Sovereign Green Bonds in India

Sovereign Green Bonds in India

Sovereign Green Bonds are investment instruments that help you to generate returns safely while funding sustainable green projects.

The first green bond was issued by the World Bank in 2008. Since then green bonds worth more than $3.5 trillion have been issued worldwide.

What are Sovereign Green Bonds?

While normal bonds allow issuers (borrowers) to use the funds as they see fit, funds raised via green bonds must be used to finance green projects that help the environment. Examples of green projects are Rampur Hydropower Project, India and GoBiGas, Gothenburg, Sweden.

The Government of India plans to issue Sovereign Green Bonds worth Rs. 16,000 crores (~$2 billion) in FY23. Towards this, Sovereign Green Bonds worth Rs. 8,000 crores (across two tranches) were issued by the GoI in Jan 2023.

Who issues Sovereign Green Bonds?

While green bonds can be issued by anyone, Sovereign Green Bonds can be issued only by national governments. So, a green bond issued by YES Bank Ltd. will be just that whereas a green bond issued by the Government of India will be termed as a ‘Sovereign Green Bond.’

Sovereign Green Bonds are safer than green bonds issued by corporates because of the sovereign guarantee that secures them. Green bonds issued by corporations have varying (credit) safety that is indicated by their credit ratings.

In FY22, the Chinese government issued green bonds worth $76 billion, the most by any national government.

How do Sovereign Green Bonds work?

Sovereign Green Bonds work like normal long-term central government bonds. They have a fixed interest rate and pay interest twice a year.

  1. Investor buys Sovereign Green Bonds (investment = principal)
  2. Bondholder receives regular interest payments every 6 months
  3. Bondholder receives the last interest payment and the principal back on the maturity date

Sovereign Green Bonds interest rates

Sovereign Green Bond issuers enjoy a ‘greenium.’

Greenium refers to the slightly lower interest rate investors are willing to accept because of the noble cause green bonds are issued for. Issuers take advantage of this and offer lower interest rates than they would for comparable ‘non-green’ bonds.

This helps issuers reduce their interest burden. And investors are happy that their money is used for the betterment of the environment. Win-win!

The most recent 10-year Sovereign Green Bond offers an interest rate of 7.29%. The 10-year Indian bond yield on the day of the Sovereign Green Bond issue was 7.38% which implies a greenium of 9 basis points.

Can NRIs invest in Sovereign Green Bonds?

NRIs can invest in government and PSU bonds but not in bonds issued by private sector companies. Since Sovereign Green Bonds are issued by the central government, NRIs are eligible to invest without any restrictions.

Both the GoI Sovereign Green Bonds are Fully Accessible Route (FAR) eligible. As per FAR, NRIs can invest in select government securities without a ceiling. NRI investments in government bonds not specified under FAR are restricted.

Do Sovereign Green Bonds have a tax incentive?

Sovereign Green Bonds don’t have a tax incentive like tax saving or exemption features.

Tax saving refers to reducing your taxable income by investing the money in specific instruments like PF under section 80C of the Income Tax Act.

Tax exemption is different and refers to no tax implications on the interest payments received from a tax-free bond. The income of such bonds is tax-free for the investor under section 10(15) of the Income Tax Act.

Examples of Sovereign Green Bonds in India

In Jan 2023, the Government of India issued Sovereign Green Bonds for the first time. The total issue size was Rs. 8,000 across two bonds. Details of the issue are below:

  5-year Sovereign Green Bond 10-year Sovereign Green Bond
Name of the bond 7.10% GOI SGrB 2028 7.29% GOI SGrB 2033
Issue size Rs. 4,000 crore Rs. 4,000 crore
Issue date 27 Jan, 2023 27 Jan, 2023
Interest rate 7.10% 7.29%
Interest payout frequency Semi-annual Semi-annual
Greenium 10 basis points 9 basis points
Maturity date 27 Jan, 2028 27 Jan, 2033

Until Feb 2023, only the above two Sovereign Green Bonds were issued by the Government of India. Many green bonds (non-sovereign) have also been issued in India by corporations over the years.