Sovereign green bonds likely in FY24 too

Sovereign green bonds likely in FY24 too

The government is likely to float sovereign green bonds in FY24 as well, beyond the proposed issuance of Rs 16,000 crore in the second half of this fiscal, keeping up its elevated focus on sustainability, an official source told FE.

“It could be a part of the government’s gross market borrowing plan for the next fiscal. But it’s too early to predict the size of the FY24 issuance. This year, this is being issued as part of an explorative exercise to gauge the market appetite, hence the size is modest,” he added. The green bond issuance accounts for just 1.1% of the government’s targeted FY23 gross marketing borrowing of Rs 14.21 trillion.

However, the government has no plan to extend tax incentives to woo investors, as it believes that there is a great appetite for such bonds among global investors, the source stressed. As such, many international investors get tax incentives, particularly in some of the advanced nations, for investing in green bonds. So, a further sweetener may not be required, he added.

Moreover, India remains the world’s fastest-growing major economy amid a global turmoil when advanced economies and China are facing an economic slowdown. So, the country will continue to draw a lot of investors who eye decent returns on their investments.

The sovereign green bonds will be rupee-denominated papers that will be open for foreign investment through the FPI (foreign portfolio investment) route. “We expect foreign investors with ESG focus to invest in these bonds. The yield on such bonds is expected to be a bit lower than that on government securities with comparable tenure,” said the source.

Some analysts had said that in the absence of tax incentives and higher yields, domestic investors–who are currently under no regulatory compulsion to invest in green bonds–may not exhibit much enthusiasm for the maiden issuance of sovereign green bonds. The yields on these bonds are expected to be lower than the other comparable government securities.

While retail investors are allowed to subscribe to such bonds, given that they typically opt for the instruments that fetch highest returns, they may stay away, said the analysts. Even many other domestic investors may choose not to invest for this reason. However, they also believe that the government can mop up the targeted Rs 16,000 crore via this route from global investors in the second half of this fiscal due to the modest issuance size, some of them said.

Also Read: Sovereign Green Bond: What is it and how beneficial will it be for investors?

Even without the global investors, the government will still be able to raise the desired amount by nudging domestic state-run banks or insurance companies to subscribe to them, given the modest size of the issuance, the analysts have said.

Importantly, once the yields on sovereign green bonds are established, it will likely influence the yield movement of such papers with similar tenure floated by private players.

Earlier this month, finance minister Nirmala Sitharaman approved a framework for the government’s maiden green bond issuance. It will focus on financing public projects across nine areas, including renewable energy, clean transportation, climate change, sustainable water and waste management and pollution control. The Reserve Bank of India will soon announce the tenure of the bonds and other operational details after consultations with investors.

The framework has been termed “medium green” byCICERO, the leading global independent reviewer of green bond investment architecture. This is the best shade, after “dark green”, assigned by CICERO for a green bond that aligns with a low-carbon climate resilient future.

Analysts said concerted regulatory push is also required to encourage investors, especially domestic ones, to put in their money in such bonds. For instance, as pointed out by Soumyajit Niyogi, director at India Ratings & Research, if the RBI makes sustainable finance a part of banks’ priority sector lending requirement, they will have to park funds for such purposes. Other regulators too, can introduce similar guidelines for institutional investors. “The green financing ecosystem in India is still evolving, and we haven’t seen any perceptible difference in the yield levels between plain vanilla bonds and green bonds. The objective of the sovereign green bonds is also to attract global investors having strict mandate to invest in ESG instruments,” Niyogi said.