Sustainable Securitisation – the next in filling sustainable finance gap in India

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

A recent UNCTAD Report[1] highlights the financing gap in sustainable development – citing the need for around $4 trillion additional investment annually for developing countries. India is no exception, in fact, various studies[2] suggest the high sustainable finance gap in the country. As the need for sustainable finance continues to grow, so does the regulator’s vigilance towards providing a definite regulatory framework around the same. In this context, SEBI has released a Consultation Paper on expanding the scope of Sustainable Finance framework in the Indian securities market[3].

The Consultation Paper proposes to expand the current regulatory framework around green debt securities[4], by including other forms of sustainable or thematic bonds[5]; to be covered by a broader expression “ESG Debt Securities”. The Paper also proposes to introduce a framework for Sustainable Securitised Debt Instruments (SDIs). In this write-up, we briefly discuss the concept of green and sustainable securitisation, and give our recommendations for the suggested framework for Green and Sustainable Securitisation in India.

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Overview of sustainability-linked loans

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-An emerging and promising financing substitute

Surabhi Chura | corplaw@vinodkothari.com

There has been a growing emphasis on sustainability across various sectors including finance, especially, with a growing mandatory requirement of disclosure of sustainability practices by companies around the world. Various sustainability-linked finance products are designed to promote the ESG objectives of the borrower while providing financial solutions.

Traditionally, loans have remained the most common way of raising finance, and sustainable finance is no exception to the same. These loans may be labelled as green loans, social loans, sustainable loans etc. Various organisations have issued voluntary guiding principles around the same[1]. A commonality in these loans is the restriction on the “use of proceeds” – that are directed towards the green, social or sustainable objectives of the borrower. Another form of sustainable finance through loans is Sustainability-linked Loans (SLLs), where the loan contains certain sustainability-linked terms. Contrary to typical green finance products, which allocate funds for designated green projects or assets, SLLs align the loan conditions with the sustainability performance of the borrower.

Other instruments of raising sustainable finance can be through the issuance of labelled bonds or GSS+ bonds. Read more about the same in our article – Sustainable finance and GSS+ bonds. One of the more recent innovative ways of financing sustainability objects of the borrower can be through Sustainability-linked derivatives.

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Sustainability linked derivatives: An instrument with a potential

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– Vinod Kothari, vinod@vinodkothari.com

Sustainability-linked loans and bonds have been surging globally. While there has been a dip in the recent periods (Q3 and Q4 of 2023) owing to tightening of regulatory conditions, the global volumes of sustainability-linked loans stood at around $ 400 billion[1].

However, there is another instrument – a derivative, which also has a linkage with sustainability targets, and that is making a global buzz. ISDA, having named this Sustainability Linked Derivatives or SLDs, is creating proper documentation basis to take this market forward. As of now, the market for SLDs is neither large nor highly standardised, but as credit defaults rose from nowhere and from a purely OTC product into being in the very thick of the global financial crisis, SLDs also merit close attention.

What is an SLD?

Think of usual derivatives in financial business – it will be an interest rate swap, or cross currency swap/FX forward. An SLD adds a sustainability-linked overlay on a typical IRS or FX hedge transaction.

For instance, assume Borrower X has taken a floating rate loan of $ 100 million, say at SOFR + 100 bps. X now hedges interest rate risk by entering into an IRS with Bank A, whereby Bank swaps this for a fixed rate of 4.5%.

Here, if we add an SLD overlay, Bank A will agree to provide a discount of, say 5 bps if X is able to meet certain specified sustainability KPIs. On the contrary, if X fails to meet the KPIs, then X pays a penalty of equal or a different amount. Depending on the agreement, the discount or penalty, or bonus/malus, may either be exchanged between the counterparties or by spent by either counterparty by way of a donation  for a sustainability cause.

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Directors’ Responsibility towards Climate Change: Lessons from Recent Litigation

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Social stock exchange for enterprises: a road not taken, or a road not found?

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Payal Agarwal, Senior Manager | payal@vinodkothari.com 

Social Stock Exchange (SSE) that emerged as a concept in India for the first time in the Budget Speech of FY 2019-20, has become a reality with the creation of a necessary regulatory ecosystem around the same during 2022. More about the regulatory ecosystem of SSEs can be read at Social stock exchanges: philanthropy on the bourses. Following the same, the two recognised stock exchanges of India having nation-wide trading terminals, viz., the NSE and BSE, have been granted recognition as SSEs in India. With this, an implementation mechanism has been provided for the “social enterprises” to get itself registered and listed on the SSEs. 

As per the NSE’s list of registered NGOs, a total of 18 not-for-profit organizations (NPOs) have been registered till date (data accessed on 4th September, 2023). The BSE’s website also contains a list of around 19 NPOs registered with its SSE segment. Fundraising through SSE is not a mandatory requirement for NPO; however, to facilitate fund raising by NPOs, a proposal has been rolled out to relax certain requirements applicable to NPOs registered with SSEs. A brief of the proposals may be accessed at Flexibility-centric recommendations proposed for SSE framework. While a traction is observed in NPOs getting registered with SSEs as a “social enterprise”, the other group of social enterprises, the for-profit entities (FPEs) have been seemingly neglected. 

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SEBI approves changes in SSE framework – Eases registration & listing of NPOs

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– Payal Agarwal, Senior Manager | corplaw@vinodkothari.com

(Updated as on November 28, 2023)

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Access our resource centre on Social Sector her:

Resource Centre on Social Sector

Panel discussion on CSR & Sustainability alongside the launch of the Book: “Practitioner’s Guide to Corporate Social Responsibility”

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Watch the Panel discussion here: https://www.youtube.com/watch?v=Ba31bj8u3z4

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Our Resource Center on CSR can be accessed here

Carbon credit markets: building the ecosystem for trading in India

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

The consequences of climate change and the need for a positive climate action need no introduction in the present world. What once remained a matter of concern for the so-called “environmental activists”, gradually traveled their way to the government as countries committed towards achieving “net zero”. Climate action requires involvement of the masses, and therefore, the government is coming up with new regulatory devices towards developing climate action on a large scale.

India is no exception to the same, and following the footsteps of other countries, has proposed to develop a compliance mechanism and domestic market for carbon credits in India. Regulatory inclusion is provided to carbon credits in India by way of an amendment to the Energy Conservation Act, 2001 (“ECA”). Carbon credits are a form of emission trading schemes (ETS), that incentivize the reduction in emissions, against the offsetting of higher emissions by other market participants. A brief comparison of the domestic ETS in other parts of the world, and the existing emissions trading markets in India can be referred to at Emission law amendments: Laying the framework for Carbon trading market in India.

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Understanding CSR for NGO

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– Pammy Jaiswal, Partner | corplaw@vinodkothari.com

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Financing transition from “brown” to “green”

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SEBI prescribes additional requirements for transition bonds

– Mahak Agarwal, Executive | corplaw@vinodkothari.com

Need for transition finance

As climate change and its impacts continue to remain one of the major concerns of any economy, transition finance is a step towards effectively transforming carbon emissions and combating climate change.

‘Transition Bonds’, as the word speaks for itself, are debt instruments that facilitate transition of a carbon-intensive business into decarbonizing business and eventually achieving the Net Zero emissions targets.

While it is true that change is the only constant, it cannot be denied that the same can often be challenging. Similar is the case with enterprises looking to metamorphosize their activities into a sustainable form. A huge amount of finance is required for carbon-intensive sectors to decarbonize and it is here that transition bonds find their application.

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