India’s government expects to issue its first green bonds at a “greenium,” with yields below prevailing market rates, and has identified 400 billion rupees ($4.92 billion) in projects that can be financed with the proceeds, it said. two government sources.
The government plans to raise 160 billion rupees through green bonds before the current fiscal end on March 31, with the first tranche of 80 billion rupees to be auctioned on Wednesday.
Proceeds would be used for “green” projects such as solar, wind and small hydro projects and other public sector projects that help reduce the economy’s carbon footprint.
The government expects a green premium, or ‘greenium’, on prices to push yields 5-10 basis points (bp) below government bonds, based on strong response and interest from global and local investors.
“The expectation of a green premium is in line with ‘greenium’ that issuers worldwide have,” said one of the two sources.
Investors expressed interest during a meeting with India’s finance ministry featuring the top 50 foreign portfolio investors (FPI) in December, the sources said, adding that those with a green mandate asked about domestic registration requirements.
On Monday, the Reserve Bank of India (RBI) said there would be no FPI restrictions on these securities.
The Treasury Department did not respond to an email from Reuters seeking comment.
“Green bonds should carry a premium because of the mandates to invest in these securities. The outstanding (amount) will be quite small initially and due to its nature we may see a bit of aggressive demand,” said Ashish Agrawal, head of FX and EM macro strategy research, Asia, Barclays.
The RBI will auction 40 billion rupees of five-year and 10-year green bonds. The 2027 five-year government bond yield of 7.38% and the benchmark 10-year bond yield were 7.16% and 7.35%, respectively.
Demand from domestic banks and mutual funds may be low because these institutions do not have a specific green mandate, said Ritesh Bhusari, deputy general manager of treasury at private lender South Indian Bank.
“These securities can also be illiquid in the beginning as only a small amount is spent,” he added.
The projects identified are more than two-and-a-half times the fundraising plan for the current fiscal year, the sources said.
So the money can be allocated to other projects if the selected projects cannot use the proceeds this year, she added.
Proxy advisory firm IiAS said last week that the bonds are in line with green bond principles, but advisedgreater transparency on project implementation timetables, together with the assessment of social and environmental risksof selected projects.
“It will be advisable to appoint an external auditor with oversight by CAG (Comptroller and Auditor General) for the use of green bond proceeds.”
Projects have been identified in sectors such as transport, renewable energy, energy and urban development, and categorized as ‘dark green’ and ‘medium green’.
The categories are based on priority and ratings according to a global framework.
The interest and principal payments on the bonds are independent of project performance and investors bear no project-related risk, according to the framework released by the government in November.
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