The Securities and Exchange Board of India ("SEBI") released a circular on 5th July laying down a comprehensive framework for ESG Debt Securities (other than green debt securities). The aim of SEBI is to bolster credibility, enhance transparency, and ensure that the standards followed by Indian companies align with international benchmarks. The regulatory framework governing green bonds has already been in place since 2017. The new framework covers social bonds, sustainability bonds, and sustainability-linked bonds. Each of these bonds has its own metrics and regulatory compliance. The framework provides regulations for all stages—pre-issuance, post-issuance, and ongoing compliance related to reporting. The eligibility criteria are quite rigid; only those debt securities that align with global standards will be categorised as "Social," "Sustainability," or "SLB" bonds.
Social Bonds
The SEBI NCS Regulations and SEBI LODR Regulations, 2015 define social bonds as debt securities issued for raising funds to be utilised to address or mitigate social issues. Examples include affordable basic infrastructure, access to essential services (e.g., health, education, vocational training), affordable housing, employment generation, food security, and socioeconomic advancement.
The issuer is required to disclose the following information in the offer document for the public:
Pre- Issuance Compliance Requirement
- The issuer must disclose the social objective of the project, along with details of the projects where the proceeds are intended to be used.
- Information about the process to be followed to evaluate the project's impact, including the taxonomies and standards to be used.
- Details of the procedure to be employed for tracking proceeds. The issuer may constitute an ESG Committee for this purpose.
- Information regarding the temporary placement of unutilised net proceeds from the issuance.
- Disclosure of the perceived social risks and the mechanisms to mitigate them.
Post- Issuance Compliance Requirements
After listing the social bonds, the issuer must disclose the following information in its annual report:
- Utilisation of the proceeds, as tracked through internal processes or as disclosed in the offer document. An external auditor must verify the tracking method and the allocation of funds.
- Details of the unutilised proceeds.
- A list of the projects in which the proceeds have been invested, with brief descriptions, the quantitative benefits/impacts of the projects, or qualitative indicators if quantitative measures are unavailable. This includes the methods and metrics used, as well as mitigation plans for perceived social risks.
- Appointment of an independent third-party certifier to ascertain whether the debt securities labelled as ESG are in consonance with recognised global standards.
Sustainability Bonds
According to the SEBI NCS Regulations and SEBI LODR Regulations, 2015, sustainability bonds refer to debt securities issued to raise funds for financing green or social projects. The compliance requirements for sustainability bonds are similar to those for social bonds and include mandatory disclosures on project objectives, evaluation processes, unutilised fund placement mechanisms, sustainability strategies, and performance targets. In addition, the issuer must comply with the provisions of the NCS Master Circular.
Sustainability- Linked Bonds (SLBs)
The SEBI NCS Regulations and SEBI LODR Regulations, 2015 define sustainability-linked bonds as "debt securities which have their financial and/or structural characteristics linked to predefined sustainability objectives of the issuer." Unlike the other two categories, SLBs are not tied to specific project uses. However, issuers must disclose Key Performance Indicators (KPIs) and Sustainability Performance Targets (SPTs), as well as the rationale for selecting them.
Conformity with Global Standards
As per SEBI's circular, only those debt securities will be labelled as "social bonds," "sustainability bonds," or "sustainability-linked bonds" if the funds raised are used for projects aligned with international standards. The circular specifically refers to the following guidelines:
- Internation Capital Market Association (ICMA) Principles/ Guidelines;
- Climate Bonds Standard;
- ASEAN Standards;
- European Union Standards; and
- Any framework or methodology specified by a financial sector regulator in India.
The aim of adopting such high standards is to enhance transparency and ensure that the funds are directed towards projects bearing environmental and social value. SEBI has also tightened disclosure obligations to reinforce accountability.
Challenges
Even though SEBI has laid out a comprehensive framework, Indian companies are likely to face a number of challenges in complying with these guidelines. ESG reporting, as required under the framework, demands reliable and verifiable data. Not all companies may have the internal mechanisms to collect such granular data, particularly the KPIs and SPTs required for Sustainability-Linked Bonds.
Another major compliance requirement is the appointment of independent third-party certifiers. Many mid-sized or smaller companies may lack the financial resources to engage such certifiers.
The biggest challenge lies in the requirement that debt securities labelled as "social bonds," "sustainability bonds," and "sustainability-linked bonds" must align with international standards. These standards are more suited to developed and mature economies. Indian companies may not be in a position to meet these international benchmarks, as the standards are often tailored to the contexts of other nations. India has its own unique socio-economic challenges, and many social or sustainability goals may be highly relevant in the Indian context, even if they do not strictly conform to international norms. While SEBI's framework aims to set a high bar, it may inadvertently overlook projects that address local priorities but fall short of global standards.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
