Indore's first municipal green bond a beacon for India's urban local bodies

The idea of floating the bond, which was oversubscribed 5 times on day-1 of launch, germinated five years back. The primary aim then was neither climate change nor an urge to save the environment

The idea of floating India’s first municipal green bond, which was oversubscribed 5 times on day-1 of the February 10 launch, germinated around five years back. The primary purpose then was neither climate change nor an urge to save the environment. The aim was to save money, and renewables showed Indore Municipal Corporation (IMC) how to save tens of crores of rupees.  

Cleaning up India’s air, water and sewers to meet a 2070 net-zero commitment cannot be done by New Delhi alone--perhaps, not even by state administrations. It lies with urban local bodies. And Indore’s success with green finance is a roadmap to India’s other urban local bodies, big and small. Starved for finance and running huge debts, many of these are letting urban centres decay, paying little heed to citizens’ welfare and the environment.

The seed for the Rs 122 crore green issuance, with an option to retain another Rs 122 crore, was sown in 2016-17, when IMC was spending around Rs 26 crore each month to supply water to the city. Water had to be pumped from a river 80 kilometers from Indore, using electricity because the flow was against gravity, said Divyank Singh, IAS, CEO, Indore Municipal Corporation. It was then that the Ministry of New & Renewable Energy rolled out an incentive for green power.

IMC seized the initiative and bid for the subsidy, which contributed about Rs 42 crore to set up a solar plant. Moreover, the Ministry of Housing and Urban Affairs offered 1.5 per cent interest subvention for a green bond, amounting to Rs 10 crore for every Rs 100 crore raised, to fund the project. That amounted to about Rs 60 crore in combined subsidy.  

"But the idea was not to avail subsidy as such," Singh said. "The idea of going ahead with the green bond was to venture into a  new kind of field, which will open up new domains of urban financing. As a municipal body, we have a Rs 7,500 crore budget, and credit lines with banks, which could have funded the solar plant."

Apart from the subsidy component, IMC’s track record in servicing loans favoured a public issue for a green bond.

"IMC enjoys double AA-plus credit ratings, given on substantial grounds after going through our financial sheets and cash flows," Singh said.

Oversubscription for the green bond by retail investors, who ignored Adani's Rs 20,000 crore FPO, was over four times.

The proceeds from the green bond, which pays investors 8.41 per cent, will go towards building the plant, said Singh, with no scope for green washing. "We have to be clear on the use of proceeds with Sebi, and so even if we want, we cannot divert the green bond funds for other uses," Singh said. "Also, we cannot claim viability gap funding without the solar project." The tender for the plant is out. On commissioning, it will generate 8.1 million units of power each month, which will be adjusted by the utility towards the 30 million units consumed by IMC.

IMC is a relatively better run corporation, with Indore, Madhya Pradesh largest city, winning the tag of the cleanest city for the past six years, irrespective of whether the BJP or the Congress was in power in Bhopal.

It was also among the first municipal bodies to venture into carbon financing, as early as 2018. It sold the carbon credits it generated, earning around Rs 10 crore, Singh said. IMC has accumulated around 300,000 carbon credits from a bio CNG project.

It is not easy to replicate IMC’s experience across India because Indore is a well managed corporation, said R R Rashmi, distinguished fellow, TERI. Most urban local bodies carry huge debts and have poor creditworthiness. And states are in no position to give sovereign guarantees for green bonds, he said.

IMC’s project was a unique proposition, Singh explained. "We are a well-managed local body. We have subsidies. The solar plant was not an income generating asset, but an income saving asset. The Rs 5 crore monthly savings is through power generated by that plant. So we will not be paying for 8.1 million units that we need to pay."

 "Moreover what we learnt is that for any particular project  there has to be a very good escrow mechanism, and very good prospective financial inflows. Only then can we generate investor interest," he added.