Investing in Sovereign Green Bonds (SGrB) through IFSC: A Comprehensive Guide for NRIs

On August 29, 2024, the Reserve Bank of India (RBI) announced a significant opportunity for eligible individuals to invest in Sovereign Green Bonds (SGrB) through the International Financial Services Centre (IFSC) located in GIFT City, Gandhinagar, Gujarat. This initiative opens the door for Non-Resident Indians (NRIs) to participate in long-term investments in Indian government bonds, specifically aimed at funding green infrastructure projects. In this article, we will explore what SGrBs are, who is eligible to invest, the interest rates offered, the investment process, tax implications, and the advantages and disadvantages of investing in these bonds.

What are Sovereign Green Bonds (SGrB)?

Sovereign Green Bonds are debt instruments issued by the government to raise funds specifically for green projects that contribute to environmental sustainability. The concept was introduced in the Union Budget for the financial year 2022-23, with the aim of reducing the carbon intensity of the Indian economy. The funds raised through SGrBs are earmarked for investments in renewable energy, sustainable infrastructure, and other environmentally friendly initiatives. This aligns with the global trend towards green investing, where investors seek to support projects that have a positive environmental impact.

Who is Eligible for Investing in Sovereign Green Bonds through IFSC?

The RBI’s notification on August 29, 2024, allows various categories of investors to participate in SGrB. According to Vijay Kuppa, CEO of InCred Money, both retail and NRI investors can invest in these bonds. Retail investors can do so through the RBI Retail Direct website or via their brokerage firms. NRIs can invest in SGrBs as ‘specified securities’ under the Fully Accessible Route (FAR).

Additionally, Persons Resident Outside India (PROIs), which includes a broader category than just NRIs, are also eligible to invest. Karan Rijhsinghani, Director at Atom Prive Wealth, notes that Foreign Portfolio Investors (FPIs) and Overseas Citizens of India (OCIs) can also participate in this investment opportunity.

What is the Interest Rate Offered for Various SGrBs?

As of now, several SGrBs have been issued, each with varying interest rates. According to Abhijit Roy, CEO of GoldenPi, the interest rates for these bonds typically range from approximately 7.1% to 7.4%. This competitive rate makes SGrBs an attractive option compared to traditional savings instruments like Non-Resident Ordinary (NRO) deposits, which generally offer lower returns.

How to Invest in SGrBs?

Investing in SGrBs is a straightforward process. Rohit Raghavan, Partner at Saraf and Partners, explains that retail investors can participate in non-competitive bidding through a Retail Direct Gilt Account or via a permitted Aggregator/Facilitator.

For those using the Zerodha platform, the investment process is similar to that of other government securities. Here’s a step-by-step guide:

1. Log in to your Zerodha account at kite.zerodha.com.
2. Click on the ‘Bids’ section.
3. On the Kite app, tap on ‘Bids’ and then select ‘Govt. Securities.’
4. Ensure that sufficient funds are available in your trading account on the issue end date, as the funds will be debited upon bidding.

How Might SGrBs Get Taxed for NRIs?

Understanding the tax implications of investing in SGrBs is crucial for NRIs. CA Prakash Hegde outlines two scenarios:

1. Selling SGrBs on the Stock Exchange (NSE):

   • If held for 12 months or less, gains will be classified as short-term capital gains (STCG) and taxed at 20%.
   • If held for more than 12 months, gains will be classified as long-term capital gains (LTCG) and taxed at 12.5%. Note that indexation benefits are not applicable for sales after July 23, 2024.
2. Redeeming SGrBs at Maturity:
   • Interest earned from the bonds is taxable as income from other sources at applicable tax rates. The redemption amount will typically equal the face value of the bonds, with any gain or loss treated as capital gain/loss based on the holding period.

Are SGrBs Sold in IFSC Tax-Free?

Currently, SGrBs held in a domestic demat account cannot be transferred to or settled in IFSC. Therefore, gains from selling SGrBs through IFSC will be taxable, similar to those sold on the NSE. However, NRIs trading in IFSC may benefit from easier access to the sovereign green bond market without needing an FPI license, along with potential reductions in transaction costs and a more favorable tax regime in the future.

Advantages and Disadvantages of Investing in SGrBs

Advantages:

1. Green Investing Objectives: SGrBs allow investors to align their financial goals with their values by contributing to environmentally sustainable projects.
2. Higher Interest Rates: SGrBs typically offer higher interest rates than NRO deposits, making them an attractive investment option.
3. Sovereign Guarantee: Being government-issued, SGrBs carry minimal credit risk, ensuring the repayment of principal and interest.
4. Portfolio Diversification: Including SGrBs in an investment portfolio can provide a socially responsible dimension without significantly altering the risk-return balance.

Disadvantages:

1. No Tax Benefits: There are no special tax advantages for investing in SGrBs; interest earned is taxed according to the investor’s income slab.
2. Limited Liquidity: While SGrBs are listed on exchanges, they may lack liquidity, making it essential for investors to consider their holding period.
3. Risk of Greenwashing: There is a potential risk that projects funded by green bonds may not deliver the promised environmental benefits.

What Retail Investors of SGrBs Need to Know

Retail investors should be aware that in the auction for SGrBs, the government allocates a certain percentage of the issue to individuals and institutions under a non-competitive bidding facility. This encourages wider participation and retail holding of government securities. To participate, investors must not maintain a current account or Subsidiary General Ledger account with the RBI and can submit bids through an Aggregator/Facilitator or maintain a Retail Direct Gilt Account with the RBI.

Conclusion

Sovereign Green Bonds present a unique investment opportunity for NRIs looking to contribute to sustainable development while earning competitive returns. With the RBI’s recent announcement, the pathway to investing in these bonds through the IFSC is clearer than ever. However, potential investors should carefully consider the tax implications, liquidity issues, and the overall alignment of these investments with their financial goals and values. As the world increasingly prioritizes sustainability, SGrBs could play a pivotal role in shaping a greener future while providing attractive investment returns.