Sustainable finance and GSS+ bonds: State of the Market and Developments

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– Vinod Kothari and Payal Agarwal | corplaw@vinodkothari.com

The topic of sustainable finance has become as critical as sustainable development, since finance is the prerequisite for sustainable development. “Finance can play a leading role in allocating investment to sustainable corporates and projects and thus accelerate the transition to a low carbon and more circular economy. Moreover, investors can exert influence on the corporates in which they invest.  In this way, long-term investors can steer corporates towards sustainable business practices.”[1] Hence, there is momentum towards organising funds and resources to transition from low energy efficiency to high energy efficiency, or renewable energy devices.

The expression “sustainable finance” is broader, as it encompasses the use of ESG considerations in financing decisions.[2] However, sustainability bonds are capital market instruments issued with a stated end-use. The term GSS+ bonds, which has recently been much in vogue, has G, S, S and then augmented by the + sign. The components of “GSS+” are as follows:

G : Green

S: Social

S: Sustainability

+ :  Other labeled bonds, particularly, transition bonds, and depending on the usage, may also include sustainability-linked bonds.

The other labeled bonds may also include blue bonds, gender bonds, climate bonds, yellow bonds etc., although the same may already be covered under one of the components of the GSS bonds. For instance, blue bonds are taken as a part of green bonds, and gender bonds are taken as a part of social bonds.

GSS+ bonds are also called “thematic” or “labeled” bonds, with the use of their proceeds linked with the respective theme represented by such bonds. These expressions may be somewhat overlapping[3].

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India to bring its debutante sovereign green bond

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– Vinod Kothari | vinod@vinodkothari.com

This version: 31st January, 2023

Following the Sovereign Green Bond framework issued by the Govt of India, and in accordance with the calendar of events issued by RBI, the first tranche of the sovereign green bonds has been successfully issued by the Govt of India. Remarkably, the bonds achieved a greenium of 6 basis points against the expected 2-3 basis points, with the issue selling at a 5-6 basis points lower yield than the sovereign yield of similar tenure. The issuance was more than four times oversubscribed. The five-year bond was priced at 7.10% and 10-year bond at 7.29%, as per the auction results released by RBI. Indian government bonds with the same maturity period were trading at a yield of 7.16% and 7.35%, respectively, during the relevant period.

After the launch of the Sovereign Green Bond framework in November 2022, India has made its fast move for debuting with a Rs 16,000 crore green bond issuance, in two tranches,  in January and February 2023, according to an RBI announcement. The proceeds will be deployed in public sector projects which help in reducing the carbon intensity of the economy. The details of such projects are not immediately available; however, going by settled Green Bond Principles , which has also been adopted by India’s own sovereign framework, these projects will be identified and ascertainable disclosed by the issuer in the offer documents[1].

The GoI green bonds will qualify as SLR securities. They will also be available for investment by non-residents on automatic route. There are two maturities – 5 years, and 10 years, each with a value of Rs 8000 crores.

Green bonds are a part of a larger category of sustainability finance instruments, including social, sustainability, transition or other various thematic bond issuances. Green bonds constitute the largest components of the so-called GSS+ bonds.

Green bonds are issued by financial sector entities, direct users as also by sovereigns. The issuance by sovereigns, such as the Government of India in the present case, is fair recent – Poland is said to be the first country in 2016 to have issued a green bond.

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2022 Wrapped Up: Regulatory review of corporate law developments

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– Payal Agarwal, Assistant Manager (payal@vinodkothari.com)

2022 has been a relatively stable year when it comes to Companies Act, save changes in the forms and filing procedures with increasing online processes, there has been significant traction on the part of SEBI. While Structured Digital Database (SDD) remained the buzzword for the listed entities with the stock exchanges requiring them to submit quarterly compliance certificates, the stress for proper controls on insider trading remained the focal point. For social enterprises, a landmark development was the introduction of the concept of Social Stock Exchanges, which seems to be shortly getting into operational mode.

We have tried to briefly cover the major developments in corporate laws during the year 2022. You may also refer to our brief discussion of the same in this youtube video. For updates relevant to the financial sector including the overseas investment norms, refer 2022 in retrospect: Regulatory activity in the financial sector. You may also refer to our quick round-up of regulatory developments in IBC in the year 2022.

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Regulatory framework for Online Bond Platform

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– Abhirup Ghosh, Principal Advisor | abhirup@vinodkothari.com

Regulatory Framework for Online Bond Platform

Securities and Exchange Board of India (‘SEBI’) on November 14, 2022, notified the circular, ‘Registration and regulatory framework for Online Bond Platform Providers’[1] (‘Circular’) for regulating online bond trading platforms, applicable immediately. The notification comes in the backdrop of several unregulated online platforms offering services relating to dealing and transfer of listed/ unlisted securities between investors (mostly non-institutional). On the path to introduce the regulatory framework, the SEBI first issued Consultation Paper on Online Bond Trading Platforms – Proposed Regulatory Framework on July 21, 2022[2] (‘Consultation Paper’), a detailed write up on which can be found in another article named, ‘SEBI proposes to regulate private debt platforms’.[3] After gathering comments from public, the SEBI issued a couple of notifications – the first one is SEBI (Issue and Listing of Non-Convertible Securities) (Second Amendment) Regulations, 2022 (‘Amendment Regulation’) on November 09, 2022[4] to bar the intermediaries from facilitating transactions in listed debt securities without a stock broker license, and second one is the aforementioned Circular, which is the subject matter of discussion in this case.

This write-up tries to discuss the implications of the Circular, but before getting into that discussion, it is important to first understand the meaning and scope of the term, “online bond trading platform”.

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Recent changes in the regulatory framework for the long-term bond market

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– Team Finserv | finserv@vinodkothari.com

Table of contents

Issuer relatedInvestor related
1.1. Amendments to the mechanism and limits for issuance of debt securities on the Electronic Book Platform (‘EBP’)2.1. Insurance companies as investors
1.2. Capping of ISINs2.1.1. Permitting investment in Additional Tier-1 (AT-1) bonds of bank
1.3. Reduction in the denomination for debt securities2.1.2. Increasing investments in infrastructure sector through banks
1.4. Enhanced guidelines for debenture trustees and listed issuer companies on creation of security and initial due diligence2.1.3. Exposure draft – investment in other forms of capital – IRDAI (Other Forms of Capital) Regulations, 2022
1.5. Monitoring of covenants, security creation and continuous due diligence2.1.4. Investment in debt securities of InvITs and REITs (22nd April, 2021)
1.6. Regulation of online bond platform2.2. Provident funds as investors
1.7. Additional participation on the ‘Request for Quote’ Platform2.2.1. Exit from investments
1.8. Operational Circular for Listing Regulations2.2.2. Private sector bonds as investment options
2.3. Supreme Court Ruling – Enforcement actions for debenture holders
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Debentureholders’ rights in Intercreditor agreements

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Supreme Court lays principles in case of debenture defaults

– Sikha Bansal, Partner, Vinod Kothari & Company | corplaw@vinodkothari.com

A well-developed corporate bond market not only provides cost-effective funds to the issuer, but also enables lenders like banks and other financial institutions to streamline their asset-liability mismatches. As such, there have been a lot of efforts to facilitate the development of the corporate bond market in India. While the market is growing steadily, the size of the market remains small as compared to other emerging markets in Asia[1]. Therefore, India may still have a long way to go.

An important element in ensuring smooth functioning of the bond market is to ensure that there is sufficient clarity on the options, remedies, and rights which the debentureholders have or may have in a given scenario. One such aspect has been dealt with by the Supreme Court (SC) in the recent ruling Securities and Exchange Board of India v. Rajkumar Nagpal and Others[2] (‘SC ruling’). The SC was dealing with the interplay between the RBI’s ‘Prudential Framework for Resolution of Stressed Assets’ issued in June, 2019 (‘RBI Resolution Framework’) and SEBI’s Circular on ‘Standardisation of procedure to be followed by Debenture Trustees in case of ‘Default’ by Issuers of listed debt securities’ (‘SEBI Circular’) and consequent impact of the same on the rights of the debentureholders.

As we see below, the SC ruling is crucial – that it clears the air around the force which SEBI Circular carries and protects dissenting investors from non-statutory compromises. However, most importantly, this SC ruling can be seen as highlighting the problems and gaps which may arise because of segregated rule-making where two regulators were bound by their respective regulatory ambit, thereby leading to a not-so-comprehensive resolution framework.

The author, in this article, has not gone into the facts of the particular case (which, inter alia, necessitated the SC to invoke Article 142 of the Constitution). Instead, the author has deliberated on the key takeaways from the SC ruling.

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SEBI proposes to regulate private debt platforms

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Proposals include stock broker registration, 6 months lock-in after allotment by an issuer

– finserv@vinodkothari.com

Background

Growth of investor interest in fixed income investment options is a sign of maturity of a market. Indian investors have traditionally been looking at securities markets for equity-type returns and use mutual funds, bank deposits etc. for fixed returns. However, in recent years, the avenues for fixed income investing in corporate bonds, P2P lending platforms, various types of collective investment schemes such as property shares[1], etc. have flourished. Hence, as investors become active and aware, they no longer limit themselves to mutual funds. Investors are now moving to debt trading platforms, which is the subject matter of SEBI’s Consultation Paper on Online Bond Trading Platforms[2] (‘Paper’). Due to stringent requirements for debt listing, the number of issuances, the number of listed debt issuances to the public is relatively low. Considering the growing investor interest, the lack of volumes of public issuances and limitations of trading of bonds through electronic bond platforms, several platforms started offering listed and unlisted debt securities to investors. This is what we are referring to as “debt trading platforms” here.

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Has the cover fallen off Covered Bonds?

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– Anita Baid, anita@vinodkothari.com

Recent activity in the Covered Bonds space

  • The Covered Bond issuance have been surging in the Indian market since 2019
  • FY 2019 witnessed the first instance of covered bonds, which was backed by vehicle loan
  • Issuance of covered bonds witnessed a sharp growth in FY 2021, as the numbers increased to INR 22 Bn, as against INR 4 Bn in FY 2020[1]
  • However, certain media reports suggest that the recent RBI regulations on transfer of loan exposures have killed the market for Covered Bonds[2]

What are Covered Bonds?

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Presentation on Corporate Governance for Debt Listed Entities

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Our resources can be accessed through below links:

  1. FAQs on recent amendments under the Listing Regulations – https://vinodkothari.com/2021/08/faqs-recent-amendments-listing-regulations/
  2. Articles on fifth amendment regulations:
  3. Ease of doing business: Debt listed companies slide down to unlisted companies – https://vinodkothari.com/2021/02/debt-listed-companies-slide-down-unlisted-companies/ 

Our  Book on Law and Practice Relating to Corporate Bonds and Debentures, authored by Ms. Vinita Nair Dedhia, Senior Partner and Mr. Abhirup Ghosh, Partner can be ordered through the below link:
https://www.taxmann.com/bookstore/product/6330-law-and-practice-relating-to-debentures-and-corporate-bonds

FAQs on LODR amendment on ‘High Value’ debt listed entities

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Our resources can be accessed through below links:

  1. FAQs on recent amendments under the Listing Regulations – https://vinodkothari.com/2021/08/faqs-recent-amendments-listing-regulations/
  2. Articles on fifth amendment regulations:
  3. Ease of doing business: Debt listed companies slide down to unlisted companies – https://vinodkothari.com/2021/02/debt-listed-companies-slide-down-unlisted-companies/ 

Our  Book on Law and Practice Relating to Corporate Bonds and Debentures, authored by Ms. Vinita Nair Dedhia, Senior Partner and Mr. Abhirup Ghosh, Partner can be ordered through the below link:
https://www.taxmann.com/bookstore/product/6330-law-and-practice-relating-to-debentures-and-corporate-bonds