RBI’s Scheme for Trading and Settlement of Sovereign Green Bonds in the International Financial Service Centre in India

Introduction

Through a recent notification dated 29th August, 2024, the Reserve Bank of India has introduced a scheme for trading and settlement of Sovereign Green Bonds (“SGrBs”) in the International Financial Services Centre (“IFSC”) in the country. Applicable to investments in the sovereign green bonds issued by the Government of India to eligible investors, it has allowed the investors to participate in the primary auctions of securities that are conducted by the Reserve Bank and transacting in the secondary markets for the securities in the IFSC.

Under the present scheme, the investors have not been permitted to repackage or write any derivative instrument or underlying securities that have been held by them under the present scheme along with not being permitted to undertake any repo transaction in such securities. Eligible IBUs have not been permitted to participate in the primary auctions under the scheme but they can undertake transactions in the secondary market. Additionally, the investors can also trade in the secondary market using the IFSC with the other investors and eligible IBUs though the transactions between two IBUs cannot be undertaken. According to Para 6(a), the notification also defines the entities or individuals who shall be eligible to participate in the scheme.

Moreover, according to the notification, under the back-to-back arrangements an eligible IBU undertakes transactions in the eligible securities with those investors which are eligible and in turn enters into an offsetting transaction with the parent bank in India. However, in case of any open security positions that arise from settlement failures or unwinding of trades with the investors, the eligible IBU must reverse the trade with its parent bank or branch/subsidiary in India of the parent bank on a T + 0 settlement basis to close out any positions of open security. The investors have also been allowed to engage in the primary auctions and the secondary market transactions, following the Reserve Bank’s guidelines wherein competitive bids can be placed through authorised clearing corporations which shall act as aggregators and the settlement of securities and shall have to adhere to the Reserve Bank’s prescribed processes in order to ensure transparency of transactions. It has also been mandated that all transactions must be mandatorily reported to the Clearing Corporation of India Limited (“CCIL”) or any other designated agency within a period of three hours of closing the trade.

Conclusion

The present notification acts as a reform towards the frameworks like Sovereign Green Bonds and other such sustainable practices that may be introduced to finance the green projects and incentivize the sustainable practices. Additionally, the update has also laid adequate emphasis on ensuring that the transparency and accountability of such financial transactions is maintained.

Coming into force with immediate effect, the operational guidelines for participating in this scheme by the entities shall be issued by the competent IFSC Authority.