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Temperatures in the Asia-Pacific region have increased drastically over the past couple of decades with rising economic activity increasing greenhouse gas emissions. A UNICEF report said that India was the 7th most affected country due to climate change-led extreme weather events. In view of this, the first tranche of India green bonds will be issued on January 25 to raise $984 m, as the focus shifts to sustainable and green development as decided under the Paris Agreement.
However, India is currently just testing the waters, as shown by the small size of the issuance, but if successful investors can expect more such issuances in the future. The bond sale has been marketed well by the country for domestic asset managers, state-run insurers and pension funds as well as foreign investors. Insurance firms that buy in the bond will be allowed to count the bonds toward insurers’ required infrastructure investments.
Details of India green bonds
The sovereign bonds will be of 5-year and 10-year tenures, and after the first offering this week a second offering is set for February 9. The exact use of the fresh capital from the green bonds is not clear yet but will align with the framework set by the Indian government. The green bonds framework includes investments in renewables, clean transportation, and water and waste management projects, among other things.
Some 400 bn rupees ($4.92 bn) worth of projects has been identified to be funded by the proceeds raised from the sale of India green bonds.
Separately, there are no restrictions on foreign investors to buy green bonds. For banks, green bond holdings can be used towards mandatory government holdings.
Domestic Indian media reported citing two government officials that the first issue of green bonds will be at a ‘greenium’ with yields below prevailing market rates. The green premium will likely push yields 5-10 basis points (bps) below sovereign 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.
The demand from foreign investors is quite high, especially from investors who have a green mandate. Meanwhile, demand from domestic banks and mutual funds is likely to be low as most do not have a specific green mandate. India also does not have domestic, green-dedicated debt funds.
Previously, Indian companies have issued green bonds in the offshore market, with a recent issue by the Export-Import Bank of India being oversubscribed by more than 100%.
Another aspect for investors is that the interest and principal payments of the India green bonds are not conditional to the performance of the projects in the money is invested in. What remains to be seen is whether overseas investors will be willing to invest in a rupee-based issue.
