Regulatory updates

The Securities and Exchange Board of India (SEBI) introduced the concept of Green Debt Security (GDS) under the erstwhile SEBI (Issue and Listing of Debt Securities) Regulations, 2008¹⁸. SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 defines GDS as:

A debt security issued for raising funds that are to be utilised for project(s) and/or asset(s) falling under any of the following categories, subject to the conditions as may be specified by SEBI from time to time:

1. Renewable and sustainable energy including wind, solar, bioenergy, other sources of energy which use clean technology,
2. Clean transportation including mass/public transportation,
3. Sustainable water management including clean and/or drinking water, water recycling,
4. Climate change adaptation,
5. Energy efficiency including efficient and green buildings,
6. Sustainable waste management including recycling, waste to energy, efficient disposal of wastage,
7. Sustainable land use including sustainable forestry and agriculture, afforestation,
8. Biodiversity conservation, or
9. A category as may be specified by SEBI, from time to time.

Further, Chapter IX of SEBI’s operational circular dated 10 August 2021 specifies certain key concepts and provisions with regard to the issue and listing of GDS, including the disclosure requirements in the offer document, continuous disclosure requirements in annual report and financial results, responsibilities of the issuer, etc.

However, with an increase in focus towards sustainability reporting and multiple changes and events taking place in the sustainable finance space around the world, SEBI, on 4 August 2022 released a consultation paper on green and blue bonds as a mode of sustainable finance (the consultation paper). The consultation paper discusses some important concepts, including the present status of green bonds as a mode of finance in India, scope of blue bonds, overall global scenario of sustainable financing, etc. The consultation paper seeks comments on a proposed regulatory framework to:

• amplify the definition of GDS
• introduce the concept of blue bonds
• reduce compliance cost for issuers of GDS with while not creating any perverse incentives that may lead to ‘greenwashing’.

Some of the key points discussed in the consultation paper are as follows:

• Initiatives that may be financed through green bonds: The consultation paper mentions certain schemes/policies undertaken by the Government of India to achieve the climate change goals¹⁹ such as phasing out coals use, using biomass in coal power plants, etc. The consultation paper solicited views on whether such initiatives offer any scope of financing through green bonds.
• Introduction of blue bonds: The Government of India has announced an initiative to develop country’s blue economy by rolling out the road map of project Sagarmala. According to the World Bank, blue economy refers to the “sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem”. In this regard, deployment of blue bonds can emerge as an important source of finance for various aspects of the blue economy. The consultation paper has also suggested some initiatives for which blue bonds can be deployed, such as sustainable fishing, ocean resource mining, geoengineering techniques, etc. The consultation paper solicited views on whether the initiatives mentioned in the consultation paper offer any scope for financing through blue bonds, and whether any additional initiatives may be added to the list. It also seeks views on whether introduction of coloured bonds (e.g., blue bonds for blue economy, yellow bonds for solar power) would help increase channels for funding to green projects.
• Proposed amendments to SEBI guidelines to align with international principles: The consultation paper proposed recommendations by SEBI’s Corporate Bonds Securitisation Advisory Committee (CoBoSAC) to align the existing SEBI guidelines with the Green Bond Principles (GBP) published by the International Capital Market Association (ICMA). Some of the key amendments proposed in this regard include:

• Change in the definition of GDS under SEBI (Issue and Listing of Non - Convertible Securities) Regulations, 2021: It has been proposed to add pollution prevention and control, and circular economy adapted products, production technologies and processes as eligible categories for issuance of GDS in the definition of GDS.
• Utilisation of issue proceeds: It is proposed that utilisation of proceeds from each issue of GDS should be tracked and disclosed separately (bond by bond approach) or on an aggregated basis for multiple green bonds (portfolio approach), and the issuer should disclose the intended types of temporary placement for the balance of unallocated net proceeds, if any.
• Identification and management of perceived social and environmental risks: It has been proposed that the issuer may provide information on processes by which the perceived social and environmental risks associated with the project(s) proposed to be financed/refinanced are identified and managed.
• Appointment of third-party reviewers/certifiers/auditors: It has been recommended that an issuer may appoint external reviewers/certifiers/auditors for:

• Assessment of objectives of the green bond to be issued,
• Post-issue management of use of proceeds from the green bond, and
• Verification of internal tracking and fund allocation from the green bond proceeds to eligible green projects etc.

Consequent to this amendment, SEBI vide a circular dated 25 August 2022, has stated that AMCs should ensure a scheme wise disclosure of investments, as on the last date of each quarter, in securities of such entities that are excluded from the definition of an associate. The disclosures of investments would include ISIN wise value of investment and value as a percentage of Asset Under Management (AUM) of the scheme. Such disclosures should be provided on the websites of respective AMCs and on the website of the Association of Mutual Funds in India.

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To access the text of the MF Amendment Regulations, please click here

To access the text of the SEBI circular dated 25 August 2022, please click here

18. SEBI (Issue and Listing of Debt Securities) Regulations, 2008 merged into SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, vide SEBI notification dated 9 August 2021.
19. These climate change goals were committed by India in the COP-26 summit held in Glasgow