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Fiscal incentives needed to encourage banks, MFs invest in green bonds: Experts

An India-UK working group has suggested that the govt should think of providing tax incentives to mutual funds and their investors for investing in local green bonds.

, ET Bureau|
Updated: Apr 04, 2017, 08.06 PM IST
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The capital required for building greenfield infrastructure in India is expected to come primarily from the private sector, given the government's tight fiscal deficit target.
KOLKATA: An India-UK working group on green finance said that Indian government should provide incentives such as tax breaks to encourage banks, insurance companies and mutual funds to invest in green bonds, which is key to India’s quest to build new infrastructure with low carbon emission.

“India has the potential to be a large market for green finance which will have a positive impact on both the Indian economy and environment,” the group said in a discussion paper, released ahead of the India-UK Financial dialogue.

India and the UK on Tuesday agreed to jointly set up a £500-million fund to build green energy projects in the country.

A green bond is like any other regular fund raising instrument but with one key difference: the money raised by the issuer are earmarked towards financing `green' projects, i.e. assets or business activities that are environment-friendly.

Must Read: What are green bonds?

India has set a target to reduce ‘emissions intensity’ of its GDP by 33-35% by 2030 from the 2005 level.

The capital required for building greenfield infrastructure in India is expected to come primarily from the private sector, given the government's tight fiscal deficit target.

The government is targeting investment of $370 billion to build roads, ports, highways, waterways and smart cities in the next three years.

The working group, consisting of executives from Axis Bank, Kotak Mahindra Bank, Housing Finance Development Corp, Barclays, HSBC and London Stock Exchange Group, has suggested that Indian government should think of providing tax incentives to mutual funds and their investors for investing in local green bonds.

“A debt fund where more than 80% of the assets are invested in green paper, can benefit from tax incentives for its investors – where effectively the tax rates are reduced from the current applicable tax rate on income arising from such investments,” the paper said.

India needs to frame guidelines for mutual fund houses, insurance companies and provident funds with large pool of assets under management to encourage investment in green bonds. At present, there is a limited investor base for green bonds.

It said that institutional investors can be encouraged to invest a minimum amount (perhaps 0.5-1% of gross investments) each year into green bonds and loans.

“Over a period of time, with pick-up in green bonds floating and annual issuance, a certain long-term minimum investment level can be encouraged or mandated.”

The bank loan limit for investments into renewable energy projects should be enhanced, preferably to Rs 7 billion, so that reasonably sized (around 100MW) wind or solar energy projects can attract greater debt financing, the paper suggested, adding that a priority sector tag for investment in green bonds would encourage banks.

“Developing a green finance framework to attract private sector capital should be viewed as an opportunity to ‘green’ the Indian financial system and create a 21 st century framework for sustainable finance in India,” the paper said. “It should not be viewed as either a trade-off between growth and sustainability called for widening of investor base.”

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KIIFB set to raise $250 million via green bond

BSE's India INX launches platform for green bonds

IFC sees immense opportunities for green bond projects in India

SBI raises $650 million via green bond issue

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