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.

Related Posts

POST A COMMENT

Budget 2022: Light at the End of the Tunnel or Dark Clouds for MSMEs?

The Union Budget 2022-23 highlighted that the Micro Small and Medium Enterprises (MSME) sector is a vital pillar of the country’s economy. It contributes to approximately 45 per cent of India’s total manufacturing output, 40 per cent of exports, and almost 30 per cent of the national GDP. The COVID-19 pandemic proved to be a major blow to the sector, especially to the small enterprises as they were abruptly forced to get on the tech wagon.[1] The unforeseen and instant digitization resulted in mounting costs at a time when they could barely sustain themselves. In light of this, the sector put their faith in the Union Budget for the FY 2022-23 for support, recovery and development.

Expectations of the MSME Sector from the Budget 

 

Previously, the government had introduced the Emergency Credit Line Guarantee Scheme (ECGLS) to provide support to the micro, small and medium enterprises amidst the pandemic. This led to an increase in the expectations of the MSME sector from the 2022 Budget. They anticipated that the government would provide benefits such as simplifying taxation procedures, credit lending, and investment incentives.

 

Changes in the Credit Framework

 

Under the aforementioned ECGLS scheme, MSMEs enjoyed a reduction in the interest rates on the loans and an enhancement in the loan procurement process.[2] This was well-received as it helped the MSMEs to recover from the clutches of the pandemic. 

It is pertinent to note that occasionally the  MSMEs have to extend their credit lines and bear the brunt of delayed payments.[3] This adversely impacts the growth of their business. Due to this, they need measures to facilitate their business decisions by improving the credit lending framework.

Due to the pandemic, a number of MSMEs were unable to utilize the benefits provided by the government. This was primarily because, either the enterprises weren’t registered as MSMEs or they did not have a secured bank account.

The cash flow was also largely impacted by COVID-19. To minimize the challenges put forth by this issue, provisions for banks to lend more to MSMEs were required. This in turn would have ensured a steady supply with the NBFs and would have further enabled them to lend credit to MSMEs.

Further, it was expected that the Special Credit Linked Capital Subsidy Scheme, which was announced in 2021, would extend to enterprises with a turnover of fewer than 5 crores. The institutional credit provided under the scheme would have allowed the smaller enterprises to procure equipment for their technological development.  Ergo, certain key changes were expected in the credit framework. 

It had also been suggested that retail loans to MSMEs should be treated differently from corporate loans.[4] This suggestion came in light of the Reserve Bank of India’s notification in November, where it clarified its asset classification norms. Under this notification, the RBI asked the lenders to classify the borrower accounts as a Special Mention Account (SMA) and a Non-performing Asset (NPA) as per the day-end process.[5]

The budget was also expected to come to grips with the problem of willful defaulters and rising NPAs in the given sector by introducing appropriate policies.

 

Reduction of Taxes

 

The government was expected to provide a considerable reduction in duties and taxes. This would have encouraged the MSMEs to invest more in capital goods and in turn produce more. To further tap the manufacturing capabilities of the MSME sector, it was suggested that the Long Term Capital Gains Tax on Private Equity should be reduced. Additionally, more subsidies should have been introduced on the imports of Capital Goods.[6] The MSMEs also hoped for GST rationalization and some relaxation in the compliance burden. This would have helped in increasing the ease of doing business.[7]

 

Incentives for Investment

 

For the inducement of investment in the sector, the MSMEs pinned their hopes on the government to provide incentives such as tax benefits for the angel investors and contrive a policy to ensure that the sector is adequately funded.[8]

 

Steps Towards Digitization

 

Furthermore, it was suggested that the government should have aimed to bring the digital revolution in the backward areas as well.  For this, the government should have promoted digital payments through certain incentives. Further, it was expected that the government would provide technological solutions to enable the MSMEs to increase their production and compete better.

 

Other Incentives

 

To address the environmental concerns, steps to promote low carbon manufacturing among the MSMEs were awaited. The 2022 Budget was expected to provide support in this regard. This would have provided the Indian economy to tackle environmental concerns as well as enable the  MSMEs to explore innovative solutions.[9]

 

Budget 2022: A Beacon of Hope for the MSME Sector? 

 

In the 2022 Budget, critical factors concerning MSMEs were targeted. These include raw material, credit access, and input costs. Further, infrastructure and skill development support, digital services support, ease of doing business was assured and facilitation of ease of doing business was announced.

 

Input Costs

 

A reduction in the import tariffs on inputs was announced along with an increase in the tariffs on the import of end products. This would protect the MSMEs and make them more competitive. While there was a reduction in tariffs including customs duty and exemptions on input like steel scrap, a 7% duty on finished goods was announced. Further, the import tariffs for industries like textiles, leather products, and handicrafts were also reduced. Lastly, the steel scrap customs duty exemption, which was given last year has been extended for another year, providing relief to MSME steel producers.[10] Moreover, certain anti-dumping and countervailing duty on stainless steel and coated steel flat products, bars of alloy steel and high-speed steel were revoked in larger public interest considering prevailing high prices of metals. On the other hand, customs duty on umbrellas was raised to 20 per cent and exemption to parts of umbrellas was withdrawn. 

Removal of exemption on items which are or can be manufactured in India and providing concessional duties on the raw material that goes into the manufacturing of intermediate products will go many a step forward in achieving our objective of ‘Make in India’ and ‘Atmanirbhar Bharat. 

 

Access to Credit

 

The MSME sector would now be facilitated with an additional credit of Rs 2,00,000 crore under the credit guarantee scheme. The Emergency Credit Line Scheme has been extended till March 2023 and an increase in the guarantee cover has been announced, from Rs 50,000 crore to Rs 5,00,000 crore with an exclusive cover earmarked for hospitality.[11] Moreover, an announcement of the use of the post office infrastructure for 1.5 lakh additional physical banking facilities was made. Additionally, it was announced that 75 remote rural districts would now have digital banking units set up by commercial banks.[12] Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) scheme will be revamped with funds infusion. This will stimulate additional credit of INR 2 lakh crore for MSEs and boost employment opportunities.

 

Infrastructure

 

Investments in multi-modal logistics parks and cargo terminals under the Gati Shakti scheme would facilitate domestic as well as global market connectivity. Thus, bringing down the cost of logistics for the sector and boosting export competitiveness. 

 

Start-ups

 

An announcement pertaining to the rationalization of capital gains surcharge was made, boosting the growth of startups. Individuals and FPOs would now be strengthened through the NABARD initiative.[13]

 

Skill Development

 

The national skill qualification framework will be oriented as per the varied industry needs. Hence, a positive initiative to bridge the gap of skilled human resources within the sector. 

 

Digital Services for the MSME Sector

 

The Union Budget 2022 declares that Udyam, e-Shram, National Career Service (NCS) and Aatamanirbhar Skilled Employee Employer Mapping (ASEEM) portals will be interlinked, and their spectrum will be broadened. They will now serve as portals with live, organic databases, delivering G2C, B2C, and B2B services. These services will relate to credit facilitation, skilling, and recruitment to formalise the economy and improve entrepreneurial opportunities.

 

Efficiency and Competitiveness

 

For MSMEs to become more efficient, the Racing & Accelerating MSME Performance (RAMP) program with the outlay of Rs 6000 crore over 5 years will be rolled out, It aims to help the MSME sector to inculcate factors such as resilience, competitiveness and efficiency.

 

Surety Bonds in Public Procurements 

 

To reduce indirect costs for suppliers and work contractors, the use of surety bonds as a substitute for bank guarantees will be made acceptable in government procurements.

 

Concessional Corporate Tax 

 

Extension of the concessional corporate tax rate of 15 per cent by one more year — till March 2024 for newly incorporated manufacturing companies has also been rolled out. 

 

PLI for Solar PV Module 

 

Budget 2022 allocated an additional Rs 19,500 crore to boost the manufacturing of solar PV modules under the production linked incentive scheme. This is to facilitate domestic manufacturing for the ambitious goal of 280 GW of installed solar energy capacity by 2030, an additional allocation of Rs 19,500 crore for Production Linked Incentive for manufacturing of high-efficiency modules, with priority to fully integrated manufacturing units from polysilicon to solar PV modules, will be made.[14]

From the above discussion, it can be seen that the 2022 Budget did oblige with the expectations of the MSME Sector. There was an increase in the budgetary allocation for the given sector. The 2022 Budget successfully addressed certain key issues such as the lacuna in the credit framework, deficiency of infrastructure, etc.

However, at the same time, it neglected a number of key issues. It ignored the needs of the unregistered MSMEs, which almost comprise 90% of the sector.[15]Further, there was a reduction in the funds allocated to key schemes. There was no allocation under the 2022 Budget for the  Credit Linked Capital Subsidy and Technology Scheme. Further, a cut of 75.56%  has been made in the Technology Upgradation and Quality Certification.[16]

The Budget failed to go beyond the schemes while exploring ways to increase the infusion of capital in the sector. In spite of the existing schemes, many enterprises are still struggling to sustain themselves. Therefore, an additional boost should have been provided by the government. 

The government also failed to tackle increased unemployment in the sector. No measures were taken to extend the benefits of the Insolvency and Bankruptcy Code to proprietorship firms. This was a serious drawback as the government failed to take the interest of more than ninety per cent of MSMEs into account amidst the pandemic.[17]

 

Some Hits Some Misses

 

The pandemic severely disrupted the MSME sector and in effect, the economic output of the country. The 2022 Budget did bring a ray of hope for the sector through schemes and incentives that shall foster a favourable ecosystem for new ventures and businesses. However, it paid little or no attention to the crucial issues that persisted. Failure to infuse funds into the market,  absolute abandonment of unregistered MSMEs and schemes aimed at supporting new enterprises while failing to extend plans to revive the existing units are some of the issues that demand a more insightful plan. Even though financial assistance extended during the pandemic did resolve the immediate sustenance issues, mounting loans and additional dues are some issues that need immediate redressal. Thus, it can be seen that India still needs a holistic approach to foster the growth of MSMEs, particularly the ones reeling under the debt of the pandemic.

References:

[1] https://economictimes.indiatimes.com/small-biz/sme-sector/why-technology-is-the-only-path-to-sustainedgrowth-for-msmes/articleshow/80281133.cms

[2] https://www.eclgs.com/

[3] https://economictimes.indiatimes.com/small-biz/sme-sector/what-can-msmes-expect-from-budget-2022/articleshow/89238615.cms

[4] https://www.financialexpress.com/industry/sme/msme-eodb-msme-budget-2022-expectations-three-key-areas-experts-say-fm-nirmala-sitharaman-must-address/2417204/

[5] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/117MCIRACP41D584957C3A43BCACEBC391B91A3FA0.PDF

[6]  http://www.businessworld.in/article/Expectations-Of-The-MSME-Sector/28-01-2021-370928/

[7] https://zeenews.india.com/economy/budget-2022-expectations-msmes-hope-for-gst-tds-reductions-relaxation-in-compliances-2429221.html

[8] https://economictimes.indiatimes.com/small-biz/sme-sector/what-can-msmes-expect-from-budget-2022/articleshow/89238615.cms

[9] https://indianexpress.com/article/business/budget/union-budget-2022-expectations-live-updates-what-market-experts-companies-industry-bodies-india-inc-economists-expect-7738854/

[10] https://economictimes.indiatimes.com/small-biz/sme-sector/govt-reduces-customs-duty-on-certain-steel-items-to-provide-relief-to-msmes/articleshow/80630835.cms?from=mdr

[11] https://economictimes.indiatimes.com/small-biz/sme-sector/budget-2022-23-eclgs-extended-to-march-2023-total-cover-up-to-rs-5l-crore/articleshow/89266189.cms?from=mdr

[12]  https://www.indiabudget.gov.in/doc/Budget_at_Glance/budget_at_a_glance.pdf 

[13] https://www.indiabudget.gov.in/doc/Budget_at_Glance/budget_at_a_glance.pdf

[14] https://knnindia.co.in/news/newsdetails/msme/msme-minister-launches-integrated-services-of-udyam-registration-portal

[15] https://www.financialexpress.com/budget/msme-eodb-budget-2022-focuses-on-ease-of-doing-business-for-msmes-but-fails-to-address-90-of-the-unorganised-sector/2423280/

[16] https://economictimes.indiatimes.com/small-biz/sme-sector/budget-2022-23-budgetary-allocation-rises-for-msmes-but-some-key-schemes-see-a-cut/articleshow/89276388.cms

[17] https://www.financialexpress.com/budget/msme-eodb-budget-2022-focuses-on-ease-of-doing-business-for-msmes-but-fails-to-address-90-of-the-unorganised-sector/2423280/

Image Credits: Image by

Image by eko pramono from Pixabay 

The 2022 Budget did bring a ray of hope for the sector through schemes and incentives that shall foster a favourable ecosystem for new ventures and businesses. However, it paid little or no attention to the crucial issues that persisted. Failure to infuse funds into the market,  absolute abandonment of unregistered MSMEs and schemes aimed at supporting new enterprises while failing to extend plans to revive the existing units are some of the issues that demand a more insightful plan.

Related Posts

POST A COMMENT

Private Equity Investment in Sports: The Off-centre Opportunity

                 “The field of sport is akin to a jigsaw puzzle, where many pieces need to come together to produce a long-term successful athlete. The athlete’s success depends not only on his/her talent but also on the support system s/he receives”

                                                                                                                                                                                        –Sudha Murthy

Earlier this year CVC Capital Partners agreed to a USD 3 billion deal with Spain’s soccer league, La Liga, in return of 10% of all media returns for the next 50 years. Closer to home, in a dramatic turn of events, when the BCCI invited bids for two new Indian Premier League (IPL) teams, a windfall of INR 12,715 crores was definitely unforeseeable – the involvement of the global private equity firm, CVC Capital Partners, to “take over” Ahmedabad added to the mystique.

For the past 13 years, IPL has been the benchmark for exemplifying what private investments can do to a sport and has opened the doors to attracting more corporate investments in other sporting ecosystems. For instance, handball is set to hit India’s television screens next year as the Premier Handball League (PHL) supported by Bluesport entertainment under the patronage of the Handball Federation of India[1].

The Indian Super League (ISL) has also successfully managed to establish itself in terms of viewership and engagement. Furthermore, sports such as hockey, kabaddi, wrestling, badminton and volleyball have managed to garner a significant following and enthusiasm in the country their respective sports league. Owing to stellar performances in the Tokyo Olympics by the likes of Neeraj Chopra, Mirabai Chanu, P.V Sindhu and Ravi Kumar Dahiya, brands are reeling to sign them, driving commercial valuations and impact associated with their respective sports onto a profitable highroad. Hence, India is an ideal ground for significant investments in the field.

Up until a few years back, the involvement of leading conglomerates like JSW, Edelweiss Group, Embassy Group and Infosys had always been purely philanthropic in nature.

However, with the visible shift in trends, the next consideration is whether private equity investment in sports would be a slam dunk!

 

Factors Driving Valuation in Sports Teams and Leagues

Odisha FC, nicknamed the Kalinga Warriors, under the ownership of a global shipping giant, is the most valuable club in the ISL standing at an impressive INR 433.26m. In a more impressive feat, the Pro Kabaddi League, since its inception in 2014, has managed to rank above the ISL and stand in close competition with the IPL in terms of viewership. In 2015, Vivo signed a 300-crore engagement to become the league’s title sponsor. In 2018, over 70 sponsors competed to invest in the league[2]. The previous edition of the event was sponsored by Dream11, while big names like Tata Motors and Honda also retained their sponsorship[3]. Additionally, with the new class of spenders from the Fintech and EdTech industries like CRED, Unacademy and Upstox making their presence felt in the roaring business of cricket, it is evident that private equity investment and sports are definitely a match!

In alignment with the abovementioned dynamics, the following factors seem to be responsible for driving valuations in these sports teams and leagues:

  1. Scarcity and the inherent elite status

Between IPL, ISL and Pro-Kabaddi, there are only 33 teams across the board. Likewise, there are only six significant sporting leagues that show potential for lucrative returns in the country[4]. On the international front, according to the PitchBook data[5] in the United States, there are only 151 teams across the NFL, NBA, MLB, MLS and NHL. Similarly, there are only 98 teams in the Premier League, Serie A, Bundesliga, Ligue 1, and La Liga. Hence, since the supply is limited, the demand remains high, which leads to sky-rocketing prices and bigger returns!

  1. Monopoly

In addition to the limited available options, these leagues rarely expand. Hence, from an investor’s point of view, working in the confines of a marketplace with limited competition and foreseeable projection of factors like market share and revenue is easier.

  1. Illiquidity

Buying shares of a sports team is challenging since most teams are not listed on the stock market. Options like affiliations and exchange-traded funds are currently the only means through which individuals can participate in the functioning of their favourite teams. Therefore, when shares are not traded frequently and the ownership is complex, buyers are keen to pay a premium if and when the opportunity arises.

  1. Fans and emotions

For private equity firms, financial profits and ancillary gains are definitely driving factors. However, when it comes to sports, followership and emotions play a significant role. Andrew Laurino of the PE firm, Dyal, pointed out once that it is more fun to own your favourite sports team than root for a chemical plant.[6]

  1. Money

Considering the financial dynamics and broadcasting revenues involved, sports do offer a fertile ecosystem of astronomical returns. For instance, Sony acquired the media rights for IPL for the first 10 years for approximately 8,000 crores. For the next 5 years, Star India bagged the media rights for 16,000 crores. Media rights for IPL are scheduled to go up for auction in 2023[7] with an expectation of the deal closing in at over 30,000 crores[8]!

 

Key Trends Favouring Private Equity Investments in Sports

The sports industry is expected to grow tremendously in the year 2022, by reaching a valuation of USD 614.1 billion globally. The Asia-Pacific and the Middle East are expected to become the fastest emerging markets in the sports industry, with annual growth rates of 9.04% and 6.2% respectively, in the next few years[9].

The key trends that are expected to drive considerable growth and offer new investment opportunities are:

  1. Because of the pandemic’s rapid integration of technology into all aspects of life, the field of sports is witnessing never-before-seen consumer behaviour. Leveraging a combination of virtual reality, new streaming media and mobile technology, the industry has expanded its experience to a global audience and paved the way for new advertising revenues.
  2. The fitness industry is booming, driven by the new age of health-conscious consumers. The trend has resulted in a growth in participatory sports.
  3. The Indian gambling industry forecasts revenue growth that could hit INR 118.8 billion in 2023[10]. Consequently, the fantasy sports and betting industries are undergoing significant regulatory changes, which are set to streamline the industry and offer more substantial and comprehensive investment opportunities.
  4. Similarly, esports is set to experience a positive movement owing to the development of more sophisticated VR tools.

Since participation in sports will experience growth from traditional and newer channels, investment in associated ancillary industries seems lucrative.  

 

Issues With Private Equity Investments in Sports

Unlike other countries, India lacks a robust, centralized, and comprehensive regulatory framework governing the sport, despite the recent changes (being) introduced over the last decade in this regard. Issues pertaining to competition law, betting, anti-competitive actions, match-fixing, and dispute resolution are dealt with varying legislative frameworks spanning from Torts to criminal law.

Investors are organising collaborations with teams and sporting authorities to access a broader consumer cohort since cemented footholds and sponsorship guarantee greater returns on investment. Often, such sponsorship and advertising campaigns during a sporting event, or associated with any sportsperson, lead to ambush marketing by other competing brands. Moment marketing is another factor that treads upon the intellectual property rights of the players and dents the commercial gains of the investors.

It is therefore prudent to formulate a competent legal framework to curb doping, betting, match-fixing, ambush marketing, sports-related arbitration, and mediation and dispute resolution. There is a pressing need for cohesive and specific legislation comprehensively covering sports in India to be implemented.

Further, at a time when private investment activity in sports is moving away from CSR and philanthropic objectives and short-term collaboration and involvement, it is pertinent to ensure that the regulatory framework aligns with the commercial interests of investors while upholding the integrity of sports. The absence of the same can and will dissuade significant private party involvement in the area.

While there are still obstacles to be overcome, the prospects for sports are evident, and successful case studies have already begun to support the investment thesis. Investors and sporting organisations must be aware of possible hazards, but under the proper circumstances, the partnership has the potential to produce radical change and growth in the sector.

References: 

[1] https://www.thehindubusinessline.com/news/national/i-day-special-sports-gets-a-corporate-push/article35915385.ece

[2] https://newsable.asianetnews.com/sports/pro-kabaddi-league-and-ipl-a-tale-of-the-two-most-successful-sporting-leagues-in-india-ayh-qpp9ow

[3] https://thebridge.in/kabaddi/how-pro-kabaddi-change-face-sport-india-25937

[4] https://www.financialexpress.com/sports/from-ipl-to-isl-sports-leagues-in-india-to-watch-out-for/2337628/

[5] https://pitchbook.com/news/articles/private-equity-sports-investing-deals-strategy

[6] https://www.institutionalinvestor.com/article/b1tckcs3y46zw4/Private-Equity-Has-Definitively-Entered-the-World-of-Professional-Sports-Here-s-What-Comes-Next

[7] https://www.indiatoday.in/sports/cricket/story/bcci-could-earn-up-to-5-billion-from-ipl-broadcasting-rights-1867693-2021-10-21

[8] https://www.exchange4media.com/ipl-news/next-five-year-ipl-media-rights-to-cost-rs-24000-crore-rs-40000-crore-115794.html

[9] https://www.torrens.edu.au/blog/why-sports-industry-is-booming-in-2020-which-key-players-driving-growth#.YZyRHNBBxPZ

[10] https://www.helplinelaw.com/business-law/LSOFSI/legal-status-of-online-fantasy-sports-in-india.html

 

 

 

 

 

Image Credits:  Image by Pexels from Pixabay 

At a time when private investment activity in sports is moving away from CSR and philanthropic objectives and short-term collaboration and involvement, it is pertinent to ensure that the regulatory framework aligns with the commercial interests of investors while upholding the integrity of sports.

Related Posts

POST A COMMENT