According to India's Intended Nationally Determined Contributions (Towards Climate Justice) under the United Nations Framework Convention on Climate Change (UNFCCC) for reductions in greenhouse gas emissions, India is determined to scale-up its renewable energy capacity more than five times with the Green Generation for Clean & Energy Secure India strategy by increasing it from 30 gigawatts (GW) in 2016-2017 to 175 GW by 2021-2022. India's national solar expansion programme alone seeks to enhance the current solar energy capacity to 100 GW (by 2022).
The ambitious clean and green energy programme calls for huge capital investment at the institutional and retail levels. To support the initiatives and to create a broad financing mechanism for green projects, the Securities and Exchange Board of India (SEBI), the country's market regulator, has brought in a new debt instrument called 'Green Debt Securities' (GDS).
In the notification on 'Disclosure Requirements for Issuance and Listing of Green Debt Securities' (GDS Guidelines) issued on May 30, 2017, SEBI has termed 'Green Debt' as a debt security instrument, which is issued by an entity to raise capital from investors, which capital is used for financing or funding 'green' projects, assets or business activities with an environmental benefit, such as renewable energy, low carbon transport and so on.
SEBI had identified certain benefits of green bonds as: (a) generation of positive public relations for the issuers' reputation as it would help in demonstrating its 'green' credentials; (b) investor diversification; and (c) pricing advantage, as the bond may attract wider investor base.
Key Features of the Guidelines
SEBI in its bid to define 'green debt' clearly has kept the definition rather exhaustive and the GDS Guidelines also give SEBI the power to include any other category of projects from time to time.
According to the definition, 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 utilised for project(s) and/or asset(s) falling under any of the following broad categories:
(a)renewable and sustainable energy, including wind, solar, bioenergy, other sources of energy which use clean technology and so on;
(b)clean transportation, including mass/public transportation and so on;
(c)sustainable water management including clean and/or drinking water, water recycling and so on;
(d)climate change adaptation;
(e)energy efficiency, including efficient and green buildings and so on;
(f)sustainable waste management, including recycling, waste to energy, efficient disposal of wastage and so on;
(g)sustainable land use, including sustainable forestry and agriculture, afforestation and so on; and
In addition to the typical disclosure norms applicable under SEBI's (Issue and Listing of Debt Securities) Regulations, 2008 (ILDS Regulations), the GDS Guidelines require the following:
(a)statement on environmental objectives of the issue of Green Debt Security;
(b)details of end utilisation of the proceeds;
(c)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 GDS;
(d)brief details of the decision making process that the issuer has followed/ would follow for determining the eligibility of project(s) and/or asset(s), for which the proceeds are being raised through issuance of Green Debt Securities; and
(e) details of the system/procedure to be employed for tracking the deployment of the issue proceeds.
SEBI has also mandated certain continuous disclosure requirements along with compliances under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 such as:
(i)Half-yearly and annual financial results should also include information in relation to utilisation of the proceeds of the issue as per the tracking done by the issuer using the internal process as disclosed in the offer document/disclosure document and details of unutilised proceeds; and
(ii)additional disclosures, which will also need to be provided along with the annual report include:
(a)subject to confidentiality obligations, a list of project(s) and/or asset(s) to which proceeds of the green debt securities have been allocated/invested including a brief description of such project(s) and/or asset(s) and the amounts disbursed;
(b)qualitative performance indicators and, where feasible, qualitative performance measures of the environmental impact of the project(s) and/or assets; and
(c)methods and the key underlying assumptions used in preparation of the performance indicators and metrics.
IV.Responsibilities of the Issuer
An issuer of GDS is required to maintain a decision-making process which it uses to determine the continuing eligibility of the project(s) and/or asset(s). It also needs to ensure that all project(s) and/or asset(s) are funded by the proceeds of GDS and meet the documented objectives. It is also responsible for utilising the proceeds only for the stated purpose, as disclosed in the offer document.
The first green bond was issued by the European Investment Bank in 2007 and was labelled as 'Climate Awareness Bond (CAB)'. The fact that GDS are now a reality in India almost a decade after first being globally introduced, showcases how far the Indian market has evolved. India as a growing economy will be required to generate enough power to meet its strategic development goals. Coupled with the rising population and the aspirations of the country, the power sector is going to play a very important role in India's development in the years to come. It is going to be interesting to see how green debt securities take off in an Indian market that has often been considered as being traditional in its investment mechanism.
In a world today that is veering and choosing cleaner and greener energy means, green debt securities will ensure that the resolve for organizations choosing to bring to the fore clean energy will increase, knowing fully well that investors are keen to invest in them.
The nature of green debt securities inasmuch as carrying lesser risks will also help investors gain confidence in them. It's now going to be a wait and watch game. Will investors in India bite the hook, or will green debt securities in India go the way of real estate investment trusts with few takers for them.
Disclaimer: The comments and opinions expressed above are of the individual and the above article should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice law in India.
Author: Kanika Premnarayen, Partner, Indian Law Partners, Mumbai
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