FIIs to Invest in India’s Sovereign Green Bonds

Introduction: FIIs and Sovereign Green Bonds

The Reserve Bank of India (RBI) has made a significant decision, allowing Foreign Institutional Investors (FIIs) operating within the International Financial Services Centre (IFSC) to invest in India’s Sovereign Green Bonds (SGrBs).

This move represents a crucial step towards securing financing for India's transition to a low-carbon economy.

What are Sovereign Green Bonds (SGrBs)?

The concept of Sovereign Green Bonds was first announced by the Finance Minister (FM) in the Union Budget 2022-23.

SGrBs are a specific type of government debt designed to fund projects that accelerate India's transition to a low-carbon economy.

Funds raised through SGrBs are earmarked exclusively for green projects, ensuring high levels of transparency and accountability in their utilization.

These bonds typically offer lower interest rates compared to conventional Government Securities (G-Secs), reflecting their alignment with broader sustainable development objectives.

Issuance of SGrBs mandates adherence to internationally recognised green standards and rigorous certification processes to ensure the credibility of the funded projects.

Classification of SGrBs

Sovereign Green Bonds are classified under the Statutory Liquidity Ratio (SLR) framework.

Financial institutions are required to maintain a certain percentage of their deposits as SLR with themselves before they can lend to customers, which can impact the availability of funds for other purposes.

Understanding 'Greenium'

SGrBs generally yield lower interest rates when compared to conventional G-Secs.

Globally, central banks and governments are actively encouraging the adoption of greeniums to support the transition towards a more environmentally sustainable future.

India's Sovereign Green Bonds Framework

The Finance Ministry released India’s first SGrB Framework in 2022.

This comprehensive framework provides detailed guidelines on the specific types of projects that are eligible to receive funding through this class of bonds.

Funding Projects under SGrBs

Funds generated from SGrBs are specifically directed towards nine green project categories:

• Renewable energy projects.
• Initiatives promoting energy efficiency.
• Development of clean transportation systems.
• Projects focused on climate adaptation.
• Strategies for sustainable water management.
• Measures for pollution control.
• Practices supporting sustainable land use.
• Construction of green buildings.
• Efforts in biodiversity conservation.

Excluded Projects

To maintain the integrity and focus of green financing, certain types of projects are explicitly excluded from SGrB funding.

• Projects involving fossil fuel extraction.
• Nuclear power generation facilities.
• Operations related to direct waste incineration.
• Projects linked to the alcohol, weapons, tobacco, gaming, or palm oil industries.
• Renewable energy projects that utilize biomass sourced from protected areas.
• Landfill projects.
• Hydropower plants with a capacity larger than 25 MW.

Credibility and Validation

To enhance the credibility of its SGrB Framework, the Indian government sought independent validation.

This validation was provided by Cicero, a Norway-based validator.

This positive rating confirms the framework's strong alignment with the global green standards established by the International Capital Market Association (ICMA).