Introduction

Recent measures have been approved by SEBI to deepen the Indian bond market, where green bonds were identified as key in helping India meet its ambitious target of building 175 gigawatts of renewable energy capacity by the year 2022, which requires a massive estimated funding of over USD 200 billion. Against this backdrop, SEBI has issued a circular on 30 May 2017 setting out disclosure norms which would govern the issuance and listing of “green bonds” (Green Bond Guidelines), in addition to the existing SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (ILDS Regulations).

The Green Bond Guidelines were preceded by a concept paper on green bonds issued by SEBI on 3 December 2015 which highlighted the key features and benefits of green bonds and a memorandum dated 11 January 2016 which proposed certain disclosure requirements for the issue of green bonds. A green bond is like any other bond, the only difference being that in case of a green bond issue, the proceeds are ear-marked solely for use towards financing of ‘green’ projects (such as renewable energy deployment, water, clean transportation, and climate adaptation efforts).

Recent transactions have demonstrated the demand for and growth of green bonds in India. The first green bond issue in India was by Yes Bank Limited in 2015 for INR 1000 crores which was oversubscribed. This was closely followed by the green bond issue by CLP India for INR 600 crores for its wind portfolio, India’s first certified climate bond issue by Hero Future Energies for INR 300 crores and the first internationally certified green bond issue by Axis Bank Limited for raising USD 500 million which was listed on the London Stock Exchange. Interestingly, the International Finance Corporation (IFC) issued green Masala bonds on the London Stock Exchange in August 2015, the proceeds of which were to be utilized for investing in Yes Bank’s green bond issuance. NTPC also raised INR 2000 crores through green Masala bonds last year for its clean energy projects. The Green Bond Guidelines demonstrate SEBI’s recognition of the increasing need of dedicated funds for clean energy projects.

Highlights of the Green Bond Guidelines

The key features of the Green Bond Guidelines are detailed as follows:

  • Expansive definition of “Green Debt Securities”: The Green Bond Guidelines widely define “Green Debt Securities” to mean funds raised for utilisation in projects and assets falling under certain specified categories such as:
    • renewable and sustainable energy (wind, solar, bioenergy, other sources of energy which use clean technology etc);
    • clean transportation including mass/public transportation etc;
    • sustainable water management including clean and/or drinking water, water recycling etc;
    • climate change adaptation;
    • energy efficiency including efficient and green buildings;
    • sustainable waste management including recycling, waste to energy, efficient disposal of wastage; and
    • sustainable land use including sustainable forestry and agriculture and afforestation etc. and biodiversity conservation.

The scope of the definition has been kept wide to include most types of green projects and SEBI has been empowered to include any other category of projects from time to time.

  • Disclosures in Offer Documents/Disclosure Documents for Green Debt Securities: The Green Bond Guidelines stipulate the following disclosures and other obligations for the issuing entity which are in addition to the typical disclosure norms applicable to any other type of bond issuance under the ILDS Regulations:
    • statement on environmental objectives of the issue of the Green Debt Securities;
    • brief details of the decision-making process the issuer has followed or intends to follow in determining the eligibility of project(s) and/or asset(s) for which green bonds are being issued;
    • details of the system/procedures to be employed for tracking the deployment of the issue proceeds;
    • details of end utilisation of the proceeds; and
    • appointment of an independent third-party reviewer/certifier, for reviewing /certifying the processes including project evaluation and selection criteria, project categories eligible for financing by Green Debt Securities.

It is important to note that refinancing of existing green projects/assets has been recognized as an acceptable end-use. Further, the Guidelines do not mandate an escrow mechanism to be installed but require the tracking procedure for deployment of funds to be detailed in the disclosures. Whilst the appointment of a third party reviewer/certifier is optional and the prerogative of the issuer, any such appointment should be disclosed in the offer documents.

  • Continuous Disclosure Requirements: Apart from the disclosures to be made by the issuer as a part of the offer document/disclosure document, the issuer is required to follow a set of continuous obligations and periodically submit certain documents to the SEBI. The following disclosures are to be made:
    • End-use Monitoring: Detailed reporting on utilisation of proceeds on the basis of any internal tracking done by the issuer where such internal tracking is verified by an external auditor and details of unutilised portions are required to be submitted on a half yearly basis and along with annual financial statements.
    • Annual reporting: On an annual basis, along with the submission of the annual report, the issuer is required to disclose the quantum of amount raised and a list of projects with brief descriptions, for which such amounts are raised. Specific details would not be required where such information is confidential. For such projects general sectoral information would suffice.
    • Performance evaluation: The issuer is required to set out certain qualitative and quantitative performance indicators and the underlying assumptions used in preparation of such performance indicators and metrics. In the event the issuer is unable to ascertain the quantitative benefits/impact, reasons for non-ascertainment are to be provided.
  • Responsibilities of the Issuer:  An issuer of Green Debt Securities is required to undertake additional responsibilities in determining whether a particular project/asset warrants such funding, maintain a decision-making process by disclosing a statement on environmental objectives, ensure that once the project(s)/asset(s) are funded they meet the desired objective and that the funds have only been used for the stated purpose.

Comment

The Green Bond Guidelines formalize the regulatory framework for green bonds with the aim of addressing the critical financing needs of India’s rapidly expanding clean energy market. These guidelines are expected to provide a big boost to the renewables sector by making investment in green bonds more attractive to investors with a benchmark for disclosure standards together with regular and continuous monitoring mechanisms to ensure that the funds are solely utilized for green projects. It is expected that this will widen access of the renewables sector to domestic and foreign capital and ease the strain on banks to lend and re-finance long term green projects.

The Green Bond Guidelines address the need for detailed disclosure norms in respect of the borrowing entity and the project for which the fund is required and ensures close monitoring of the utilisation of the bond proceeds. The Green Bond Guidelines will give an impetus and add immense credibility to an innovative financial product which has already established its success in both international and domestic markets. This step will aid the corporate bond market as well as strengthen India’s global commitments at international climate change forums.