Introduction

“Green Bonds are the one of the kinds of debt instruments, wherein the issuer gets capital from the investors only if the investment (capital) is being raised to fund green projects relating to renewable  energy or emission reductions etc. In order to regulate the Green Bonds market in India the Securities Exchange Board of India (SEBI) in May, 2017 came out with a circular stating the disclosure requirements for issuance and listing of Green Debt Securities in India. Such guidelines demonstrates SEBI’s recognition of the increasing need of dedicated funds for clean energy projects”

Recent transactions have demonstrated the demand for and growth of green bonds in India.

Green Debt Securities as Defined under the Circular

A debt security shall be considered as ‘Green’ or ‘Green Debt Securities’, if the funds raised through issuance of the debt securities are to be utilized for project(s) and/or asset(s) falling under any of the following broad categories-

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 Issue and Listing of Debt Securities (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 utilization 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.

“The issuer of a green bond to make disclosure about environmental objectives of the issue of such securities in the offer documents. Besides, issue also has to provide details of the systems and procedures to be employed for tracking the proceeds of the issue, including investments made and earmarked for eligible projects 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 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.

“A Green Bond is a regular fixed-income financial instrument for raising capital through the debt capital market with the key differentiator being the framework for utilization of the proceeds of such bonds. The Green Bond market is developing into a class of alternate investment spurred by the growing realization that urgent steps have to be taken to address a range of rising environmental issues. Creating solutions to these challenges will require new ideas and investment capital.

With the issuance of Green Bonds by Indian Corporates, there shall be significant positive multiplier effect due to investor diversification, increased capital inflow, and access to finance at various stages of the project lifecycle”

Conclusion

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 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.

India is one of popular markets when it comes to issuance of Green Bonds. It featured in the 7th position in terms of issuances in 2016 with issuance of USD 2.7 billion, behind United States, France, China, Germany, Netherlands and Sweden. The future prospects of Green Bonds in India also seems bright, considering the ambitious target set by India’s Intended Nationally Determined Contribution (INDC) for achieving climate change object and funding requirement of USD 2.5 trillion that is envisaged by INDC for meeting the desired objectives. On such pretext, some definitive guidelines will certainly do a world of good for the issuers in the country.

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Acquisory News Chronicle - July 2017