Since the first bond issuance in 2012 by Omnicane (a listed company involved in the sugarcane industry), key local market players have jumped on the bandwagon to raise debt financing by issuing bonds, and the appetite of issuers and investors seems to have steadily grown over the years.
At that time, the regulatory framework for listed bonds was principally found in the Listing Rules of the Stock Exchange of Mauritius (SEM) and the rules of the Development and Enterprise Market (DEM), and private placements were not subject to the purview of any regulatory authority or laws until fairly recently. With the proclamation of the Securities (Preferential Offer) Rules (the Preferential Offer Rules) in 2017, private placements became regulated instruments.
The Mauritian authorities and regulators took heed of stakeholders’ demands and brought about a number of changes over the years to the Listing Rules, the DEM Rules, and the Preferential Offer Rules to balance the practicalities of issuing bonds whilst still protecting investors’ interests.
OPPORTUNITIES FOR THE LOCAL MARKET
With a view to continue encouraging investors and issuers and to reposition Mauritius as an attractive jurisdiction for sustainable finance, the minister of finance, economic planning and development announced the advent of a framework for green and blue bonds in the 2020-2021 budget.
Consultations by the government, the two regulators of the banking and the financial services industry: the Bank of Mauritius (BOM) and the Financial Services Commission (the FSC), and other market participants led to the publication of the BOM guide for the ‘Issue of Sustainable Bonds in Mauritius’ (the BOM Guide) in June 2021, and the FSC guidelines for the ‘Issue of Corporate and Green Bonds in Mauritius’ (FSC Guidelines) in December 2021 and as revised recently in April 2022. Whilst the BOM Guide merely serves as a guide for informational purposes, the FSC Guidelines attracts administrative sanctions (such as directions, private warnings, public censures, and revocation of licenses) in case of breaches. As it has binding authority compared to the BOM Guide, the FSC Guidelines will be the focus of this article.
With the first ever green bond issuance by Cim Finance (a listed company in the leasing sector) this year, the jurisdiction’s transition into the sustainable finance sector is well under way.
WHO CAN ISSUE GREEN BONDS AND IS THERE A MINIMUM SUBSCRIPTION AMOUNT?
Corporate and individual investors can subscribe for at least MUR 1 million for private placements or MUR 10,000 for public offers of green bonds issued by four categories of ‘eligible issuers’.
The first is issuers making a public offer of securities or a takeover offer by an exchange of securities.
Second is issuers with: at least 18 months before the proposed issuance, net assets exceeding MUR 100 million (or its equivalent); at least three years’ incorporation and either having positive net profits after tax over the last 12 months’ preceding the application for the issue or having a debt/EBITDA for the last two financial periods preceding the issue of a weighted average between zero and six times (inclusive); and no history of recurrent default or late payments.
Third is issuers of fully secured or guaranteed bonds, who also meet the second requirement above; or fourth, issuers of green bonds with a minimum BBB credit rating.
Issuers who temporarily do not comply with these requirements may nevertheless issue green bonds, provided that such bonds are solely intended for sophisticated investors until the issuers meet the necessary requirements and include certain prescribed disclosures in the offering document.
SALIENT FEATURES OF THE FSC GUIDELINES
The FSC Guidelines draw heavily on the Green Bond Principles of the International Capital Markets Association (ICMA GBPs) and set out the four principles in that respect.
To qualify as a green bond, proceeds must necessarily be utilised for green projects having clear and, where feasible, quantifiable environmental benefits (such as renewable and sustainable energy, clean transportation, green buildings amongst others). Internal processes and mechanisms must be implemented by the issuer to evaluate, select and approve green projects, measure their expected environmental benefits, manage and track the allocation and utilisation of the proceeds, and for the temporary placement of the remaining uninvested balance.
As transparency is a key factor, issuers are also expected to appoint a registered auditor, licensed or recognised credit rating agency or other service provider recognised by the FSC (independent assessor) to conduct periodical independent external reviews, audits or certifications.
They must also incorporate a pre-issuance review report in the documents of a public offer or furnish such report to investors in case of a private placement; and annually publish a green bond progress report intended for investors until the maturity of the bonds concerning prescribed matters (including a description of the selected projects, the allocation of proceeds, any environmental impact, KPIs and underlying methodology or assumptions, the expected timeframe for completing those projects, and so on).
The offering document must contain prescribed disclosures on the corporate governance and board practices of the issuer, a comprehensive statement of the issuer’s debt and liabilities, and any events triggering the early repayment of invested amounts. In addition, the offering document must comprise of a green bond memorandum which is the main source of disclosure for issuers to demonstrate the greenness of the proposed projects and the application of the aforementioned principles, criteria and processes.
Among the continuing disclosure obligations of issuers of bonds (whether by public offer or private placement), publication is required in respect of any changes in the terms and conditions of the bonds, the redemption or cancellation of the bonds, the occurrence of an event of default, information which may directly and materially affect the pricing of the bonds, and the status of outstanding bonds (where such bonds are outstanding). Maturity dates must be announced at least one month prior, and investors must be promptly informed in case of early redemptions. Each year, the issuer must submit information on the status of outstanding bonds to the FSC within 30 days of any request.
If the green bonds are listed, the issuer must, in addition to continuing compliance with the rules of the securities exchange and any other applicable laws, publish information for any new tranche of bonds such as the credit rating of that tranche, the interest rate paid, the maturity date, the actual rate at issue, the spread over the repo rate for floating rate bonds, or the spread over similar maturity government bonds for fixed rate and zero-coupon bonds.
Issuers must appoint the following functionaries:
An issuing and paying agent (IPA), to ensure the proper segregation of monies of different issuers and from the IPA’s own funds, adequate insurance policies are in place against fraud and electronic and computer crimes, investors are notified, the credit rating agency, the CFA and the FSC are promptly informed of any default, funds are received from the issuer and paid to investors at redemption, and details of the green bond issuance is reported to the FSC within 14 working days of the issue date.
A corporate finance adviser (CFA), responsible for acting as the principal point of contact between the FSC and the issuer, verifying all information disclosed in the offer document before the issue date, arranging for the allocation of an International Securities Identification Number code to each bond issue if applicable, ensuring that the offer document specifically mentions investments are subject to credit and other risks and payments will be made only if the issuer has made the funds available to the IPA, conducting customer suitability assessments to ensure that individual investors understand the risks associated to the investment and that such investment matches the customer’s objectives and risk appetite, conducting investor due diligence checks, ensuring that the pricing of the bonds reflect their credit rating (if any) and is aligned with market conditions, and reporting to the FSC every six months on the outstanding amount of green bonds issued and other relevant information.
If the bond is underwritten, an investment dealer must also be appointed. Appropriate disclosures in that regard should be covered in the offering document.
The FSC Guidelines also cover further information concerning the unrestricted transferability of bonds, the manner in which bonds should be traded, bought back, transferred or redeemed, market conventions applicable in respect of the coupon rate, and restrictions on securitisation.
Whilst the implementation of the green bond framework remains a welcome and encouraging step, the framework may present some challenges, which similarly exist in other countries.
From a global perspective, the lack of harmonisation of reporting standards and the voluntary nature of those standards have been critiqued by market experts and Mauritius is not an exception as, to this date, there is no definition of what amounts to ‘green’ in our legislation. Issuers may be discouraged from utilising other reporting standards (such as the United Nations’ Principles for Responsible Investments and the Standards of the Climate Bonds Initiative) as the BOM Guide and the FSC Guidelines are largely inspired by the ICMA GBPs.
Greenwashing also remains a major concern in the absence of a concrete universal or local definition of ‘green’. As an illustration, China allowed investments in ‘clean use of coal’ until late 2019, which was not aligned with its European counterparts. Issuers must remain alive to the risk of misrepresentations in the offering documents. Given that Mauritius is still in the primitive stage of greening its financial sector, our courts have not yet had the opportunity of addressing the matter. Another question which arises is whether Mauritian courts are ready to face the challenge of addressing greenwashing claims.
Proving the loss or damage suffered by investors (aside from the moral and ethical implications) may pose an additional challenge. It is likely that greenwashing claims would be resolved in accordance with the regime under the Securities Act 2005 on criminal and civil liability for defective prospectuses and Mauritian contract law principles, and may further potentially engage directors’ liability as the offering document contains certain directors’ statements on their responsibility for its contents.
Compared to traditional bonds, the costs associated with a green bond may present barriers for certain issuers as they should consider the cost of setting up an appropriate internal framework for the continuous assessment and monitoring of KPIs, the annual cost of appointing the independent assessor, and ancillary costs associated with the preparation of his report or certification.
In contrast to certain jurisdictions, the current regime does not yet cater for sufficient financial and tax incentives. For example, Singapore has addressed the problem of costs through the Green Bond Grant Scheme, whereby eligible issuers are given a grant to cover the expenses of obtaining the annual independent report or certification, and the MAS Sustainable Bond Grant Scheme which is similar but extends to pre-issuance reviews and ratings. Moreover, interest derived by investors from bonds issued to finance renewable energy projects approved by the Mauritius Revenue Authority are exempt from income tax. It might be worth expanding the scope of this exemption to other categories of green projects. In South Africa, Nedbank issued green bonds underwritten by the International Finance Corporation (IFC) to finance green buildings, hence contributing to the country’s decarbonisation targets. Similarly, Singapore took the initiative to finance through sovereign bonds the building of island-wide charging points for electric vehicles intended to phase out the use of conventional engine vehicles. The question would be whether by limiting fiscal incentives to renewable energy projects, Mauritius is exploring the full potential for financing green projects through the issue of green bonds.
Whilst the initiative as a whole is laudable, the current framework may be tweaked to further stakeholders through improvements such as setting standards for ‘greenness’, implementing additional financial and fiscal incentives and schemes, and fostering investor education.