Sustainable Finance: Government concludes sovereign green bond sale of Rs 160 billion

To achieve its net zero goals, India is focusing on generating additional global financial resources. To lower the carbon emissions of the economy, the Union budget for 2022-23 announced the issuance of sovereign green bonds (SGBs). As highlighted by the Interna­tio­nal Capital Market Association (ICMA), a green bond differs from a regular bond as it emphasises a commitment to deploy the funds raised solely for financing or re­financing “green” projects, assets, or bu­siness activities.

In February 2023, the Indian governme­nt concluded the sale of Rs 160 billion in SGBs. The first tranche was released in Ja­nuary 2023, raising a total of Rs 80 billion. Of this, Rs 40 billion was raised for a five-year tenor (2028) at a yield of 7.1 per cent. The remaining Rs 40 billion was issu­ed for a 10-year tenor (2033) at a yield of 7.29 per cent. The second tran­che of SGBs was released in Februa­ry 2023, also for Rs 80 billion, divided into two tranches of Rs 40 billion each. The tenor and yield were the same as in the first tranche.

A key highlight was that the yield was a few basis points lower than government securities of the same tenor. A lower yield signifies that the green bonds carried a premium – commonly referred to as “greenium” for green bonds – thus making the price of the security higher. The Re­serve Bank of India (RBI) set the cut-off yields for the two bonds at 7.23 per cent and 7.29 per cent respectively.

These proceeds will be used to fund pu­blic sector projects that reduce the economy’s carbon intensity. A green finance wor­king committee led by Chief Econo­mic Adviser V. Anantha Nages­waran will select the government projects that will receive green financing. The Ministry of Finance has formed a Green Finance Working Co­m­mittee to help with project evaluation and selection. Under the committee’s su­per­vi­sion, an annual report will be published on the allocation of proceeds to eligible projects, the description of projects financed, the status of im­plementation and unallocated proceeds. The proceeds from the sale of green bonds will be deposited in the Consoli­dated Fund of India. The Public Debt Management Cell will track the proceeds and monitor the funds allocated to eligible green expenditures.

The features of the issued SGBs are as follows:

  • Issuance method: The SGBs were issued through a uniform price auction.
  • Non-competitive bidding facility: As specified in the Scheme for Non-competitive Bidding Facility in the Auction of Government of India Dated Secu­ri­ties and Treasury Bills, 5 per cent of the notified amount of sale is reserved for retail investors.
  • Eligibility for repurchase transactions (repo): SGBs are eligible for re­purchase transactions in accordance with the ter­ms and conditions specified in the repurchase transactions (RBI Directions, 2018) as amended from time to time.
  • Statutory liquidity ratio (SLR) eligibility: SGBs are considered an eligible investment for SLR purposes.
  • Underwriting: The primary dealer’s un­derwriting commitments and liquidity su­p­port were revised for the auction of SGBs.
  • When-issued trading: The SGBs were eligible for “when-issued” trading in accordance with the RBI’s guidelines on Transactions in the When Issued Ma­rket in Central Government Secu­rities.
  • Tradability: The SGBs were tradable in the secondary market.
  • Non-resident investment: SGBs will be designated as specified securities un­­­der the “fully accessible route” for non-resident investment in government se­curities.

RBI’s famework

Last year, the government issued the fra­mework for SGBs, which adheres to the ICMA’s principles for green bonds, in­cluding four core components and key recommendations intended by RBI.

Th­e­se four core components are use of pro­ceeds, project evaluation and selection, management of proceeds, and reporting. Accor­ding to the RBI framework, a green project helps to promote energy efficiency, re­du­ce greenhouse gas emissions, promote climate resilien­ce and improve natural ecosystems and biodiversity.

The classification of a “green project” for the same is outlined based on the following principles. First, encouraging the re­source utilisation that is energy efficient. Second, reducing carbon emissi­o­ns and greenhouse gas emissions. Third, promoting climate resilience and adaptation. Fourth, improving natural eco­sys­tems and biodiversity, particularly in accordance with the principles of Sus­tainable Development Goals.

Key benefits and challenges

The issuance of SGBs will assist the In­di­an government in obtaining the requir­ed finance from potential investo­rs for deploying public sector projects aiming to reduce the carbon intensity of the economy. They will further strengthen India’s co­mmitment to its Nationally Determined Contribution (NDC) targets and increase its credibility in the global green finance ecosystem. Since SGBs are a new government initiative in India, th­ey will give institutional inves­tors a good indication of how environmentally frie­ndly the government’s fu­tu­re initiatives will be. The payments of principal and interest for this framework’s issuances are not contingent on the performance of the eligible projects. Investors in bonds issued under this framework are not exposed to any project risks as these green bonds are is­sued by the government. Therefore, the default risk is low. Private firms can buy the certified green bonds and receive periodic in­terest on these bonds. The payments are not conditional on the performance of the projects, which is a key incentive for inves­tors to invest in green bonds. Tra­ns­pa­rent disclosure norms, reporting frameworks and specific green project screening criteria will sustain investor interest in India’s first sovereign green bond market.

The key challenges with green bonds are the false claims of environmental co­mpliance, no specific tax incentives for green bonds in India, maturity and mismatches between long-term green in­vestment and investors’ relatively short-term interests. The lack of a universal definition of green finance, combined with information asymmetry, frequently results in “green-washing”, in which investors do not receive full in­formation about the usage of green bo­nds. Often, the proceeds of green bon­ds claim to be deployed in projects that are environment friendly but may not actually help in reducing emissions. Addi­tionally, though India monitors greenhouse gas emissions through re­po­r­ting mechanisms such as Perform, Ac­hieve and Trade and monitors rene­wable ca­pa­city deployments throu­gh renewable purchase obligations, it la­cks a national measurement, reporting, and verification platform for tracking climate finance.


Going forward, the central banks and policymakers, as custodians of financial stability, will be required to evaluate and exa­mine the instruments or strategies they should use or focus on in order to meet su­stainability goals without im­pa­cting their existing policy mandates. In addition, it conducted a survey of leading scheduled commercial banks on climate risk and sustainable finance. As per the survey results, the banks and fi­nancial institutions were found to have a critical role in financing the transition to a low-carbon economy and supporting national climate commitments.

Banks and financial institutions have always served as the backbone of India’s economic growth, thus, as the country shif­ts its focus to sustainable growth, they will need to take the lead and accelerate green lending. A number of structural adjustments to the conventional lending approa­ch, such as the assessme­nt and certification of a project’s green credentials, may be required to support this acceleration.

As highlighted by M. Rajeshwar Rao, de­pu­ty governor, RBI, in December 2022, banks must focus on two key aspects. First, relying on their time-tested expertise in financial intermediation by acting as an effective conduit for channelling finance to carbon-efficient sectors and industries in line with national policies and goals. Se­co­nd, improving the management of financial risks in their books that may be caused by climate change. Such risks ran­ge from direct physical risks resulting from adverse weather ev­ents to reputational and legal risks. Ob­viously, strategies for mitigating these ri­sks must be based on sound public po­li­cy objectives, and all stakeholders must play a role in assisting the country in traversing and transforming into a climate-resilient economy.

Going forward, it is expected that SGBs will attract market investments and lo­ans to fund green projects due to their low interest rates. This measure is likely to re­in­force India’s commitment to its NDC go­als and enhance its credibility with in­ter­national climate investors.

Nikita Choubey