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India’s green issuers set to make a dash for cash

By Narae Kim
23 Mar 2016

Although sceptics argue that the Indian green bond market is driven more by the government than market forces, most market participants believe the asset class is set to take off over the next 12-18 months due to the country’s insatiable demand — and need — for green projects. Narae Kim reports.

If renewable power targets are anything to go by, India is serious about going green. Last year, prime minister Narendra Modi put forth a slew of ambitious goals that were aimed at bringing his country’s renewable energy capacity to 175GW by 2022, including 100GW of solar, 60GW of wind, 10GW of biomass-fired power and 5GW of hydropower, with the possibility of hitting 250GW by 2030.


Considering the installed solar power capacity stood at a mere 4.26GW for solar power as of October 2015, the Ministry of New and Renewable Energy (MNRE) is not wrong to describe this as a “massive jump”.

Financial markets are taking notice. The country’s fifth largest private bank, Yes Bank, became the country’s first green bond issuer in February 2015 with a Rp5bn ($73.5m) 10 year bond that was followed soon after by Export-Import Bank of India’s $500m five year deal in March — the country’s first offshore outing for green fundraising.

These pioneering trades encouraged a flurry of Indian green bond issuers to jump into the offshore and onshore bond markets. CLP Wind Farms became the first green bond corporate issuer in the domestic bond market in September 2015 by selling Rp6bn in triple-tranche notes. ReNew Power quickly followed to become the second corporate issuer to sell a green bond with a Rp4.51bn 17.5 year deal. On the offshore side, IDBI Bank ventured out to sell a $350m five year offering in November.

On top of these syndicated deals, Yes Bank returned with a Rp3.15bn 10 year private transaction, which was
taken up exclusively by the International Finance Corporation (IFC) after the World Bank unit issued a Rp3.15bn Masala bond.

Having raised $1.85bn of proceeds through green bonds in 2015, India received yet another green boost in early February 2016 when Hero Future Energies issued Asia’s first climate bond certified by the Climate Bonds Initiative with a Rp3bn multi-tranche offering. 

“That’s important because we believe a company needs to assess the impact of climate change on their operations and then figure out a suitable climate strategy in response,” says Wai-shin Chan, director in climate change strategy at HSBC in Hong Kong. “So starting from supranationals, quasi-governments to other financial institutions, and now to corporates, it’s a good signal.”

Before bonds there were loans

According to two India-based DCM bankers, loans have supported renewable energy generation projects of more than 2.5GW per annum on average for the past five years, which translates into about Rp120bn. 


“Although there have been sporadic bond issues by renewable project companies as an alternative source of funding, it is safe to assume term loans still account for 90%-95% of green funding,” says Jayen Shah, head of DCM at IDFC Bank in Mumbai. 

Shah reckons that bond financing has lagged due to factors such as investors’ higher credit rating requirements and the fact that projects take time to achieve commercial production capacity. 

A lack of familiarity with green bonds was another obstacle. “The Indian corporate bond market isn’t deep and renewable energy is a new sector that started developing only recently,” says Kailash Vaswani, deputy CFO of ReNew Power Ventures in New Delhi. “There are not many investors aware of this asset class so we spent quite a lot of time on investor education.”

Vaswani believes his company was able to achieve pricing benefits with its green bond due to a credit enhancement structure and a partial guarantee that it received from India Infrastructure Finance Company Limited (IIFCL) and the Asian Development Bank (ADB). The ADB and the IIFCL set up a Rp7.2bn project bond guarantee facility in 2012 to draw more institutional investors into infrastructure projects in India. With ReNew, ADB gave a 50% guarantee to IIFCL for the bonds, and IIFCL in turn guaranteed about 30% of the notes. As a result, the locally A rated borrower could issue an AA+ rated bond, and with strong demand the borrower ended up cutting costs by up to 150bp.

“Due to the lack of familiarity, Indian investors are looking at green bonds only from a yield perspective and go after only quality issuers,” says Vaswani. “Therefore, issuers need strong sponsors, who, if not with an explicit guarantee, can at least provide some assurance that they are standing behind this commitment.”

Government push

Market participants think the government should play a bigger, more active role in attracting investors as well as issuers to this asset class. “Dedicated funds for green financing — either owned by the government or under private management — would be of help,” says IDFC’s Shah. “What the government can also do is to lower or exempt the tax rate charged on income from green assets to all investors. In addition, the government’s full guarantee will definitely draw more corporate issuers and investors.”


At the moment, different investor types have different tax rates for interest income. For example, mutual fund asset managers pay no tax, while the withholding tax of 5% is imposed on foreign portfolio investors. Retail, high net worth individuals pay as much as 34.608%, which is expected to go up to 35.535% starting on April 1, according to the 2016 Budget announced on February 29. 

Market participants are also asking for the government to provide further incentives to promote rupee denominated offshore bonds, also known as Masala bonds, which India has been keen to push out in a bid to internationalise its currency.  

Washington DC-based Keshav Gaur, director of treasury client solutions at the IFC, suggests the Modi administration should waive the withholding tax for green rupee denominated offshore bonds, at least for the first few frontrunners, to encourage debut issuers. 

New green guidelines

Against this backdrop, Indian green bond advocates welcomed, finally, the release of a formalised framework for the asset class in January 2016, with the Securities and Exchange Board of India (Sebi) approving a draft proposal that was released at the end of last year. Under the rules, issuers have to provide details of the system to be employed for tracking the proceeds, which will need to be verified by external auditors.

“Although we already welcomed the first few issues labelled as ‘green bonds’, having a formalised framework is another huge step forward, especially when there has been so much talk but not much action to show that the Modi government wants to go green,” says a Singapore-based syndicate banker. 

Ulrik Ross, global head of public sector and sustainable financing at HSBC in London, also welcomes Sebi’s proposals, but says this is only the first step. “To build scale in the Indian green bond market we believe the guidelines for listing announced by Sebi have helped the market. Two other areas that would help accelerate the growth would be increased access to government backed risk capacity as well as a mechanism that will lower the costs for borrowers.”

Offshore sprouts

The government’s green ambitions also touch overseas markets. In September 2015, the Reserve Bank of India (RBI) unveiled the final framework for Masala bonds following consultation with market participants. Under the final framework, RBI permits corporates, real estate investment trusts (Reits) and infrastructure investment trusts (InvITs) to issue Masala bonds. 

“Sebi’s guidelines will help increase green bond issuance out of India but I am also optimistic that the offshore rupee markets will continue to develop, especially in light of the RBI announcement,” says Gaur, adding that he is already seeing “huge interest from Indian corporate issuers and is working with some to help them enter the Masala bond markets with green bonds.” 

The London Stock Exchange (LSE) has also started to support the development of green bonds in India, signing a memorandum of understanding with Yes Bank, which will list a green bond of up to $500m on the LSE by December 2016.

“The LSE is a big advocate of green financing and we have a growing platform of green bonds, including rupee and renminbi denominated issues,” says Nikhil Rathi, CEO and director of international development at the LSE in London.

Political gimmick?

But not everyone is convinced that green is the number one priority. “I think it is more of a political gimmick,” says a treasury official at an Indian state-owned company. “The green industry in India, like in China, largely depends on the government’s support, such as subsidies or tax breaks. In other words, it is vulnerable to external factors since ‘going green’ and ‘economic growth’ don’t really go together. If the global economy struggles like now, green always sits on the backburner for the sake of growth.” 


And relying on government support is risky as the direction of policies can change at any time, depending on the politics. “The current Modi government is keen on green for sure, but what if the next one isn’t so much?” says the Singapore-based syndicate banker. “Issuers themselves should come up with ways to stand on their own feet regardless of the government’s will. Until then, we will have a couple of issues from government related and financial borrowers, but at best sporadically and selectively.”

But many India-based bankers reject this, saying that deals are economically driven, rather than politically charged. “Green financing decisions are made after carefully evaluating a number of factors, such as commercial viability, techno-feasibility, debt-servicing capabilities and regulatory frameworks, of individual projects,” says Shah at IDFC Bank. “Credible international entities such as IFC, ADB and Sembcorp have either taken equity stakes or debt financed renewable projects in India. I think investments are purely based on economic merits.”

Singapore’s Sembcorp Industries, for example, announced in February 2015 that it would acquire a 60% stake in Green Infra, a renewable energy company in India with a wind and solar portfolio, for Rp10.6bn.  

Going green


Despite the arguments over the true drivers of green bond dealflow, the asset class is likely to grow sharply in the years to come, not least because India, being one of the most vulnerable countries to climate change, has a vested interest in pushing it. “India, through its climate pledge, has a list of mitigation targets as well as a list of adaptation strategies, which is especially important for India given the share of agriculture in the economy,” says HSBC’s Chan. “The impact of climate change ordinarily manifests itself through warmer temperatures and water availability so India has a big stake in this.” 

Issuers agree and expect the asset class will take off in the next 12-18 months. “We are definitely going to see a massive growth in Indian green bonds market,” says Vaswani. “I think the investor education process is underway at present and investors will be further comforted as the government announces more rules and guidelines. I believe for the next 12-18 months, we will see a large increase in issuance and investors will be keen to lap it up.”

Vikas Dawra, managing director, sustainable investment banking at Yes Bank, agrees. “First, several institutional investors now have strong environmental commitment and ethos, which increases their preference for green bonds, and secondly, renewable energy projects usually involve lower risks and its risk profile makes it preferable to regular bonds.”     

Masala bonds off the menu — for now

Despite progress being made by the IFC last August, onshore green bond issuers tell GlobalCapital they do not plan to explore the Masala market in the immediate future. 

“At the moment we are not looking at Masala bonds,” says Samir Ashta, CFO at CLP Wind Farms in Mumbai. “We did look into it but decided that it doesn’t add value to us as pricing won’t work out and investors would compare us to Indian issuers overseas to see whether we fit into their portfolio. Instead, we can get deals done with competitive pricing in India.” 

For ReNew Power, the lack of a credit rating remains a key issue. “At this point we are not actively exploring the offshore bond market due to a lack of international credit ratings,” says Kailash Vaswani, deputy CFO of ReNew Power Ventures in New Delhi. “Even if we get one, we won’t be investment grade, which means that the yield expectation, including the cost of hedging currency risk, would be high.”

But he stresses that in the long term when his company grows in scale and its credit
ratings improve, it will be able to access the Masala bond market. “We hope to get better ratings in the next two to three years as it will lower the cost of borrowing further by another 100bp.”

However, India-based DCM bankers expect issuers will eventually line up in the offshore pipeline. 

“Several infrastructure financing institutions, banks and project sponsors are preparing for offshore issuance in dollars and rupees and internally keeping documentation ready,” says Jayen Shah, head of DCM at IDFC Bank in Mumbai. “I’m guardedly optimistic about the growth of green bonds.” 

Ulrik Ross, global head of public sector and sustainable financing at HSBC in London, says: “We see a healthy pipeline of green bond issuance in India both onshore and offshore. It is clear that much more educational work is needed on the investor side in India but this is part of a natural progression. Green bonds are a nice way of attracting more FDI [foreign direct investment] which is a key cornerstone for the Indian government.”       

By Narae Kim
23 Mar 2016