Centre may reject bids in green bond auctions over low greenium

Greenium refers to the premium that the issuer receives on green bond issuances.

The Centre is open to rejecting bids for its sovereign green bond issuances if the greenium offered on them falls short of expectations, although it aims to mop up Rs 20,000 crore through this instrument this fiscal, a senior government official said.

The UNDP explains greenium, or green premium, as the pricing benefits based on the logic that investors are willing to pay extra or accept lower yields in exchange for sustainable impact.

In 2024-25, the proposed fund requirement for green projects from green bond proceeds has been pegged at Rs 32,061 crore. However, the actual amount to be raised is likely to be around Rs 20,000 crore.

Although there is no official full-year target for green bonds, the Centre had said in March that out of the Rs 7.50 lakh crore of total gross borrowings in the first half of FY25, Rs 12,000 crore will be through issuance of sovereign green bonds.

In the Union Budget last month, the government lowered its planned gross market borrowing for the full financial year ending March 2025 by Rs 12,000 crore to Rs 14.01 lakh crore.

"We are not seeing the kind of interest on green bonds, which was expected. Green bonds were introduced because of requests from outside. We are not changing any policies on that, but yes, it has to be cost-effective," the official said, adding that the Centre may not accept offerings if the greenium isn't up-to-the-mark.

"Can assure you, we are not scrapping the sovereign green bonds plan. But, we are sensitive to the greenium we get on these instruments," this official said.

In fact, back in May, the government did not raise any funds through the first green bond auction of FY25 as the Reserve Bank of India did not accept any bids at the sale.

The finance ministry has not been impressed by the greenium or green premium on its green bond issuances, which has, for the most part, been significantly lower than initial expectation of 5-10 basis points (bps) below the prevailing market rates.

In keeping with the ambition to significantly reduce the carbon intensity of the economy, the Union Budget 2022-23 announced the issuance of Sovereign Green Bonds. These instruments are expected to help the Indian government tap finances from potential investors for deployment in public sector projects with sustainable goals.

The investors in green bonds are typically willing to accept lower yields because of the sustainable nature of the projects financed by the proceeds of the bond sales.

In FY24, the government raised Rs 20,000 crore through green bonds, starting with Rs 5,000 crore through a five-year paper in November 2023 that fetched the Centre a greenium of just 1 basis points. The remaining amount was raised in tranches through 10-year and 30-year papers.

In 2023-24, the Centre received an average greenium of just 2 bps across all tranches. This is despite including a paper with a longer maturity period of 30 years expecting greater participation from insurance companies and pension funds.