GIFT City may see sovereign green bond trade from H2: Fin min sources
Informist, Wednesday, May 22, 2024
--Fin min sources: Govt green bond trade to start in GIFT City Oct-Mar
--Fin min sources: May tweak sovereign debt tax for GIFT City trades
--Fin min source: Govt green bond to be rupee-denominated in GIFT City
--Fin min sources: Green gilts to be traded, settled in dlr at GIFT
--Fin min source: Green gilt trades in GIFT may be settled by CCIL arm
--Fin min source: Policy tweak likely Jul for green gilt trade at GIFT
By Krity Ambey and Sagar Sen
NEW DELHI – Trading of sovereign green bonds is likely to start in International Financial Services Centre at the Gujarat International Finance Tec-City in Gandhinagar in the second half of the fiscal year started April, two finance ministry officials said. The launch entails a host of changes in process and norms that are currently being worked upon, they said.
"Since the bonds will be denominated in rupee but will be traded in dollar, the process of issuance, process of trading, the process of redemption, for principal, for interest... the entire scheme has to be developed," one of the officials said.
The Reserve Bank of India had announced in April that it will soon issue a framework to enable the trading of sovereign green bonds in GIFT City. The finance ministry is in talks with the RBI and the International Financial Services Centres Authority to avoid any tax arbitrage, the official said. "We don't want differential tax treatment. We don't want arbitrage."
GIFT-IFSC is a deemed foreign jurisdiction set up by the government to boost foreign investments in Indian assets, and only foreign portfolio investors can invest here. The interest on debt instruments trading at GIFT-IFSC is taxed at 9%. However, outside of IFSC, such income of foreign portfolio investors is taxed at India’s treaty rate with the country where the investor is based or at the local withholding tax rate of 20%, whichever is lower.
The government may tweak the tax rate on sovereign debt trades in GIFT City to avoid any arbitrage, the first official said. "I don't think there will be any changes (in tax rate) in the domestic; whatever changes have to be brought in, that will be in GIFT." The RBI and the IFSC regulator are in the process of identifying the policy changes that are required to facilitate sovereign green bond trades at GIFT City, the official added. They will propose the amendments to the finance ministry, and these may be announced in the upcoming Union Budget in July, the official said.
"We will start with primary auction (of sovereign green bonds) in the domestic market, and then the bonds will be traded in GIFT," the official said. "But we would also like to explore if simultaneous auctions can be held."
"The sovereign green bonds will trade on the IFSC exchange itself," the official said, adding that they may be settled at CCIL IFSC Ltd, a subsidiary set up by the Clearing Corp of India Ltd in GIFT City. Recently, four banks--ICICI Bank, State Bank of India, Bank of India, and HDFC Bank--had announced they had signed agreements to invest in CCIL's subsidiary in GIFT.
Government-issued green securities, masala bonds in essence, will be the first sovereign instrument to be traded in GIFT City that currently has equity and corporate debt trades. Masala bonds are rupee-denominated bonds that are issued in offshore capital markets. These bonds, offered and settled in dollars to raise Indian rupee, allow issuers to tap foreign funds without running the risk of currency depreciation. The first masala bond was issued by the World Bank's International Finance Corp in 2014 to fund an infrastructure project in India. Since then, several banks, corporates and autonomous bodies, such as the National Highways Authority of India have issued masala bonds.
The government has been raising funds through green bonds in the domestic market since 2022-23 and has raised a total of 360 bln rupees in the last two years. In Apr-Sep, the first half of this fiscal year, the government is set to borrow 60 bln rupees through 10-year green bonds. Unlike the last two years, this time the government will issue green bonds in the first half, with the first auction slated for May 31. End
