GREEN BONDS AND FII -
ECONOMY
News: Why has India allowed FIIs to
invest in its green bonds? | Explained
What's in the news?
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Recently, the Reserve Bank of India (RBI) has allowed investments in the country’s
Sovereign Green Bonds (SGrBs) by Foreign Institutional Investors (FIIs).
Key takeaways:
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This decision will expand the available capital for
the country’s ambitious objectives, as committed by Prime Minister Narendra
Modi at the 2021 COP26 in Glasgow.
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SGrBs are a kind of government debt that specifically funds projects
attempting to accelerate India’s transition to a low carbon economy.
Foreign Institutional
Investors (FII):
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Foreign institutional investors (FIIs) are those institutional investors who invest in
assets belonging to a different country other than that where these
organizations are based.
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The capital influx from FIIs can positively or
negatively impact the local economy, influenced by factors including market
dynamics, governmental policies, and worldwide economic conditions.
Investors of FII:
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Investors such as pension funds, mutual funds,
insurance companies, banks, and other significant financial institutions from
abroad are included in Foreign Institutional Investors (FIIs).
Governed by:
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FIIs in India are governed by the Securities and
Exchange Board of India (SEBI), and
the Reserve Bank of India (RBI).
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They also set the investment limits for them.
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SEBI has over 1450 foreign institutional investors
registered with it.
Significance of FII:
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FIIs are crucial to a country’s financial markets as they enhance liquidity, boost
trading volumes, and affect stock prices.
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These investors deploy their capital into various
financial instruments like stocks, bonds, and derivatives, driven by their
strategic investment plans and views on market conditions.
Green Bonds:
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Green bonds are bonds issued by any sovereign entity, inter-governmental groups
or alliances and corporates with the aim that the proceeds of the bonds are
utilised for projects classified as
environmentally sustainable.
Sectors under Green
Bonds:
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Green bonds are specifically designed to fund
environmentally friendly initiatives.
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The projects they finance can include renewable energy, energy efficiency, clean
transportation, sustainable agriculture, and more.
Sectors not Included:
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Nuclear power generation, landfill projects,
alcohol/weapons/tobacco/gaming/palm oil industries and hydropower plants larger
than 25 MW have been excluded from the framework.
India and Sovereign
Green Bonds:
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The framework for the sovereign green bond was
issued by the government on November 9, 2022.
Implementing
Agency:
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The Green
Finance Working Committee (GFWC), chaired by the Chief Economic Advisor and
constituted by the Ministry of Finance, oversees the implementation of the
framework.
Features of the Sovereign
Green Bonds:
1. Issuance Method:
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SGrBs will be issued through Uniform Price Auction.
2. Eligibility for
Repurchase Transactions (Repo):
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SGrBs will be eligible for Repurchase Transactions
(Repo).
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SGrBs will also be reckoned as eligible investment
for Statutory Liquidity Ratio (SLR) purpose.
3. Tradability:
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SGrBs will be eligible for trading in the secondary market.
4. Investment by
Non-residents:
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SGrBs will be designated as specified securities
under the ‘Fully Accessible Route’
for investment in Government Securities by non-residents.
Significance:
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Green Bonds provide investors with an opportunity
to support environmentally sound practices, impacting the strategic decisions
of the entities issuing the bonds.
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They offer a way to mitigate risks associated with
climate change and aim to achieve returns that are comparable to, if not better
than, traditional investments.