Knowledge Nugget: Green Bonds to Masala Bonds — A must-know for UPSC exams

2. The yield of a bond is the effective rate of return that it earns. But the rate of return is not fixed — it changes with the price of the bond. Understand this through an example: Suppose the face value of a 10-year G-sec is Rs 100, and its coupon payment is Rs 5. Buyers of this bond will give the government Rs 100 (the face value); in return, the government will pay them Rs 5 (the coupon payment) every year for the next 10 years, and will pay back their Rs 100 at the end of the tenure. In this case, the bond’s yield, or effective rate of interest, is 5%.

3. Sovereign green bonds (SGrBs) are those that are issued by sovereign entities, like the Government of India, which formulated a framework for issuing such bonds in 2022. The framework defines “green projects” as those that encourage energy efficiency in resource utilisation, reduce carbon emissions, promote climate resilience, and improve natural ecosystems.

4. The Securities and Exchange Board of India (SEBI) has proposed the concept of blue bonds in its paper titled ‘Consultation Paper on Green and Blue Bonds as a Mode of Sustainable Finance’.  According to SEBI, India has tremendous scope for the deployment of blue bonds in various aspects of the blue economy.

Blue economy is defined by the World Bank as the “sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of ocean ecosystem.” European Commission constructs it as “All economic activities related to oceans, seas and coasts.”

5. Masala Bonds are rupee-denominated bonds i.e. the funds would be raised from the overseas market in Indian rupees. According to RBI FAQ, any corporate, body corporate, and Indian bank is eligible to issue rupee-denominated bonds overseas.

6. According to the Organisation for Economic Co-operation and Development (OECD), “Social Impact Bonds are a type of social impact investments and are a “pay-for-success” instrument as the return on investment of a social impact bond depends on the outcome of the programme that is financed.” This feature allows for tracking the progress of the outcome, thus ensuring transparency for investors.

7. According to OECD, Sustainability-linked bonds are bonds “for which the financial and/or structural characteristics can vary depending on whether the issuer achieved predefined sustainability or Environmental, social and governance objectives”.  It is a forward-looking performance-based instrument where issuers commit to future improvements in sustainability outcomes within a determined period.

BEYOND THE NUGGET: Sustainable Development Goals

Sustainable Development Goals

The Union Cabinet has reaffirmed that it is on track to meet its SDGs well ahead of the 2030 deadline. The main objective of Sovereign Green Bonds, Blue Bonds, Social Impact Bonds, and other bonds is to meet the SDG targets. Here are some of the important SDGs.

⇒ Goal 7: Ensure access to affordable, reliable, sustainable, and modern energy for all.

⇒ Goal 11: Make cities and human settlements inclusive, safe, resilient, and sustainable.

⇒ Goal 13: Take urgent action to combat climate change and its impacts.

⇒ Goal 14: Conserve and sustainably use the oceans, seas, and marine resources for sustainable development.

⇒ Goal 17: Strengthen the means of implementation and revitalise the global partnership for sustainable development.

Post read question

With reference to ‘IFC Masala Bonds’, sometimes seen in the news, which of the statements given below is/ are correct? (2016)

1. The International Finance Corporation, which offers these bonds, is an arm of the World Bank.

2. They are the rupee-denominated bonds and are a source of debt financing for the public and private sector.

Select the correct answer using the code given below:

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor

(Source: Explained: Bonds, yields, and inversions, What are sovereign green bonds? Why is demand for such bonds weak in India?, OECD, IFC, globalgoals)

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