How to achieve sustainable finance & green growth by issuing green debt securities?

The Budget 2023 prioritized its direction toward sustainable finance & green growth. To achieve this, SEBI has taken various measures for increasing interest in sustainable finance in India as well as around the globe, with a view to aligning the extant framework for green debt securities with the updated Green Bond Principles (GBP) recognized by the International Organization of Securities Commissions (IOSCO).

Thus SEBI, in its recent amendment dated February 3rd, 2023, has modified the definition of Green debt Securities in Issue and Listing of Non-Convertible Securities Regulations. The regulatory framework defines Green Debt Securities as debt securities issued for raising funds that are to be utilized for projects or assets falling under certain categories. 

The regulator further strengthened the framework for green debt securities by introducing the concept of ‘blue’ and ‘yellow’ bonds as new modes of sustainable finance in relation to pollution prevention as well as control and eco-efficient products. Blue bonds relate to water management and the marine sector, while yellow bonds pertain to solar energy. Though it was already included in the previous definition but is now specifically renamed under different sub-categories of green debt securities.                                                                                                                                                                                                                                                         

In addition to the above, transition bonds also form part of the sub-categories, which comprise funds raised for transitioning to a more sustainable form of operations, in line with India’s Intended Nationally Determined Contributions which refer to the climate targets determined by India under the Paris Agreement at the Conference of Parties 21 in 2015, and at the Conference of Parties 26 in 2021.

In its recent circular dated February 3rd, 2023, SEBI also listed dos and don’ts relating to green debt securities to avoid occurrences of ‘greenwashing’. Greenwashing is basically ‘making false, misleading, unsubstantiated, or otherwise incomplete claims about the sustainability of a product, service, or business operation’.

While raising funds for a transition towards a greener pathway, the issuer of green bonds will continuously monitor to check whether the path undertaken towards a more sustainable form of operations is resulting in the reduction of the adverse environmental impact and contributing towards a sustainable economy, as envisaged in the offer document to avoid greenwashing risks, the regulator said in a circular.

The issuer will not utilize funds raised through green bonds for purposes that would not fall under the definition of ‘green debt security’ under the rules. In case such instances come to light regarding the already issued green debt securities, the issuer will disclose the same to the investors and, if required, by a majority of debenture holders, undertake early redemption of such debt securities.  This further widens the scope of compliance as continuous monitoring & disclosures must be done by issuers in true letter & spirit.  SEBI formalized the same in a circular dated February 6th, 2023 with regard to revised disclosure requirements for the Issuance and Listing of Green Debt Securities.

Few of the major compliances wrt. Issue & listing of Green Debt Securities include:

• Appointment of a lead merchant banker, underwriter, debenture trustee(s), and registrar to the issue by the issuer

• Advertisements for Public issues

• Creation of charge or security and Debenture Redemption Reserve
• Filing of application form and abridged prospectus along with draft offer document