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  • Aadesh Ramadorai

The Stone Left Unturned: Green Bonds through GIFT-IFSC Platforms

[Aadesh is a student at Tamil Nadu Dr Ambedkar Law University.]

The present era of international multilateralism is at a defining moment in history where the "decisions we make now will determine the future of our people and our planet". To meet its environmental obligations and commitments undertaken/ made by India before the world, it is critically in need of inbound foreign direct investment (FDI) in the renewable energy sector which has been shockingly low over the past few years. Sustainable financing is one of the most important tools with which such decisions are made by leaders at the global front.

It is suggested that this requisite financing be procured through the issuance of ‘green bonds’ through the platforms available at the Gujarat International Fintech City’s (GIFT) International Financial Services Centre (IFSC).

The Ongoing FDI-Shortage Crisis

Estimates indicate that India requires over USD 2.5 trillion and USD 10 trillion to meet its 2030 and 2070 climate action targets respectively. Unfortunately, inbound FDI has been thoroughly insufficient in the following years despite 100% allowance via the automatic route. To substantiate, FDI constituted merely 7.27% of the domestic renewable energy market in the year 2022, i.e., USD 1.6 billion in a market valued at USD 22 billion. In fact, the first issuance of sovereign green bonds in January 2023 witnessed alarmingly low subscription from foreign investors in spite of the lifting of the foreign investment cap on these securities by the Reserve Bank of India (RBI).

Green Bonds

Green Bonds are defined as ‘any type of instrument where the proceeds or an equivalent amount will be exclusively applied to finance, or re-finance, in part or in full, new and/or existing eligible green projects.’ With additional specificity, Indian law recognizes them as ‘green debt securities.’ Their ability to be traded in secondary markets, fixed coupon rates and the access they provide to wider pools of capital from foreign investors make them the best method of climate financing when compared to renewable-energy based loans, sustainability-linked loans and limited debt from domestic banks.

GIFT–IFSC as a Platform to Attract FDI for Green Bonds

The development of sustainable financing in the GIFT - IFSC is at its nascent stage and is equipped with immense potential. In fact, the Union Budget 2022-23 states that ‘services for global capital for sustainable and climate finance in the country will be facilitated in the GIFT city'. The GIFT-IFSC’s Expert Committee on Sustainable Finance has identified the four-pillars which make it a globally conducive platform for sustainable financing as delved into below.

Pillar 1: Policy and regulation

One of the biggest hurdles to the flourishment of the carbon-market in India is the lack of a clear green finance taxonomy as well as the inadequacy of measurement, reporting and verification systems. Presently, the Green Finance Working Committee of the Ministry of Finance analyses projects against principles laid down in its own framework, a process which is tedious, time-consuming, and incongruous with international green finance taxonomies.

However, the IFSC Authority (Issuance and Listing of Securities) Regulations 2021 and the IFSC Authority (Fund Management) Regulations 2022 address this inadequacy for securities bought on an IFSC platform and additionally have dedicated provisions to combat greenwashing as well as mitigate the high risks of climate finance respectively.

Pillar 2: Infrastructure

Once of the biggest advantages of the GIFT - IFSC is the presence of a unified regulator which discharges the functions of RBI, SEBI, PFDRA and IRDAI. While domestic insurance providers and pension funds benefit from investing in green bonds, their issuance through the GIFT–IFSC medium would benefit foreign entities in these two sectors as well. Moreover, the National Stock Exchange had launched the NSE International Financial Sustainability Platform at GIFT–IFSC. A first of its kind, this environmental, social and governance platform will simplify the listing and trading of sustainability-linked financial products to ‘channelize the flow of sustainable finance to India.’

International clearing-houses like Euro-clear enable prompt and simplified settlement of bonds and are an incentive to foreign investors. Two such international clearing-houses function in the GIFT–IFSC, i.e., India ICC which bear recognition from the European Union.

Pillar 3: Competitiveness

Green-bonds traded through the GIFT–IFSC are coupled with a myriad of benefits such as 4% withholding tax as well as 0% capital gains tax, stamp duty, goods & service tax and minimum alternate tax. Such incentives have proven to significantly boost the FDI towards sustainable finance, as witnessed in the year 2016 when the Indian Renewable Energy Development Agency Limited issued a series of tax-free green bonds which received extremely high subscription from foreign investors. While these benefits are accompanied by a short-term loss in revenue, they would also improve the international perspective of credit-worthiness as a result of long-term investment in environmental sustainability.

Alternatively, Rupee denominated bonds issued overseas, i.e., green masala bonds, constitute a proven avenue to attract FDI in the renewable energy sector as investors need not bear exchange rate-related risks. In 2015, Yes Bank Ltd. issued masala green bolds which were all subscribed for by the World Bank Group’s International Finance Corporation (IFC) and issued on the London Stock Exchange. This issue was successful due to the credit enhancement provided by IFC as well as its higher credibility relative to Yes Bank Limited.

Pillar 4: Strategic partnership

In June 2022, India INX signed a cooperation agreement with the Luxembourg Stock exchange to increase access to Indian securities for foreign investors. The two institutions already had a memorandum of understanding (MoU) which they entered in 2020 with a focus on advancing sustainable financing in India. The benefits of this partnership were reaped by the State Bank of India which listed USD 650 million worth of green bonds on both these exchanges and received incredible response from foreign investors.

Similarly, the GIFT – IFSC has signed MoUs with the United Kingdom Finance Ministry, the Climate Policy Initiative and numerous other sovereign organs and non-sovereign organizations to facilitate and thereby attract larger volumes of green FDI.

Prior Green Bond Issuance with Large-Scale FDI

Till date, only two categories of green bond series have invoked the interest of foreign investors. The first category being the previously depicted masala green bonds issued by Yes Bank, where the bonds were listed by a borrower not incorporated in India and on an overseas platform.

The second category is those green bonds which are issued in foreign currency denominations. These include EXIM Bank’s series of dollar denominated green bonds which received investor-response from Asia, North America, and Africa in spite of their unimpressive ‘BBB’ rating. Analogously, Yes Bank Limited issued another series of green bonds worth USD 500 million in 2015 in Euro-denomination as opposed to the previous Rupee-denomination, and this series received rampant FDI response without the IFC acting as an intermediary.

Apart from these two categories, the only other series of green bonds with considerable foreign subscription are those which were listed on a platform available at the GIFT–IFSC. One such series is REC Limited’s issuance of green bonds valued at USD 750 million at the Ind. Inx platform of the GIFT IFSC in May 2023. In addition to being the largest ever senior USD tranche by an Indian non-banking financial company, it enjoyed gargantuan success in raising capital from global investors.

The Way Forward and Conclusion

The IFSC Authority can further address the disharmony with international principles by framing additional regulations as the existing regulations only address the gap in measurement, reporting and verification systems and not the absence of a green finance taxonomy. It is high time that Indian entities start listing green bonds on the platforms made available at the GIFT–IFSC, the credibility of which had been forged with the success of the previously delineated issue by REC Limited.

Moving on, it is suggested that institutions set up offices within the GIFT–IFSC and make use of the overseas benefits that come with its strategic location recognized by law. In fact, the Indian Renewable Energy Development Agency Limited is planning to set up an office in this manner to avoid foreign exchange hedging costs. Additionally, its chief managing-director hinted links with the IFC, an intermediary which has brought colossal FDI response to green bonds issued by Yes Bank Limited as previously elucidated.

At the apex regulatory level, it is suggested that the Government abolish withholding tax on green debt securities as this would reduce the cost of capital and thereby incentivize foreign investors.

In conclusion, India’s NDCs would remain a pipe-dream unless there is an exponential influx of sustainable financing through FDI in the years to come. Given the paucity of time before 2030 targets, it is strongly suggested that both private, public and government stakeholders commence with the issuance of green bonds through the various platforms available at the GIFT–IFSC to increase the FDI in India’s renewable energy sector.


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