This article is written by Kashish Khattar, Amity Law School, Delhi [IPU], pursuing Ace your Internship course at Lawsikho.

Introduction

A bond is a debt instrument with which an entity raises money from investors. The issuer gets capital while the investors receive fixed income in the form of interest. When the bond matures, the money is repaid. A green bond is the same as a bond, the only difference is that the issuer of a green bond publicly states that the capital is being raised to fund ‘green’ projects, which can be utilised under certain specified categories such as:

• renewable and sustainable energy (wind, solar, bioenergy, other sources of energy which use clean technology etc.);
• clean transportation including mass/public transportation etc.;
• sustainable water management including clean and/or drinking water, water recycling etc.;
• climate change adaptation;
• energy efficiency including efficient and green buildings;
• sustainable waste management including recycling, waste to energy, efficient disposal of wastage;
• sustainable land use including sustainable forestry and agriculture and afforestation etc. and
• biodiversity conservation.

The definition has been kept expansive enough to include every type of green project that can be thought of at the present time and for the future time being.

Importance of Green Bonds in the Indian Economy

Introduction of Green Bonds sets to resolve the issue of funding in the evolving renewable energy sector. India has set an ambitious target of 175 GW of renewable energy by 2022 and reduce its carbon footprint. An estimated investment of USD 200 billion is required to achieve that capacity. The delay in these ‘green’ projects has largely been due to lack of capital funding. Green Bonds, is a fast emerging investment for clean energy. Some key benefits for issuing green bonds are:

1. Investor diversification: These bonds help the issuer to amplify funding sources and limit the dependency on specific markets by such issuers. Particularly, Green bonds have been quite popular with investors focused on sustainable and responsible investing (SRI), investors that come under the ESG criteria (Environmental, Social and Governance) etc.
2. Potential for Pricing Advantage: The green factor to these bonds brings with it, pricing advantage. The green bonds have high prospects to bring domestic and foreign capital for renewable energy on better financing terms, including lower interest rates, and longer repayment schedules.

Procedure for Issue of A Green Bond

To issue a green bond, the compliances laid down in Securities And Exchange Board Of India (Issue And Listing Of Debt Securities) Regulations, 2008 (“ILDS Regulations”) and the Green Bond Guidelines (“Circular”) issued by SEBI (“Board”) on 30th May 2017 are required to be complied with:

1. The issuer has to make an application to a recognised stock exchange has been made for listing of securities. The issuer has to appoint merchant bankers registered with the Board, one of whom should be lead merchant banker. It also has to obtain in-principle approval for listing of green bonds on the stock exchange, obtain a credit rating from a credit rating agency. The issuer also has to enter into an arrangement with a depository for dematerialization of the green bonds.
2. It will also appoint one or more debenture trustees in accordance with the appointment of debenture trustees and duties of debenture trustees of the Companies Act, 1956 (“Act”) and SEBI (Debenture Trustees) Regulations, 1993. Issuer cannot issue green bonds for loans or acquisition of shares of anyone for people who are part of the same group or who are under the same arrangement.
3. The offer document has to contain all material disclosures which are needed by the subscribers to take an informed decision. The issuer and lead merchant have to make sure that the offer document will contain – which talk about matters to be specified in prospectus and reports to be set out. And disclosures such as last three years annual report, undertaking from the issuer etc. The objective of the green bond, brief details of how the issuer has determined the eligibility of the projects, procedure to be used for deployment of the proceeds of the issue. Details of the projects where the green bonds will be utilised, appointment of third party reviewer for certifying things such as project evaluation, selection criteria, project categories eligible for financing by green bonds.
4. The draft and final offer document has to be displayed on the websites of stock exchanges. Advertising for public issues would include advertisements in the national dailies, no misleading material should be included, it should be truthful, fair and clear, it should only talk about the relevant subjects. Any other product or advertisement issued by the issuer during the subscription should not make any reference to the issue of green bonds.
5. The issuer proposing to issue green bonds online through the website of the designated stock exchange has to comply with the relevant requirements which may be specified by the Board. The price will be determined by the issuer and the lead merchant banker together or through the book building process. The issuer can decide the minimum subscription which it seeks to raise by the issue of green bonds, disclosing the same in the offer document.
6. A trust deed will be executed by the issuer in favour of the debenture trustee in three months of the closure of the issue. The trust has to contain clauses as maybe prescribed under Section 117A of Act, and those in Schedule IV of the SEBI (Debenture Trustees) Regulations, 1993. The debenture redemption reserve will be created by a company for redemption of green bonds in accordance with the Act, and any circulars issued by the central government. The trust should will not contain limiting obligations and liabilities of the issuer in connection with the rights and interests of the investor.
7. There should a proposal to create a charge or security in respect to secured green bonds which have to be disclosed in the offer document, the issuer is supposed to give an undertaking about the assets on which charge is created are free from any burden.  The proceeds from the issue will be kept in an escrow account till the documents for creation of security as stated in the offer document are executed.
8. Responsibilities of the issuer – The issuer will maintain a decision making process which determines the eligibility of the projects/assets. Including, without any exception, a statement on the environmental objectives of green bonds and a way to determine whether the projects or assets are eligible to be considered. He will ensure that all projects or assets are funded by the proceeds of the green bonds, and meet its objectives. The utilisation of proceeds is well established in the offer documents. The issuer or any agent of the issuer, if following any globally accepted standard for measuring environmental impact on the project or has a process of identifying projects or assets, or utilising of proceeds will disclose all the details in the offer document, disclosure document and in continuous disclosures.

Procedure for Listing of Green Bonds

• Mandatory Listing

1. 1. Issuer who desires to make an offer of green bonds to the public has to make an application for listing to one or more designated stock exchanges under Section 73 of the Act;

1. 1. Issuer has to comply with all the conditions of listing such green bonds as have been specified in the listing agreement with the stock exchange; and

1. 1. The issuer who wishes to issue privately placed green bonds has to forward the listing application with disclosures specified in Schedule 1 of the recognised stock exchange within fifteen days from the date of allotment of those green bonds.

• Conditions for listing of green bonds on private placement basis

1. 1. The issuer has to issue green bonds in compliance with provisions of the Act, rules prescribed and other applicable laws, credit rating has been obtained from one agency registered under the Board, securities to be listed are in dematerialized form, disclosures in Regulation 21 have been made. The issuer has to comply with conditions specified in Listing Agreement with the stock exchange where these securities are supposed to be listed, the designated stock exchange has to collect a regulatory fee as specified in Schedule V. The issuer has obtained fresh credit rating from at least one credit agency, ratings have to be reevaluated on a periodic basis, appropriate disclosures have to be made in regard with re-issuance of term sheet. The issuer seeking listing will make disclosures as specified in Schedule I of the regulations and the annual report of the issuers; it should be made on website of stock-exchanges and shall be downloadable in PDF/ HTML formats. Relaxation of strict enforcement of rule 19 of Securities Contracts (Regulation) Rules, 1957. The Board relaxes enforcement of sub rules (1), clause (b) of sub rule (2) and (3) of rule 19.

Compliances

• Continuous Listing Conditions

1. 1. All issuers making public issue or seeking to list green bonds issued on private placement basis will comply with conditions of listings specified in respective listing agreement for green bonds, every rating obtained by the issuer will be reviewed by a credit rating agency and any changes will be disclosed by the issuer to the stock exchange, any change in rating will be communicated to investors as maybe determined by the stock exchange, debenture trustee will issue a press release in any of the events when – there is default by issuer to pay interest on green bonds, failure to create a charge on assets, revision of rating assigned to the green bonds. All this information has to be placed on the website if there is one of the debenture trustee, issuer or stock exchange etc.

• Trading of green bonds

The green bonds, public or on a private placement basis will be listed on a recognised stock exchange, will be traded and such trades will be cleared and settled in the recognised stock exchanges subject to conditions specified by the Board, if green bonds are traded over the counter – they have to be reported on a recognised stock exchange. The Board can specify conditions for reporting of trades on the recognised stock exchange.

• Continuous Disclosure Requirements

Aside from disclosures made by the issuer in SEBI Listing Regulations, 2015. The issuer is required to submit to SEBI from time to time, its annual report and financial results along with utilisation of the proceeds on the basis of any internal tracking done by the issuer where such internal tracking is verified by any external auditor whereby he can verify the proper utilisation of proceeds of the green bonds and allocation of the same towards projects or assets. Also, details of unutilized proceeds will be given.

1. 1. Additional disclosures that need to be submitted with it’s annual report include the quantum of amount raised and a list of projects with brief descriptions, for which such amounts are raised. Details need not be provided when such information comes under the ambit of confidentiality. General information would suffice in these cases; and Certain qualitative and quantitative performance indicators are required, also the underlying assumptions used in the preparation of the performance indicators and metrics are required.

Impact of Green Bonds on the Market

The Circular does a great job in formalizing the regulatory framework for issuing and listing of these bonds. They are a big boon to the renewable sector and make the investments more lucrative to investors and provide a benchmark to regulate and monitor these guidelines that funds are only used for green projects. This will broaden access to domestic and foreign capital and relieve the banks from the strain of lending and refinancing long term green projects. Green Bond Guidelines also ensure detailed disclosure norms for the borrowing authority, closed monitoring of the utility of the bond proceeds, an incentive and add immense quality to a novel financial product which has already established its success in international and domestic markets. The guidelines also strengthen India’s commitments at the COP21 Agreement.