Why in the News?

On April 5 the Reserve Bank of India (RBI) green lighted investments in the country’s Sovereign Green Bonds (SGrBs) by Foreign Institutional Investors (FIIS).

What’s in Today’s Article?

• About FIIs (Meaning, Categories, Use)
• About Green Bonds (Meaning, Examples, Data, etc.)

• About SGBF (Aim, Eligibility, Proceeds, Implementing agency, etc.)
• FIIs to Invest in Green Bonds

What are Foreign Institutional Investors (FIIs)?

• Foreign Institutional Investors (FIIs) are organizations or entities that invest money in the financial markets of a country other than their own.
• These investors can include pension funds, mutual funds, insurance companies, banks, and other large financial institutions from foreign countries.
• FIIs play a significant role in the financial markets of a country by providing liquidity, increasing trading volumes, and influencing stock prices.
• They invest in a range of financial instruments, including stocks, bonds, and derivatives, based on their investment strategies and market outlook.
• The inflow of funds from FIIs can have both positive and negative impacts on the local economy, depending on various factors such as market conditions, government policies, and global economic trends.
• Investments by FIIs in India are regulated by the Securities and Exchange Board of India (SEBI) while the ceilings on such investments are maintained by the Reserve Bank of India (RBI).

What are Green Bonds?

• Green bonds are issued by companies, countries and multilateral organisations to exclusively fund projects that have positive environmental or climate benefits and provide investors with fixed income payments.
• The projects can include renewable energy, clean transportation and green buildings, among others.

Example of Green Bonds:

• The World Bank is a major issuer of green bonds and issued $14.4 billion of green bonds between 2008 and 2020.
• These funds have been used to support 111 projects around the world, largely in renewable energy and efficiency (33%), clean transportation (27%), and agriculture and land use (15%).
• By the end of 2020, 24 national governments had issued Sovereign Green, Social and Sustainability bonds totalling a cumulative $111 billion.

India’s Sovereign Green Bonds Framework:

• First announced in the Union Budget 2022-23, the proceeds of these green bonds will be issued for mobilising resources for green infrastructure.
• Aim –
• To mobilise Rs 16,000 crore through the issuance of green bonds in the current fiscal ending March 2023.
• Under the framework, the Finance Ministry will, every year, inform the RBI about spending on green projects for which the funds raised through these bonds will be used.

Features of the SGrBs:

• Issuance Method –
  • SGrBs will be issued through Uniform Price Auction.
• Eligibility for Repurchase Transactions (Repo) –
  • SGrBs will be eligible for Repurchase Transactions (Repo).
  • SGrBs will also be reckoned as eligible investment for Statutory Liquidity Ratio (SLR) purpose.
• Tradability –
  • SGrBs will be eligible for trading in the secondary market.
• Investment by Non-residents –
  • SGrBs will be designated as specified securities under the ‘Fully Accessible Route’ for investment in Government Securities by non-residents.

Eligible Projects:

• All eligible green expenditures will include public expenditure undertaken by the government in the form of investment, subsidies, grants-in-aid, or tax foregone (or a combination of all or some of these) or select operational expenditures.
• R&D expenditures in public sector projects that help in reducing the carbon intensity of the economy and enable country to meet its Sustainable Development Goals (SDGs) are also included in the framework.
• The eligible expenditures will be limited to government expenditures that occurred maximum 12 months prior to issuance of the green bonds.
• Sectors not included –
• Nuclear power generation, landfill projects, alcohol/weapons/tobacco/gaming/palm oil industries and hydropower plants larger than 25 MW have been excluded from the framework.

FIIs to Invest in Green Bonds:

• The Reserve Bank of India (RBI) has approved investments in the country’s Sovereign Green Bonds (SGrBs) by Foreign Institutional Investors (FIIS).
• The RBI had issued SGrBs worth ₹16,000 crore in two tranches in January and February last year with maturities in 2028 and 2033.
• While in both instances the bonds were oversubscribed, the main participants were domestic financial institutions and banks, narrowing the avenues from where the government could borrow.
• SGrBs yield lower interest than conventional G-Secs, and the amount foregone by a bank by investing in them is called a ‘greenium’.
• But central banks and governments the world over are encouraging financial institutions to embrace greeniums to hasten the transition to a greener future.

Significance of the RBI’s Decision:

• Allowing FIIs to invest in India’s green projects widens the pool of capital available to fund the country’s following ambitious goals pledged by Prime Minister Narendra Modi at COP26 in Glasgow 2021:
  • 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%.