In today’s world of globalization and competition, it becomes of utmost importance for the companies to raise capital for smooth functioning of business. Hence, Companies Act, 2013 (“Companies Act”) lays down new criteria and process for raising capital which are more structured and stringent than before.
Further, companies prefer raising funds through debt in order to meet the fund requirements of the business since debt does not dilute the ownership interest in the company.
Debt financing route comes with many more alternatives than just traditional bank loans, the range of choices includes Taxable Bonds, Tax Free Bonds, Municipal Bonds, Green Bonds, etc. The new Companies Act has also opened doors for structured and organised Private Placement of non-convertible Debentures.
In comparison to taxable bonds, tax free or municipal bonds offer a lower rate of return, since municipal bonds are exempt from local and state taxes. This provides the investor with the benefit of paying only federal taxes when the time comes.
Tax free bonds are issued by the infrastructure finance companies in terms of Central Board of Direct Taxes (“CBDT”) notification. The issuers of these Tax Free Bonds are quasi-sovereign entities such as Indian Renewable Energy Development Agency (IREDA), PTC India Financial Services Limited (PTC) and NTPC Limited (NTPC) with AA+ or AAA rating. The bonds will be listed on the exchanges and are expected to be fairly liquid. The coupon or interest is tax-free and is paid annually.
Further, in order to meet the preliminary yet huge financial requirement of USD 2.5 trillion, for the ambitious climate change plans of Government of India (GoI) and with an aim towards financing green projects, Securities and Exchange Board of India (“SEBI”) has proposed new norms for issuing and listing of ‘Green Bonds’.
Green bonds in its simplest form are fixed income financial instrument for raising capital through the debt capital market in order to finance climate change mitigation projects. There are of course multiple potential sources of debt to meet this climate change aim of GoI, but there are challenges associated with each of these sources in terms of their capacity, cost, tenor, currency risks etc. As an emerging class of bonds, Green Bonds are anticipated to be the magical solution for financing climate change resilient projects or other environmentally beneficial projects. The “green” designation on any traditional renewable energy project could potentially attract new investors enlarging the investor base for the issuer
The ‘green’ series of Bonds have generated substantial investor interest and has helped in meeting environmental or socially responsible goals, as the proceeds of a Green Bond offering shall be allocated towards financing green projects.
In terms of the concept paper floated by SEBI on December 3, 2015, the issue of Green Bonds shall be governed by the existing SEBI regulations for issuance of corporate bonds i.e. SEBI (Issue and Listing of Debt Securities) Regulations, 2008.
Although the process of issuing Green Bonds is generally the same as issuing other corporate bonds, there are few additional disclosures pertaining to periodic reporting of fund allocation. The issuer would have to make disclosures including use of proceeds, list of projects to which Green Bond proceeds have been allocated in the annual report and periodical filings made to the stock exchanges.
The concept paper issued by SEBI has provided an indicative list of broad categories of areas for assigning the status of Bonds as ‘Green’ which are as follows:
Until recently, issuers and investors have relied upon project descriptions in the prospective bond documents as well as independent third party analysis (or verification) to identify a “green” project since no formal criteria or definition of eligible “green” projects has been accepted.
The concept of Green Bonds is still nascent and is yet to gain ground among Indian companies. In India, Green Bonds were first issued by Yes Bank in February 2015. Post that, Export-Import Bank of India (Exim Bank) came out with a dollar denominated Green Bond issue in March 2015 followed by CLP Wind Farms (India), an arm of Hong Kong- based power company CLP, raised funds for its wind business through these Green Bonds. Further, IDBI Bank was India’s first public-sector bank to raise funds through Green Bonds in November 2015.
The emerging Green Bond market may appeal to Indian public agencies that have policies encouraging climate, socially conscious and environmental sustainability goals. While the overall issuance of Green Bonds is similar to issuing conventional debt, there are additional administrative costs to consider with regard to developing a Green Project selection process and on-going reporting requirements related to the environment benefits of such projects.
With the GoI turning its attention to Green Bonds and given the massive investments required, this will need to be complemented by large amounts of private capital which is sought to be addressed through Green Bonds.
As anticipated by GoI, Green Bonds shall address the funding problem for clean energy initiatives. But, investors and issuers should be wary of strings attached to such bonds since there are currently no standardized criteria for assessing a bond as ‘green’. The issuance and ongoing costs associated with a green bond could be greater than those of a regular bond. These costs include monitoring and reporting processes, as well as up-front investment to define the bond’s green criteria and sustainability objectives.
However, a company must have a blend of both equity and debt financing to meet the fund requirements. The most viable structures for debt financing are tax free bonds issued by quasi sovereign entities.
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