Capital Markets: Challenges and Developments

RBI says no Foreign Investment cap on Sovereign Green Bonds

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Sovereign Green Bonds

Mains level : Not Much

green bond

The sovereign green bonds issued by the Indian government will not have any restrictions on foreign investment, the Reserve Bank of India (RBI) said.

What are Sovereign Green Bonds?

  • A bond is an instrument to raise debt.
  • Since 2007, a market for bonds specifically self-labeled or designated as ‘green’ has emerged.
  • This label differentiates a green bond from a regular bond, which signifies a commitment to exclusively use funds raised to finance or re-finance “green” projects, assets, or business activities.
  • When these bonds carry guarantees related to the repayment of principal and payment of interest by the sovereign or the government, they are called sovereign green bonds (SGrB).

How are the projects for green bonds selected?

  • A project is classified “green” on the basis of four key principles. These include-
  1. Encouraging energy efficiency in resource utilisation
  2. Reducing carbon emissions and greenhouse gases
  3. Promoting climate resilience and
  4. Improving natural ecosystems and biodiversity, especially in accordance with SDG (Sustainable Development Goals).

When is the first sovereign green bond likely to be issued? 

  • In her Budget speech early this year, Finance Minister announced that sovereign green bonds will be issued for mobilising resources for green infrastructure.
  • The proceeds will be deployed in public sector projects that help in reducing the carbon intensity of the economy.
  • These green bonds would be available in 5-year and 10-year tenure.

How are they different from conventional government bonds?

  • Government bonds or government securities (G-Secs) are normally categorised into two — Treasury Bills and dated or long-term securities.
  • These bonds carry coupon rates and are tradable in the securities market.
  • SGrB is one form of dated security. It will have a tenor and interest rate.
  • Money raised through SGrB is part of overall government borrowing.

Who are likely to be the buyers of these bonds? 

  • Both domestic and international investors are expected to be interested in SGrB.
  • However, one thinking is foreign investors may be slightly hesitant due to currency risk.

 

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