Mumbai: India presents a huge opportunity for green financing, but government and regulators need to clear impediments like caps on foreign portfolio inflows and pricing caps on masala bonds if it were tap those potential, a leading American brokerage said today.
Bank of America Merrill Lynch (BofAML)’s country head Kaku Nakhate said the policy thrust on a shift to renewable power and also metro projects will result in lots of demand but stressed on the need to create the necessary “ecosystem” for the newer instruments to flourish.
Gaurav Singhal, its director for investment banking, said domestic companies have raised USD 6 billion through green bonds since the first issue in late-2015 but refrained from giving his estimate on the outlook for next year citing the impediments.
He said the foreign portfolio limits which are reviewed every quarter get exhausted very soon, leave little scope for first-time issuers in sectors like renewables which have witnessed increased interest in recent times.
As against the need to raise up to USD 32 billion in debt for renewable companies till 2022, we are in a situation where companies cannot raise masala bonds, a newer emerging instrument, at coupons of 3 percentage points above the G- secs, Singhal said.
“Now, the bigger problem is that they have put in a pricing cap. So, G-sec plus 300 bps is the pricing cap. Some companies which were high yield but not have that restriction earlier, are now faced with this restrictions because they may not be able to meet the pricing cap of 300 bps,” he said.
He said if not for the caps, which are not favourable for the first-time issuers, he would have been confident of the money raised in 2018 surpassing the same in 2017.
“But now with these additional regulatory boundaries that have been sketched, it is a bit difficult to say how the first-time issuers, especially in the high yield area, will fare,” Singhal said.
This June, the Reserve Bank had reviewed the pricing caps on external borrowings.
Singhal said apart from the renewable energy sector, the metro projects alone represent a funding opportunity of nearly USD 80 billion on the green bonds front.
Nakhate said audit trails of how the money is being used is very necessary and something where domestic issuers will need improvements.
“We really need to create an ecosystem as an industry to get financing for this,” she said, adding even though China raised its first green bond after an Indian issuer, it has now gone up to be the largest issuer in the world.
Singhal said there is no incentive yet on the pricing front for green bonds as they continue to be issued at par with the corporate bonds. But things may change in the future with a larger number of green-bonds only funds coming in.