RBI allows FPIs to invest in sovereign green bonds through IFSC; key things to know
Upstox
3 min read • Updated: April 6, 2024, 10:42 AM
Summary
To facilitate wider non-resident participation in sovereign green bonds, “it has been decided to permit eligible foreign investors in the IFSC to also invest in such bonds”, the RBI said. The proceeds from the issuance of such bonds is used by the Centre for mobilising resources for green projects in the public sector.
The Reserve Bank of India (RBI) has permitted foreign portfolio investors (FPIs) to invest in sovereign green bonds, also known as climate bonds, through the International Financial Services Centre (IFSC) in Gujarat.
“At present, foreign portfolio investors registered with SEBI are permitted to invest in sovereign green bonds (SGrBs) under the different routes available for investment by FPIs in government securities. With a view to facilitating wider non-resident participation in SGrBs, it has been decided to permit eligible foreign investors in the IFSC to also invest in such bonds,” the RBI said, while releasing the statement on developmental and regulatory policies on April 5.
A scheme for investment and trading in SGrBs by eligible foreign investors in IFSC is being notified separately in consultation with the Centre and the IFSC Authority, it added.
What are sovereign green bonds?
Sovereign green bonds or SGrBs are similar to any other fixed-interest bearing debt, except for the fact that the issuer pledges to use its proceeds for environmental-friendly projects. In this case, the sovereign entity that is issuing the bonds is the government of India, and it has pledged to use the amount raised through the bonds for funding green projects.
The decision to issue SGrBs was first announced in the Union Budget for fiscal year 2022-23, and subsequently the government issued the first tranche of the bonds in January 2023.
The government had set a target of raising ₹20,000 crore via the issuance of SGrBs in FY24, and it plans to borrow ₹12,000 crore through the sale of the bonds in the first six months of FY25.
How will increased investments in sovereign green bonds help the govt?
By allowing FPIs to invest in SGrBs through IFSC, the government aims to further deepen the climate bonds market. The funds raised through these bonds will help the government in tapping the requisite finance from potential investors for deployment in public sector projects aimed at reducing the carbon intensity of the economy.
The Finance Ministry, in the FY23 budget, had stated that SGrBs will be useful for “mobilising resources for green infrastructure”. It will also enable the country to “meet its Sustainable Development Goals (SDGs)”, the Department of Economic Affairs had added, in a note issued last year.
The document released by the DEA clarified that proceeds from SGrBs cannot be used for projects involving new or existing extraction, production and distribution of fossil fuels, including improvements and upgrades; or where the core energy source is fossil-fuel based.
They are also barred from use in nuclear power generation projects, direct waste incineration projects, and projects pertaining to alcohol, weapons, tobacco, gaming, or palm oil industries.