The Indian government plans to issue its initial green bond, referred to as “greenium,” with yields lower than current market rates and has identified 400 billion rupees ($4.92 billion) worth of projects that can be financed with the proceeds, according to two government sources.
The Government of India plans to raise INR 160 billion through the issuance of green bonds for the fiscal year ending March 31, with the first auction of INR 80 billion scheduled for Wednesday. These bonds will be a crucial component in the government’s efforts to promote sustainable and environmentally-friendly initiatives.
The proceeds from the green bonds will be allocated towards “green” projects including solar power, wind, small hydro projects, and other public sector initiatives that aim to reduce the carbon footprint of the economy.
Due to strong interest from both local and global investors, the government anticipates a “green premium,” or “greenium,” on bond prices, which will result in yields that are 5-10 basis points lower than those of sovereign bonds.
According to one of the sources, the expectation for a green premium is in line with the “greenium” that bond issuers have received globally.
According to sources, there was a significant level of interest expressed by investors during a meeting between India’s Ministry of Finance and top 50 foreign portfolio investors (FPI) in December. This further highlights the potential success of the government’s green bond offering and the growing demand for investments in sustainable and environmentally-friendly initiatives.
Additionally, investors who have the mandate to invest in green projects inquired about the domestic registration requirements.
On Monday, the Reserve Bank of India (RBI) announced that there will be no restrictions on foreign portfolio investment (FPI) in these securities. The Ministry of Finance has not yet commented on the matter.
According to Ashish Agrawal, head of FX and EM macro strategy research, Asia at Barclays, green bonds are expected to command a premium due to the mandates to invest in these securities. He added that the outstanding amount will be relatively small initially, and due to the nature of the bonds, there may be strong demand for them.
The Reserve Bank of India (RBI) will be conducting an auction for INR 40 billion each of five-year and 10-year green bonds. The government’s five-year 7.38% 2027 bond yield and benchmark 10-year bond yield were at 7.16% and 7.35%, respectively. These green bonds will be a part of the government’s efforts to raise INR 160 billion through sustainable and environmentally-friendly initiatives in the current fiscal year ending March 31st. Ritesh Bhusari, Deputy General Manager for Treasury at the private sector lender South Indian Bank, stated that the demand from domestic banks and mutual funds may be low as these institutions do not have a specific green mandate.
Additionally, it should be noted that these securities may not be easily traded initially due to the limited quantity that is being offered.
According to sources, the projects identified exceed the fundraising goal for the current fiscal year by more than two-and-a-half times. If the chosen projects are unable to utilize the funds this year, the money can be reallocated to other ventures.
Last week, proxy advisory firm IiAS stated that the bonds align with the principles of green bonds, but recommended greater transparency in terms of project implementation timelines, as well as a social and environmental risk assessment of the chosen projects.
According to IiAS, it would be beneficial to appoint an external auditor with oversight by the Comptroller and Auditor General (CAG) to ensure proper utilization of proceeds from the green bond. The identified projects fall under sectors such as transportation, renewable energy, power, and urban development and have been classified as “dark green” or “medium green.”
The categories are based on priority and ratings, as per a global framework. According to the framework released by the government in November, the interest and principal payments of the bonds are not linked to the performance of the projects, and investors do not bear any project-related risks.
