FIIs To Invest In Its Green Bonds In India

18 Apr 2024

Context

Recently, the Reserve Bank of India (RBI) has allowed investments in India’s Sovereign Green Bonds (SGrBs) by Foreign Institutional Investors (FIIs).

Sovereign Green Bonds (SGrBs) in India

  • Refers: These are a kind of government debt that specifically funds projects attempting to accelerate India’s transition to a low carbon economy.
  • High Adoption: Central banks and governments the world over are encouraging financial institutions to embrace greeniums to hasten the transition to a greener future.
    • However, SGrBs yield lower interest than conventional G-Secs, and the amount foregone by a bank by investing in them is called a greenium. 
  • Issued Earlier in India: The RBI had issued SGrBs worth ₹16,000 crore in two tranches in January and February last year with maturities in 2028 and 2033. 
  • Classification under Statutory Liquidity Ratio (SLR): Moreover, these green Government -Securities (G-Secs) were classified under the SLR.
    • SLR is a liquidity rate fixed by the RBI that financial institutions must maintain with themselves before they lend to their customers.

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Sovereign Green Bonds Significance

  • Widens the Capital Pool: Allowing FIIs to invest in India’s green projects widens the pool of capital available to fund the country’s ambitious 2070 net zero goals, ensuring 50% of India’s energy comes from non-fossil fuel based sources and to reduce the carbon intensity of the nation’s economy by 45% (pledged by Indian PM at COP26 in Glasgow 2021).
  • Diversification & Regulatory Support: Climate finance experts believe that India would gain from allowing FIIs in green G-Secs as FIIs are also looking to diversify their pool of green investments, as there is considerable regulatory support particularly in developed countries, making India’s green bonds an attractive investment opportunity.
    • Example: India has successfully addressed greenwashing fears with the Sovereign Green Bonds Framework in late 2022.

About Green Bonds

  • Issued by: Any sovereign entity, inter-governmental groups or alliances and corporates with the aim that the proceeds of the bonds are utilized for projects classified as environmentally sustainable.
    • Green bonds are specifically designed to fund environmentally friendly initiatives including renewable energy, clean transportation, sustainable agriculture, etc.
  • Importance: The growth in Green Bonds and green finance also indirectly works to disincentive high carbon-emitting projects.
    • For Investors: Green Bonds offer investors a platform to engage in environmentally sound practices, influencing the business strategy of bond issuers.
      • They are a way to mitigate climate change associated risks and achieve returns that are comparable to, if not better than, traditional investments.

About Foreign Institutional Investors (FIIs)

  • FIIs are those institutional investors which invest in the assets belonging to a different country other than that where these organizations are based.
  • Regulated by: FIIs in India are governed by the Securities and Exchange Board of India (SEBI), and the Reserve Bank of India (RBI)
    • SEBI has over 1450 foreign institutional investors registered with it.
  • Impact: With the buying of securities by these big players, markets trend to move upward and vice-versa. 
    • They exert strong influence on the total inflows coming into the economy. 
  • Importance: FIIs play a very important role in any economy, who invest a considerable amount of money in the markets. 
    • The FIIs are considered as both a trigger and a catalyst for the market performance by encouraging investment from all classes of investors which further leads to growth in financial market trends under a self-organized system.

Green Taxonomy Framework in India

  • Announcement to Issue SGrBs in Budget: In the 2022-23 Union Budget, the Indian Finance Minister announced the government’s decision to issue SGrBs to accelerate funding government projects such as harnessing offshore wind, grid-scale solar power production, or encouraging the transition to battery operated Electric Vehicles (EVs). 
  • Aim: To prevent greenwashing and ensure transparency and receiving validation from Norway-based Cicero.
    • Rating by Cicero: Cicero rated India’s framework as “green medium” with a score of “good governance”.
      • It would be crucial to identify new green projects with credible audit trails and high impact to optimally deploy the proceeds, especially ones that have received limited private capital like Distributed Renewable Energy and clean energy transition finance for MSMEs.”
Also Read: India Becomes 4th Largest Stock Market

 

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