RBI Introduces Scheme for Sovereign Green Bonds in IFSC

The Reserve Bank of India (RBI) has launched a new scheme on August 29, 2024, aimed at facilitating the trading and settlement of Sovereign Green Bonds (SGrBs) within India’s International Financial Services Centre (IFSC).

This move is part of a broader effort to attract foreign investment and enhance non-resident participation in these environmentally focused instruments.

The scheme, which is effective immediately, allows eligible foreign investors to invest in SGrBs issued by the Government of India. It marks a significant amendment to existing Foreign Exchange Management regulations, detailing the scope of participation, settlement processes, and the roles of various entities within the IFSC.

Key highlights of the scheme include:

1. Eligible Investors: The scheme permits persons resident outside India, as defined under the Foreign Exchange Management Act (FEMA) 1999, to invest in SGrBs within the IFSC, provided they are not incorporated in high-risk jurisdictions identified by the Financial Action Task Force (FATF). Additionally, IFSC Banking Unit (IBUs) of foreign banks that do not have a branch or subsidiary licensed to undertake banking business in India are also eligible to participate.
2. Primary and Secondary Market Participation: Investors can engage in primary auctions of securities conducted by the RBI and trade in the secondary market within the IFSC. However, IBUs are restricted from participating in primary auctions but can conduct transactions in the secondary market.
3. Trading and Settlement: The scheme outlines strict guidelines for trading procedures, including restrictions on repackaging or writing derivative instruments on underlying securities held by investors. It also specifies that transactions between two eligible IBUs are prohibited, but IBUs can trade with investors under a ‘back-to-back’ arrangement, ensuring no overnight open securities positions are maintained.
4. Compliance and Reporting: The RBI has mandated stringent Know Your Customer (KYC) and Anti-Money Laundering (AML) practices, along with rigorous data management and reporting protocols to ensure transparency and compliance with Indian laws.
5. Operational Guidelines: The operational guidelines for the scheme will be issued by the International Financial Services Centres Authority (IFSCA) to facilitate smooth participation and adherence to the rules.

This initiative by the RBI is expected to expand the market for SGrBs and contribute to India’s environmental goals by channeling foreign investments into sustainable development projects. The move also underscores the government’s commitment to broadening the financial landscape in the IFSC, making it an attractive destination for global investors.

The RBI has emphasized that any violations or disruptions in the settlement process will result in penalties, and it reserves the right to share anonymized trade data with relevant authorities.

SGrBs were first introduced by the Indian government in January 2023 and were included in the government borrowing calendar for FY 2023-24. The introduction of this scheme is seen as a strategic step towards integrating India’s financial markets with global green finance initiatives.