The Indian government issues green bonds. Here's a fun read about its nuances

If you’re a company or government that issues a bond, you borrow some money from investors and promise to pay it back to them with an interest. But if you issue a green bond, you borrow some money and promise to pay it back with a bit less interest than you would on a regular bond. Investors in your green bond essentially give you a discount with the condition that you use the money to do nice, environmentally friendly stuff.

Finance calls this difference in interest rates between a regular bond and a green bond a “greenium”. (It’s a funny word that I’ll be using unironically through this piece.)

Last month, the Indian government issued its first ever green bonds and it was a pretty successful sale. The government sold a billion dollars’ worth of bonds at an interest of 7.29%, which was about 0.06% lower than a regular government bond of a similar duration. This figure—0.06%—is the greenium that investors were willing to discount for good, green projects.

This bond sale is great for the government! The government wants to build solar projects and wind turbines and all that good stuff, and if investors give the government money to do this at a cheaper rate, it can build more of this good stuff.

Okay, let’s keep the government’s bond sale aside for a second. If you’re someone who’s looking to issue green bonds, the place for you to do it is either in the US or Europe. That’s where there are rich funds with mandates to invest only in green stuff, or a portion of their funds only in green stuff. In fact, there is so much money there that’s looking to invest in green stuff, that it’s started to annoy people who think that “green” is just a marketing term being exploited by companies to get cheap money. [1]

The point is—green bonds and foreign investors are like chocolates and Charlie. You like to sell green bonds to foreign investors, and foreign investors like to buy them. What you don’t want to do is sell green bonds to Indian investors (they won’t buy!). And yet, from the Business Standard:

The Reserve Bank of India on Wednesday conducted the government’s maiden sale of green bonds, with a total of Rs 8,000 crore worth of two securities – a five-year bond and a ten-year bond - being sold.

As had been anticipated by traders ahead of the auction, the sale saw robust demand from state-owned banks. Insurance companies were also said to have participated strongly at the debt sale, dealers said.

“There was good demand from PSU banks and insurance companies. Further, FPIs have likely picked up at least Rs 700 crore of the green bonds,” ICICI Securities Primary Dealership head of trading Naveen Singh said.

Foreign investors seemed to have bought about 10% of the bonds, but most of them were bought by state-owned banks and insurance companies.

The government tried to market their green bonds to foreign investors. It also removed some restrictions on foreign investors buying Indian government bonds. But what foreign investors really want is that they can buy bonds in dollars, not in rupees. If they buy a rupee bond and the exchange rate falls, they might lose more money because of the exchange rate falling than they would gain with the interest. Not a risk they want!

The government wanted to sell green bonds to foreign investors, but foreign investors didn’t want to buy green bonds in rupees, so the government decided to sell them to state-owned banks instead. [2] Apparently, if you’re a state-owned bank, and the state is selling green bonds, you pay a greenium to ensure the state is happy.

Indore sells some green bonds

When the Indian government sold green bonds, it was a successful sale! Sure, government-owned banks bought them—not ideal—but the banks paid a greenium and the government got money for cheap. So, in theory, it was a success. Maybe a good start if nothing else.

But we saw that it isn’t easy to get foreign investors to invest in the Indian bond market. Even for the Indian government! Foreign investors do want to buy green bonds but they want their money in dollars more. Now imagine how difficult it would be for a small city government to issue green bonds and find foreign investors. Yet, this month, the Indore municipal government issued green bonds. The local government wanted to raise ₹122 crore ($15 million) but ended up receiving a commitment to raise 5X as much!

Something that’s essential for a green bond, apart from the promise to use the bond money for green stuff, is a greenium. If a greenium didn’t exist, the bond issuer (borrower) could just sell a regular bond and use the money for whatever. An investor in a green bond pays a greenium to ensure that her money is being used for good.

The Indore government’s green bonds come with an interest rate of about 8.25%—reasonably high for a government bond at this time. For context, the bond by the Indian government mentioned in the last section paid 7.29%. If you check out news pieces about Indore’s green bond sale, there is not one mention of a greenium.

A bond issuer issues a green bond so that it can borrow money cheaper than usual. The Indore government issues a green bond so that it can get nice articles written about it. [3]


[1] Recently, Aswath Damodaran pointed out that Adani Group could raise money via green bonds for its solar projects, even though the conglomerate includes large natural gas, coal and ports businesses.

[2] To clarify, banks, even state-owned banks, buy government bonds all the time. Some of it is regulation, but it’s also because government bonds are a safe fixed-income investment for anyone, banks and otherwise. In this particular case, though, there was no reason for state-banks to buy green bonds only to get paid less interest. Government-banks fund all sorts of projects and there is no mandate for them to chase green stuff.

[3] This might sound like a joke, but having news articles written about your safe, high-interest bonds definitely helps in attracting investors. Ask Indore’s municipal government, they just had 5X the needed commitment for their bonds!

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I saw the same post on Reddit today under india investing
On bonds, would anyone know any site that tracks daily changes in RBI open market operations
More in this site : Explained: What Are Government Securities (G-Secs) And How Are They Issued?

Yes I posted it there as well! Not sure if there are any sites tracking the prices of bonds in the secondary market, unfortunately. Definitely a need to do this though.

Thanks for the informative article!
PSBs are acting like arms of the govt funded by the people.
In the present format, the greenium is a tax.

You’re welcome!

I suspect the government won’t issue too many green bonds anymore. It was
trying them out and couldn’t attract foreign investors, so it will probably
ditch them entirely.

Not sure what are the regulations on the time period of these bonds and why the issuer is issuing them for smaller time period. Indore Municipality said they will invest the green bond in a solar plant but the time period is only 5 years, why not issue the bond for the life of the solar plant or atleast 10 years time and what will they do after 5 years?

Wonder where the GOI will invest the green bonds since there is no direct investment in any green power by the GOI

GOI does release tenders for renewable projects from time to time. The money can go there.

MNRE does release tenders but these are more subsidy amounts towards solar rooftop and pumps. The amounts raised are much larger than the subsidy programs. There are PSUs like NTPC NHPC or SJVN or SECI which directly do tendering and install large green power plants, I think NTPC also is in also process of raising green bonds.

Makes sense. Thanks for the insight!

GOI has informed today that another tranche of Rs 23,764 green bonds are being issued and amounts including the previous tranche will be going towards Railways budget in procuring electric locomotives and metro lines construction !!

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