It’s time to go green in investments. After ESG funds, now green bonds have made their way into India’s financial landscape. The government on Thursday completed the second tranche of its maiden sovereign green bond offering to raise ₹8,000 crore for green projects. The first tranche comprised the same amount which included the sale of ₹4,000 crore of 5-year (New GOI SGrB 2028) and ₹4,000 crore (New GOI SGrB 2033) of 10-year papers bearing a coupon of 7.10% and 7.29%, respectively. The cut-off yield in the second tranche was set at 7.23% for the five-year green bond and 7.30% for the 10-year green bond.
While retail investors swear by fixed deposits, most of them are unaware of government security (g-sec) bonds which offer similar returns and hold similar risk-profile. This is precisely why the retail participation in sovereign green bonds remained low even as domestic institutional investors such as banks and insurance companies participated in it in droves.
“Retailors can participate in green bond auction via non-competitive segment. 5% of total auction is reserved for the non-competitive segment. In the non-competitive segment along with retailors, Regional Rural Banks (RRBs) and Cooperative Banks are also allowed to participate,” says Sandeep Jethwani, Co-Founder, Dezerv.
“In Jan 2023, the total issue size was ₹8,000 crore and the total bid amount in the non-competitive segment was nearly ₹58.28 crore and the number of bids was only six. Prima-facie majority of the invested amount was from corporates and rural banks only. Retail participation was close to nil,” he adds.
Retail investors can still buy green bonds in the secondary market as these bonds are issued in the demat form. However, it is possible only if existing buyers choose to sell their bonds. One can do it via the secondary market platform (NDS OM) of RBI Retail Direct. One can check out primary issuances of ongoing bonds as well.
How green bonds are different from regular bonds
The funds raised via regular bonds can be used for any purpose. However, green bonds are specifically meant for green projects. “The money raised via sovereign green bonds is compulsorily deployed in projects that help in reducing greenhouse gas emissions and carbon intensity by encouraging resource utilisation that are energy efficient and incentivise bio-diversity and natural ecosystem,” says Vineet Patawari, Co-Founder & CEO StockEdge.
From an investor’s perspective, the difference lies in yields. Green bonds are issued with a premium, known as "greenium” as these bonds don’t possess project-related challenges, hence low-risk. This premium results in a lower yield or return for investors. In India, however, the yields are nearly closer to those of normal bonds. So, if one is willing to invest in environment-friendly projects, one may consider it. “These bonds give the satisfaction that you are doing something for the environment,” says Patawari.
However, investors purely looking at higher returns do have better fixed-income options. “G-sec yields are similar to FD rates, and liquidity is still a big concern for retail investors. That’s why the G-sec option doesn’t excite them. There are many other good quality high yielding secured bonds and mutual fund options available for retailers to consider. Recently SEBI has reduced the minimum face value of bond from ₹10 lakh to 1 lakh, which will increase retail investor participation in the fixed income asset class,” says Jethwani of Dezerv.
Green bonds offer an opportunity to earn sovereign-guaranteed returns while doing one’s bid for the environment. It may not form the core of your fixed-income portfolio but deserve a token presence.
Aprajita Sharma is a freelance journalist and a certified financial planner. She can be reached at @apri_sharma on Twitter and LinkedIn.