green bonds through a concept paper in December 2015 and followed with a memorandum the next month. The memorandum clarifies that an issuer must make annual and periodic disclosures to stock exchanges about the projects green bond proceeds are used for. However, the SEBI’s definition of green bonds is still vague and the requirement for independent third-party certification of the issuance of green bonds remains optional.

“The framework and measures important to ensure proper categorisation, reporting, auditing and proceed allocations of green bonds are not in place yet,” says Manisha Shroff, associate partner at Khaitan & Co. “The main challenge is to provide a comfort to investors that the proceeds of the green bonds will actually be deployed in a green project having an environmental and social angle which is backed by certification, there is a framework for monitoring the end use and the project, and methods of project evaluation.”

“The main legal issue would be to incorporate such measures into the legal framework to provide a robust mechanism which makes the product more attractive to investors and provides the issuers with a uniform set guidance on additional disclosures, end use monitoring and project evaluations,” she adds.

Innovative deal structures

Manisha Shroff

Some of the successful green bonds in India include the first green issuance by Yes Bank in 2015 for Rs1000 crores ($160 million) with a 10 year maturity which was largely oversubscribed. The bank raised another $49 million through the first green masala bond with the International Financial Corporation raising the offshore rupee bond on the London Stock Exchange. “This involved the unique combination of a masala bond structure achieving the end use of investment towards green projects,” says Shroff. The second green masala bond was issued by India’s power utility NTPC in August 2016.

Clean power producer Greenko issued a $500 million bond in 2016. “Greenko’s offshore bond was innovative in being the first high-yield issuance of its kind and it was backed by Singapore’s sovereign wealth fund GIC,” says Khandge.

“Green bonds ease the strain on banks to lend and refinance long-term green projects,” says Shroff. “In addition, an enhanced investor base gives issuers a pricing advantage and a favourable bargaining position, helping to lower the cost of financing of infrastructure, unlike bank loans. Unlike ordinary bonds, green bonds would also boost the mobilisation of sovereign funds, unlocking investment opportunities with an overall positive impact.”

“Globally we can see some rapidly evolving deal structures such as revenue bonds, where the financing is backed by security over the cash flows of green projects; and securitised bonds involving securitisation of green assets which include for example cash flows from solar and wind assets,” adds Shroff.

The momentum for green bonds is growing. India is not the only jurisdiction in Asia that is trying to boost the sector. China is doing the same. While innovative deal structures and increased investor interest are helping to drive more investment into green projects, what is needed now is more robust frameworks on project certification and evaluation to help drive this growth.