MNRE May Propose Tax Incentives For Green Bond Buyers

(MENAFN- Live Mint)

New Delhi: In a bid to boost climate finance, the Union ministry of new and renewable energy (MNRE) plans to urge the finance ministry to offer tax incentives to green bond buyers, according to two people familiar with the matter.

The consideration aims to boost investor interest in green bonds, which is necessary to meet the financing requirements for the clean energy targets.

"Though sovereign green bonds were launched a few years back, they are yet to pick up. Now the interest rate of green bonds and other bonds is largely similar. So, there is no incentive for green bond buyers when premiums are low. So, the ministry is looking at ways to make them more attractive and may propose to the finance ministry for some sops in the form of tax rebates to those who invest in green bonds," said one of the two people mentioned above .

Key Takeaways

Green bonds have emerged as a popular investment tool for climate finance globally. They fund projects with positive environmental impact while offering investors returns. These bonds are issued by public, private, or multilateral entities to raise capital for initiatives that contribute to a more sustainable economy and generate identifiable climate, environmental, or other benefits. Green bonds fund projects like renewable energy, energy efficiency, clean transport, conservation, and certified green buildings.

Market evolution

In India, green bonds are issued by the Reserve Bank of India, which are known as sovereign green bonds. State-run financial institutions, including REC Ltd, Power Finance Corp, and Indian Renewable Energy Development Agency (Ireda), are among the major issuers of green bonds in the country, along with corporates.

Saurabh Agarwal, tax partner, EY India, said, "Tax incentives for green bonds would represent a strategic and critical policy tool for India's clean energy transition. By making green bonds more lucrative, the government can effectively channel a significant volume of private capital towards the nation's ambitious sustainability goals."

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He added that the targeted fiscal measure will be instrumental in attracting the additional funding required to promote the energy transition, ensuring that capital markets play a pivotal role in building India's resilient and sustainable future.

Citing Climate Bonds Initiative, a report by The Energy Resources Institute (Teri) last year noted that as early as 2016, India had about $15.7 billion of unlabeled climate-aligned bonds used toward low-carbon transport and renewable energy assets. Officially, India entered the green bonds market in 2015 with Yes Bank issuing the first green bond maturing in 10 years for financing renewable energy projects. Since then, several banks and corporates have entered the market.

Growth potential

The report noted that despite the promising prospects, the issuance of green bonds in India has progressed slowly over the last few years. At the macro level, the Indian bond market is currently in a nascent stage, and Indian green bonds' coupon rates have averaged mainly in the range of 2.75-6% for dollar-denominated issuances, and in the range of 7.5-10% for rupee-denominated issuances. This difference has resulted from currency risk associated with the rupee-greater hedging costs due to the volatility of the currency and low liquidity and trading within the Indian secondary market, it said.

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"For instance, the two tranches of the sovereign green bonds issued by the government of India in 2023 were able to initially obtain a 'greenium' or a price advantage for the local currency issuance-reflecting cheaper financing costs and suggesting a strong appetite for green bonds among domestic investor; but the lack of trading activity and the consequent illiquidity has led to issuance losing its greenium," it said. Greenium or green-premium is the savings made by an issuer due to a lower coupon rate payment to investors on a green bond, compared to conventional bonds.

It added that strategizing policy and market interventions to accelerate the growth of the green bonds market in India requires an understanding of the factors driving the demand and supply of green bonds and the factors enabling their green premium over regular corporate bonds.

With its plan to achieve 500 GW non-fossil power generation capacity by 2030 and net-zero carbon emissions by 2070, stakeholders feel there is immense potential for the green bond market to grow.

India rank

Climate Bonds Initiative, an international non-governmental organization mobilizing global capital for climate action had said in a statement in June this year that India ranks as the fourth-largest emerging market source of aligned green, social, sustainability and sustainability-linked (GSS+) debt globally with cumulative issuance of $55.9 billion by December 2024, up 186% from $21.4 billion in 2021.

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Since January 2023, the Union government has issued eight sovereign green bond tranches totalling ₹47,700 crore ($5.7 billion). The government announced that it would introduce sovereign green bonds in the FY23 budget to raise more capital to curb climate change and for energy transition needs.

Queries mailed to the ministries of new and renewable energy, and finance remained unanswered till press time.

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