L&T’s ESG bond debut may open India’s sustainable debt market—if investors stay interested
The company listed India’s first ESG bond on the National Stock Exchange under Sebi’s new framework earlier this week. But whether this sparks a broader trend or remains an isolated milestone hinges on a critical factor: investors' willingness to pay the “greenium”.
Mumbai: On 23 June, infrastructure giant Larsen & Toubro (L&T) listed India’s first environmental, social & governance (ESG) bond on the National Stock Exchange under Sebi’s new framework. While Indian companies have previously raised ESG debt overseas, L&T’s rupee-denominated issuance is a domestic first under Sebi's guidelines.
Experts believe the ₹500-crore sustainability-linked bond (SLB), anchored by HSBC and offering a 6.35% coupon (competitive by market standards) suggests that investors are willing to back credible ESG-labelled issuances.
But whether this debut sparks a broader trend or remains an isolated milestone hinges on a critical factor: investors' willingness to pay the “greenium" – the difference between the yield or returns investors receive from a green bond versus a similar conventional bond.
“The primary factor will be investor interest and their willingness to offer a green or ESG premium to the bond issue compared to other fixed-income instruments," said Bose Varghese, senior director-ESG at Cyril Amarchand Mangaldas. “Demand for rupee-denominated ESG bonds has been lukewarm because of the issuers’ expectation of a ‘green premium’ and investors’ lack of interest to offer that. But L&T has done it. We can expect more to follow", he said.
Global vs local demand
Globally, ESG-labelled instruments from Indian companies have seen strong demand. In 2015, Exim Bank issued a $500-million green bond, followed by Axis Bank in 2016. But in India, listed green bond issuance, including municipal bonds, stood at just ₹6,953 crore as of March 2025, according to Sebi data collated by ICRA ESG Ratings Ltd.
According to data cited by Nikhil Aggarwal, CEO of investment platform Grip Invest, green bonds outperformed conventional bonds by nearly 2% in 2024. “The positive response from institutional investors highlights strong demand, which will be critical for future issuances," said Aggarwal.
R. Shankar Raman,president, whole-time director & chief financial officer (CFO) at L&T, told Mint the company aims to encourage responsible finance as a strategic pillar. “We received interest from reputed investors and arrangers who were aligned with the ESG theme. The issuance also enabled us to secure beneficial pricing, reflecting the positive market sentiment toward credible sustainability-linked offerings," he said.
Data from Prime Database showed thatIndia’s green bond market saw 27 issues totalling ₹8,743 crore between FY21 and FY25. The highest was in FY22, when ₹2,677 crore was raised across 10 issues. Only two issues, worth ₹700 crore, have been recorded so far in FY26.
Sebi's ESG bond framework
Sebi’s 5 June circular introduced a framework covering green, social, sustainability, and sustainability-linked bonds. It mandated KPI-linked disclosures and third-party verification. “While the framework is robust, its effectiveness will depend on the independence and reputation of the third party hired," said Varghese.
“L&T has long-standing sustainability targets, including carbon and water neutrality," said Heena Khushalani, partner, climate change and sustainability services, EY India. “For a company with strong internal momentum on ESG and measurable long-term targets, this instrument is flexible and a logical step," she added.
Khushalani also pointed out that SLBs often include coupon rate adjustments based on the achievement of sustainability targets. “If attractive coupon rates—like the 6.35% in L&T’s case—become a trend, it’ll incentivise more issuers," she said.
To be clear, among green bonds with a three-year tenure, Avaada Solaris and Clean Sustainable Energy offer a 6.75% coupon rate, according to data from Prime Database.
Still, a shortage of qualified reviewers in India could delay issuances. “This could create bottlenecks in timely issuance and validation," Aggarwal warned.
Khushalani said, “Sebi, NSE, or platforms like GIFT City could jointly issue guidelines or empanel competent verifiers to mitigate greenwashing risks."
The push for sustainable finance is likely to grow, especially among large firms with net-zero commitments. Experts said the Sebi framework has brought regulatory clarity and boosted investor confidence. “As successful examples emerge, more corporates are likely to explore ESG bonds, not just as a funding tool but as a strategic instrument to align with global investor expectations," said L. Shivakumar, CEO of ICRA ESG Ratings Ltd.
Shivakumar also highlighted India’s proposed draft climate finance taxonomy, aimed at bringing consistency to ESG disclosures by aligning them with global standards. “It will provide a structured classification system that enables better comparability and tracking of outcomes," he added.
Smaller firms could struggle
Despite policy momentum, experts said smaller firms could struggle to participate in the ESG debt market owing to high compliance costs, limited visibility, and weaker secondary-market liquidity.
“So far we have seen only large, reputed Indian corporations issuing ESG-labelled bonds," said Varghese. “For smaller companies with smaller fund requirements, issuance costs may prove significant."
Indian Renewable Energy Development Agency Limited issued a 10-year bond for ₹590 crore in 2019 and Dme Development Limited issued a 10-year bond for ₹775 crore in 2024.
An analyst at a rating agency said, “The real test will be how effectively Sebi ensures enforcement and prevents greenwashing. Without that, the credibility of the entire market is at stake."
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