India is trying hard to meet its ambitious green targets by promoting Gujarat International Finance Tec-City, its offshore financial centre in the western state of Gujarat, as a sustainable finance hub, but the scale of the funding requirements and the absence of a green taxonomy present daunting challenges.
"Renewable energy producers, equipment manufacturers, and companies from core sectors such as cement, steel and power that want to transition from red to green will require tonne-loads of capital," International Financial Services Centres Authority chairperson K Rajaraman said in an interview with IFR Asia. "Our idea is to create options for Indian companies to access capital – equity, debt and financial services – which is required for transition to green from GIFT City."
India is estimated to require US$10trn of capital to meet its 2070 net-zero target. Out of this, US$190bn–$215bn will be required to build 500GW of renewable energy capacity by 2030 from 201.45GW currently, according to Moody's.
IFSCA, GIFT City's regulator, is currently working on a transition framework for issuers that want to raise capital for their green transitions.
"For example, a power plant wants to switch production processes from red to orange or green. The market mechanism is just not completely possible and some support from the sovereign will also be required like blended finance and first loss guarantee," he said.
Under blended finance, public sector funds can be used to reduce risk, helping attract private investors. Under first loss, a third party such as a government entity can guarantee a lender's loss if the borrower defaults on the loan.
The transition finance framework, which will enable GIFT City to be a hub for transition funds and bonds, is expected to be launched in five to six months, Rajaraman said.
IFSCA has directed the international banking units present in GIFT City to allocate 5% of gross loans and advances towards green, social, sustainable and sustainability linked sectors from April 1 and has also waived the fund filing fees for the first 10 ESG funds registered in the city.
The Reserve Bank of India and IFSCA recently allowed foreign investors such as non-resident Indians and IBUs of foreign or domestic banks to directly trade and settle green bonds through GIFT City.
IFSCA has also put out a consultation paper on principles to mitigate the greenwashing of ESG-labelled securities.
GIFT City has been touted as India’s answer to rival international financial centres such as Hong Kong, Dubai and Singapore. It offers many tax benefits, including 100% tax exemption for 10 years and lower withholding taxes on offshore bonds and loans originating there, spurring issuers to raise offshore finance from the hub.
Indian companies have raised US$13.93bn of ESG-labelled securities from GIFT City and lenders have distributed over US$1.5bn of green/sustainable loans so far, according to IFSCA data.
Lagging behind
However, India's total ESG-related debt issuance is still lagging behind other jurisdictions.
China, Japan, South Korea, Hong Kong and Singapore are far ahead for issuance of ESG-related bonds and loans. Year to date, India has raised US$8.4bn of such debt compared to US$63bn in China, US$38.5bn in Japan, US$18.6bn in South Korea, US$25.8bn in Hong Kong, US$35bn in Singapore and US$7.7bn in the Philippines, according to LSEG data.
GIFT City is creating a lot of the frameworks that enable the flow of sustainable finance, "but they are not likely to immediately lead to a scaling up in sustainable finance to the extent India requires for its net-zero transition," said Bose Varghese, senior director of ESG at law firm Cyril Amarchand Mangaldas. "One key enabler that is lacking is a green taxonomy, a classification system of green activities and assets."
In her budget speech in July, finance minister Nirmala Sitharaman said that India will develop a taxonomy for climate finance to enhance the availability of capital and support green transition. However, a taxonomy or green financing roadmap is yet to be announced.
Instead, IFSCA has adopted international frameworks from bodies such as the Climate Bonds Initiative and the European Union to help issuers access offshore financing, Rajaraman said.
But a green taxonomy is important as it "will help align the issuers and investors who will have full visibility of the money which they are allocating," said Varghese at Cyril Amarchand Mangaldas. "It can bring more transparency, reliability and may help address greenwashing."
Meanwhile, Indian state-owned lenders and top asset managers are rushing to set up financing units and funds in GIFT City.
In May, the Indian Renewable Energy Development Agency joined a clutch of lenders such as Power Finance Corp to open a unit in GIFT City to buttress offshore lending to the renewable energy sector. Recently, Aditya Birla Sun Life Asset Management set up its ESG Engagement Fund with a seed capital of US$25m in GIFT City to invest in companies that want to improve their ESG scores.
These initiatives are small steps. "Over a period of time, we expect GIFT City to become a sustainable financing hub. So, while we have started, we have a long time to go, because the quantum of money required by India is huge and we are trying to expand the possibilities here," Rajaraman said.
Challenges ahead
The country needs to address demand and supply side challenges to meet an estimated annual US$70bn green financing requirement, according to Varghese.
Smaller issuers find it difficult to raise ESG debt due to the cost and time involved compared with large companies with a proven track record. "A lot of the green financing demand is coming from the transition technology sectors where the risk-return profile may not be very attractive. Global green finance will go to jurisdictions where the policy and regulatory regimes are attractive," he said.
Insufficient or no green premium for issuers tapping green debt is another challenge, along with no incentives for investors, while the carbon credit market is still too small to make a difference. The government could use state-owned issuers like Small Industries and Development Bank of India and IREDA to set up green funds or give loans to SMEs to help them with energy efficiency or transitioning to green, since small issuers often find it difficult to raise such capital, Varghese said.