Financing Global Transition Through Green Bonds

Green bonds were first issued by the World Bank in 2008 to push for private sector participation in projects contributing to a better environment and mitigating the risks of climate change. The Intergovernmental Panel on Climate Change (IPCC), which includes more than 1,300 scientists from the United States and other countries, forecasts a temperature rise of 2.5 to 10 degrees Fahrenheit over the next century.

Hence, it was essential to have an alternative mode of financing that would attract investors and global institutions’ attention towards projects, specifically catering to environment friendly projects thereby also ensuring that governments globally achieve their commitments in the reduction of emissions of CO2 and greenhouse gases.

The Indian government, in particular, has introduced measures and brought out amendments to regulations to encourage the construction of renewable energy projects. However, the evolution and growth of environment focused projects is mostly dependent on the modes of financing available in the market. In this article, we shall review primarily the laws applicable to green financing.

Types of Green Bonds

Green bonds are regular bonds with the distinction that the money raised from the investors must only be used to finance projects that are environmentally friendly. More precisely, green bonds finance projects that are aimed at renewable energy infrastructure, energy-efficient buildings, clean transportation, and waste management.

There are primarily four types of green bonds, mainly distinguished based on the collateral or security being provided in the issuance of green bonds:[1]

  • Green ‘Use of Proceeds’ Revenue Bond: These types of green bonds are secured by the projects producing income.
  • Green ‘Use of Proceeds’ Bond: These types of bonds are secured by assets.
  • Green Securitized Bond: These types of green bonds are secured by large pools of assets.
  • Green Project Bond: These types of green bonds are secured by the balance sheet and assets of the project.

 

Green Bond Principles

The voluntary best practice guidelines called the Green Bond Principles (GBP) were established in 2014 by a consortium of global investment banks.[2]

The GBP accentuates the required transparency, accuracy and integrity of information that will be disclosed and reported by issuers to stakeholders. The GBP has four core components, which include:

  1. Proceeds must be used for green projects;
  2. Process adoption for project evaluation and selection;
  3. Maintaining transparency in the management of proceeds; and
  4. Reporting of information pertaining to the use of the proceeds.

The GBP is a framework devised with the goal of accentuating the role that global debt capital markets can play with respect to environmental and social sustainability.

In India, the Securities and Exchange Board of India (SEBI) notified a circular dated May 30, 2017, which provides for the Disclosure Requirements for Issuance and Listing of Green Debt Securities in India, and the definition of a green bond has been given under the circular, which is within the outline of the International Capital Market Association’s GBPs with certain deviations.

Evolution of  Green Bonds in India

India’s first green bond was issued in 2015 for renewable energy projects such as solar, wind, hydro, biomass and power by Yes Bank. In the same year, another leading banking institution, Exim Bank of India, issued a five-year, $500 million green bond, which is India’s first dollar-denominated green bond.

Subsequently, Axis Bank[3] launched India’s first internationally listed and certified green bond and raised $500 million to finance climate change projects and solutions around the globe and use the bond proceeds to promote green energy in urban and rural areas, transportation and what is called ‘green-blue infrastructure’ projects in India and abroad. KPMG provided third-party independent assurance as per the requirements of the GBP (established by the International Capital Market Association). [4]

Regulatory Framework Governing Green Bonds in India

In 2017, the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS) defined a “green debt security” (GDS) as debt securities used for funding project(s) or asset(s) falling under any of the following broad categories:

Renewable Energy, Clean Transportation, Sustainable Water Management Systems, Climate Change Adaptation, Energy Efficient and Green Buildings, Sustainable Waste Management, Sustainable Land Use, including Sustainable Forestry and Agriculture, Afforestation, Biodiversity Conservation; and any other categories specified by SEBI.

Issuance of listed green debt securities in India must be in compliance with all the following regulations:

  1. Chapter IX of the SEBI operational circular covers the issue and listing of Non-Convertible Securities (SEBI Operational Circular).
  2. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations).
  3. The SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.

However, there are no specific guidelines mentioned for unlisted green debt securities other than the general requirements for the issuance of unlisted green debt securities.

In the month of February 2022, Finance Minister Nirmala Sitharaman announced in her budget speech that India will issue sovereign green bonds to fund green projects. In FY23, the government will issue sovereign green bonds as part of its borrowing programme. The funds will be used to fund public-sector projects.

In addition to the above, on August 4, 2022, SEBI issued a consultation paper on Green and Blue Bonds as a mode of Sustainable Finance aiming to align with the updated GBP by ICMA and seek public comments on the proposed regulatory framework.

The Ministry of Finance rolled out the Sovereign Green Bonds framework (“Framework”) [5] that has been rated “Medium Green”, with a “Good” governance score by a Norway-based independent second opinion provider, the Center for International Climate Research (CICERO). The issuance of sovereign green bonds will help the Government of India with much needed capital and deploy funds from investors in public sector projects. The investors shall not bear any project related risks. The Government of India shall use the proceeds to finance/refinance projects falling under eligible green projects.

The Framework has provided a list of excluded projects, which include nuclear power generation, landfill projects, hydropower plants larger than 25 MW etc. Any expenditure relating to fossil fuels is excluded. The Green Finance Working Committee, constituted by the Ministry of Finance, will assist in the selection and evaluation of projects. The Framework’s publication will provide much-needed clarity and direction to the government’s initiatives aimed at transforming India into a green economy.

Benefits of Investment in Green Bonds

Green bond investments may lead to sustainable development and achieve the climate change goal, benefitting the environment in the future. Green Bonds will lead to increased funding for emerging sectors such as renewable energy since the Reserve Bank of India has included the renewable energy sector as part of its priority sectors. As a result, banks will have to dedicate a specific portion of their lending book to the priority sector. This will help the credit flow in this sector.

As far as commercial viability is concerned, green bonds typically have a lower interest rate than the loans offered by a commercial bank, which helps to reduce the cost for the issuer or promoter.

Challenges Pertaining to Green Bonds

  1. Green Bonds, especially in the Indian context, are still not very popular as there is a lack of structure and framework and uncertainty about the return on investment.
  2. There are no proper rating guidelines for green bonds or green projects to help investors make their investment decisions and to verify companies’ improvements, which directly impacts the development of the green bond market.
  3. The funds that have diversified investments in various sectors may not find investments in the green sector valuable compared to returns in other non-green projects. There have also been instances where, during the running of the Project, the issuer or promoters have faced queries from the authorities about whether the project falls under the green category or not.

Green Finance

India announced at the COP26 Climate Summit that it will increase its efforts to achieve the goal of net zero carbon emissions by 2070, including doubling its non-fossil energy capacity to 500 gigatonnes. [6] However, there has been growth in green financing in India over the last few years in both the public and private sectors.

It appears that the banks and financial institutions in India are not ready for the green transition as the experience in factoring climate change as a risk factor is not there when undertaking credit appraisals.[7] Even the bond market in India is still evolving, which is confirmed by the fact that green bonds have constituted only 0.7% of the overall bond issuance in India since 2018. More initiatives will be needed from a regulatory perspective to make green bond issuance more attractive by bringing measures that make investments in green bonds attractive as compared to other debt securities in India and in international markets.

Furthermore, as the world’s nations, including the developed world, look to India to lead the global transition, India should take the lead in attracting investments in green finance, which will not only benefit individual investors looking for safe instruments with attractive returns, but will also benefit the country in generating investment.

Leveraging a Healthy Green Bond Market in India

To build a healthy green bond market, one of the most important criteria is to achieve international norms, rules and regulations for green bonds along with a reasonable return on investment. Green financing, as an additional source of funding, must be used by companies and investors to establish projects that reduce the risk of climate change. There is an unprecedented demand for green energy globally, and investments through green financing will become inevitable in the long run.

References:

[1] https://efinancemanagement.com/sources-of-finance/green-bonds

[2] https://www.climatebonds.net/market/best-practice-guidelines

[3] https://cdkn.org/story/feature-india-strengthens-credentials-green-bond-issue#:~:text=The%20Axis%20Bank%20bond%20issue,base%20being%20%27green%27%20investors.

[4] https://home.kpmg/xx/en/home/services/advisory/risk-consulting/internal-audit-risk/sustainability-services/first-green-bond-in-india.html

[5] https://dea.gov.in/sites/default/files/Framework%20for%20Sovereign%20Green%20Bonds.pdf

[6] https://www.outlookindia.com/website/story/india-will-achieve-net-zero-carbon-emissions-by-2070-pm-modis-bold-pledge-at-glasgow-un-climate-summit-cop26/399507

[7] https://www.financialexpress.com/opinion/how-to-get-green-financing-to-take-off/2753083/

 

Image Credits: 

Photo by Towfiqu barbhuiya on Unsplash

Green bonds are regular bonds with the distinction that the money raised from the investors must only be used to finance projects that are environmentally friendly. More precisely, green bonds finance projects that are aimed at renewable energy infrastructure, energy-efficient buildings, clean transportation, and waste management.

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The Energy Conservation (Amendment) Bill, 2022 – A Retort to Increasing Emissions

On August 9, 2022, the Energy Conservation (Amendment) Bill, 2022 (the “Bill”) passed the muster of the Lok Sabha (lower house of the Indian Parliament). The Government of India had identified new areas to achieve higher levels of penetration of Renewable energy and the bill sought to enhance demand for renewable energy at the end- use sectors such as Industry, buildings, transport etc.

What demanded the introduction of the Bill?

Decarbonization. The Bill, which amends the Energy Conservation Act, 2001 (the “Act”), introduces a series of modifications that opens the door for sustainable development. According to Bill’s statement of objects and reasons, it aims to, among other things, promote the use of green fuels and the growing renewable energy sector, ensure industrial energy efficiency, and establish a domestic “carbon market”, and carbon trading scheme to fulfil the commitments made by India at COP-26 (Conference of Parties -26) in Glasgow in 2021.

 

What are the major changes proposed in the Bill?

 

The Penalty


To enhance the effectiveness of the law and create stronger deterrence, the bill introduced stricter enforcement mechanisms. The changes include new penalties and aggravation of existing penalties for violations of certain provisions relating to the efficient use of energy and its conservation[1], use of deceptive names (introduced in the Bill)[2], and provision of information[3].

A new penalty introduced, for instance, is that if a vehicle manufacturer fails to comply with fuel consumption standards, he will be liable to pay an additional penalty (in addition to the penalties he is liable to under the Act) per unit of vehicles sold in the corresponding year, as follows:

  • twenty-five thousand rupees per vehicle for non-compliance with norms up to 0.2 litres per 100 km.
  • fifty thousand rupees per vehicle for non-compliance with norms above 0.2 litres per 100 km.[4]


Carbon Credit Trading


The Bill seeks to reduce carbon emissions by creating a carbon credit trading scheme. The Central Government is empowered under Section 14AA of the Bill to specify such a scheme.

Interestingly, the Act has enumerated a scheme through which energy savings certificates are issued by the Central Government to those plants or industrial units whose energy consumption is less than the prescribed norms and standards. Units that are unable to comply with the set energy consumption norms are entitled to purchase the energy savings certificate to ensure compliance. The industrial units that fail to meet the energy savings targets even after purchasing the energy saving certificates are liable to be punished with a fine as per the provisions of the Act.

To understand how a carbon credit trading scheme would aid in reducing emissions, we must understand what a carbon credit trading scheme is. A carbon credit is a certificate/permit that gives its holder the right to emit a certain amount (usually a tonne) of carbon dioxide. Based on historical emissions, carbon credits are provided to an organisation in a particular sector. If the organisation goes over its allocated amount of carbon credits, then it would have to purchase more credits from the carbon market, where carbon credits are bought and sold. And the price of the carbon credit is determined by the market forces of supply and demand. Additional factors that influence the pricing of carbon credits include regulations established by the government, international climate change protocols, emission trading schemes, and a carbon tax. This scheme or system of buying and selling carbon credits is, in simplistic terms, a carbon trading scheme. Hence, the carbon trading scheme aims to reduce carbon/greenhouse gas emissions by assigning a financial cost for causing pollution. This implies that for such units, carbon emissions will now be equivalent to any other capital investment like raw materials or labour.


Expanding, Enlarging, and Empowering


  1. Vehicles and Vessels– The Act, under Section 14, empowers the Central Government to set standards to enable efficient use of energy and its conservation for any equipment, appliance that consumes, generates, transmits, or supplies energy. The Bill seeks to include vehicles (as defined under the Motor Vehicles Act) and vessels into the scope of Section 14. Corresponding provisions for penalties have also been included in the Bill for violations of the provisions of the Act.
  1. Buildings- Under the Act, the Central Government and the Bureau of Energy Efficiency have the authority to lay down energy conservation standards for buildings, ascertained in terms of area. The Bill seeks to amend the provision to the effect that, now, the Bureau and the government shall set energy conservation and sustainable building codes, that shall elaborate upon standards for energy efficiency and conservation, use of renewable energy, and other requirements for green buildings.
  1. Residential Buildings– The energy conservation code in the Act has only been made applicable to commercial buildings. The Bill seeks to include residential buildings along with commercial buildings under the scope of the Code. As per the amended provision of the Bill, the State Governments have also been empowered to lower the load threshold. By bringing residential buildings under the scope of the energy conservation code, the responsibility for ensuring mindful energy consumption would effectively fall on citizens as well as industries.
  1. Composition of BEE Governing Council– The governing council of the Bureau of Energy Efficiency (BEE) created under the Act has twenty, not exceeding twenty-six members, which is intended to be expanded to thirty-one, but not exceeding thirty-seven members by the Bill. This expansion is likely intended to improve bureaucratic efficiency in the administration and enforcement of the provisions of the Act.
  2. State Electricity Regulatory Commission– The Act empowers the Bureau of Energy Efficiency to make regulations as necessitated, with the approval of the Central Government[5]. The Bill also envisages empowering the State Commission to make regulations for discharging its functions under this Act[6].


Concluding Thoughts


The amendments that are envisioned under the Bill are strides in the right direction for enabling better regulation of carbon emissions and promoting the objective of sustainable development by encouraging a switch from fossil fuels to renewable energy sources. While the carbon trading scheme under the Bill has the right intentions, it is still lacking in clarifications pertaining to the market structure and incentive scheme for facilitating carbon trading in the country.

As with any other law, strict enforcement and alignment of all the relevant stakeholders contingent on the success of proposed policies under the Bill would be key in ensuring that India achieves its goals towards facilitating a steady shift from fossil fuels to promotion of new and renewable energy (wind, solar, etc.), accomplishes milestones contemplated in the National Green Hydrogen Mission, and actualizes its vision to meet 50 per cent of its energy requirements from renewable sources by 2030, as envisaged under the ‘Panchamrit’ strategy announced at the COP 26 conference in Glasgow.  

References:

[1] Section 14 clause (c) or clause (d) or clause (h) or clause (i) or clause (k) or clause (l) or clauses (n) and (x); and Section 15 clause (b) or clause (c) or clause (h) of the Act.

[2] Sub-section (1) of Section 13A of the Bill.

[3] Section 52 of the Act.

[4] Second proviso to Section 26 (2) of the Bill.

[5] Section 58 of the Act.

[6] Section 13 of the Bill.

Image Credits: Photo by catazul from Pixabay 

The amendments that are envisioned under the Bill are strides in the right direction for enabling better regulation of carbon emissions and promoting the objective of sustainable development by encouraging a switch from fossil fuels to renewable energy sources. While the carbon trading scheme under the Bill has the right intentions, it is still lacking in clarifications pertaining to the market structure and incentive scheme for facilitating carbon trading in the country.

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Income Tax Returns for AY 2020-21: Ready Referencer

With the extended time limit for filing of Income Tax Return (for AY 2020-21), u/s. 139(1), without late fees, for Non-Audit cases and for Non-Corporate assessees of 31st December 2020 fast approaching, given below is a quick guide for ready reference of some key changes that have been made in the respective Income tax return forms for this year.

Further, the conditions and features for eligibility of forms that are applicable for filing the correct income tax returns are also specified as follows:

Key Procedural Changes:

  • ITR 1 to ITR 4 can be filed using PAN or Aadhar by Individuals.
  • The submitted ITR forms display the ITR-V with a watermark ‘Not Verified’ until the same is verified either electronically by EVC or by sending the same via post after manual signing.
  • The unverified form ITR-V will not contain any income, deduction and tax details. The unverified form will only contain basic information, E-filing Acknowledgement Number and Verification part.
  • The unverified acknowledgement is titled as ‘INDIAN INCOME TAX RETURN VERIFICATION FORM’ & final ITR-V is titled as ‘INDIAN INCOME TAX RETURN ACKNOWLEDGEMENT’.
  • Return filed in response to notice u/s. 139(9), 142(1), 148, 153A, and 153C must have DIN.
  • There is a separate disclosure for Bank accounts in case of Non-Residents who are claiming income tax refund and not having a bank account in India.

COVID related Changes:

  • The Government had extended the time limit for claiming tax deduction u/CH VIA to 31st July 2020, and the details of the same need to be reported in Schedule DI (details of Investment).
  • The time limit for investing the proceeds or capital gains in other eligible assets, so as to claim exemptions u/s 54/ 54B/ 54F/ 54EC, had been extended to 30th September 2020.
  • Penal interest u/s. 234A @ 1% p.m., where the payments were due between 20-03-20 to 29-06-20 and such amounts were paid on or before 30-06-20, had been reduced to 75%, vide ordinance dated 31-03-20.
  • Period of forceful stay in India, beginning from quarantine date or 22-03-20 in any other case up to 31-03-20, is to be excluded, for the purpose of determining residential status in India.[1]

Consequences of Late filing of Return of Income:

  • Late Fees u/s. 234F of INR. 5,000 up to 31.12.20 and INR. 10,000 up to 31.03.21. In case of total income up to 5 Lacs, the penalty is INR. 1,000.
  • Penal Interest u/s. 234A @ 1% per month
  • Reduced to 75%. vide Ordinance dated 31.03.20, where the payments were due between 20.03.20 to 29.06.20, and such amounts were paid on or before 30.06.20.
  • Vide CBDT Notification dt 24.06.2020, no interest u/s 234A if Self-Assessment tax liability is less than 1 Lac and the same has been paid before the original due date.
  • In case of a belated return, loss under any head of Income (except unabsorbed depreciation) cannot be carried forwarded.
  • Deduction claims u/s. 10A, 10B, 80-IA, 80-IB, etc would not be allowed.

Consequences of Late filing of Return of Income:

  • Late Fees u/s. 234F of INR. 5,000 up to 31.12.20 and INR. 10,000 up to 31.03.21. In case of total income up to 5 Lacs, the penalty is INR. 1,000.
  • Penal Interest u/s. 234A @ 1% per month
  • Reduced to 75%. vide Ordinance dated 31.03.20, where the payments were due between 20.03.20 to 29.06.20, and such amounts were paid on or before 30.06.20.
  • Vide CBDT Notification dt 24.06.2020, no interest u/s 234A if Self-Assessment tax liability is less than 1 Lac and the same has been paid before the original due date.
  • In case of a belated return, loss under any head of Income (except unabsorbed depreciation) cannot be carried forwarded.
  • Deduction claims u/s. 10A, 10B, 80-IA, 80-IB, etc would not be allowed.

Vide CBDT Notification dt 24.06.2020, no interest u/s 234A if Self-Assessment tax liability is less than 1 Lac and the same has been paid before the original due date.

  1. Section 5A: Apportionment of income between spouses governed by the Portuguese Civil Code.
  2.  115BBDA: Tax on dividend from companies exceeding Rs. 10 Lakhs; 115BBE: Tax on unexplained credits, investment, money, etc. u/s. 68 or 69 or 69A or 69B or 69C or 69D.
  3. Inserted in sec 139(1) by Act No. 23 of 2019, w.e.f. 1-4-2020:

Provided also that a person referred to in clause (b), who is not required to furnish a return under this sub-section, and who during the previous year:

  • has deposited an amount or aggregate of the amounts exceeding one crore rupees in one or more current accounts maintained with a banking company or a co-operative bank; or
  • has incurred expenditure of an amount or aggregate of the amounts exceeding two lakh rupees for himself or any other person for travel to a foreign country; or
  • has incurred expenditure of an amount or aggregate of the amounts exceeding one lakh rupees towards consumption of electricity; or
  • fulfils such other conditions as may be prescribed,

Shall furnish a return of his income on or before the due date in such form and verified in such manner and setting forth such other particulars, as may be prescribed.

4. Section 57: Deduction against income chargeable under the head “Income from other sources”.

5. Schedule DI: Investment eligible for deduction against income (Ch VIA deductions) to be bifurcated between paid in F.Y.19-20 and during the period 01-04-20 to 31-07-20.

6.High-value Transaction: Annual Cash deposit exceeding Rs. 1 crore or Foreign travel expenditure exceeding Rs. 2 Lakhs, Annual electricity expenditure exceeding Rs. 1 Lakh.
7.Schedule 112A: From the sale of equity share in a company or unit of equity- oriented fund or unit of a business trust on which STT is paid under Section 112A.

8. 115AD(1)(iii) proviso: for Non-Residents – from the sale of equity share in a company or unit of equity-oriented fund or unit of a business trust on which STT is paid under Section 112A.
9. Section 40(ba): any payment of interest, salary, bonus, commission or remuneration paid to a member in case of Association of Person (AOP) or Body of Individual (BOI).

10. Section 90 & 90A: Foreign tax credit in cases where there is a bilateral agreement; Section 91: Foreign tax credit in cases of no agreement between the countries.

[1] Circular No 11 of 2020 dated 08th May 2020.

References

Image Credits: Photo by Markus Winkler from Pexels

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