Appetite for Masala Bonds grows

Financial Services Alert


In brief…

Borrowing by Indian companies from the overseas market or "External Commercial Borrowings" (commonly referred to as ECBs), is regulated by the Reserve Bank of India (RBI) and is governed by the various rules specified by the RBI.

Until recently, the ability of Indian companies to borrow from the overseas markets was predominantly limited to foreign currencies. The RBI issued its A.P. (DIR Series) Circular No. 17 on 29 September 2015 (the Rupee Bond Guidelines) which allowed Indian companies to raise funding through the issuance of Rupee-denominated debt instruments – which are now widely referred to as "Masala Bonds".

The Rupee Bond Guidelines have increased the ability of Indian issuers to access the international debt capital markets and thereby have potentially opened up another avenue for Indian issuers to seek competitively priced funding from the international markets. Similarly, the Rupee Bonds Guidelines have allowed foreign fixed income investors the first real opportunity to have exposure to the Indian Rupee, which has been enjoying a lower volatility lately compared to other Asian currencies.

This article outlines some key features of Masala Bonds and the outlook for issuers.

NB: However, please note that Indian regulations do not permit foreign law firms to advise on Indian law. This article is based on our discussions with Indian counsel, our understanding of Indian regulations, and our experience of working on India-related transactions.


The Rupee Bond Guidelines allow a greater universe of issuers to issue Masala Bonds. In addition to companies (as was the case), any "body corporate", non-bank financial company, real estate investment trust and infrastructure investment trust which is subject to the regulatory oversight of the Securities and Exchange Board of India (SEBI) is also eligible to issue Masala Bonds.

Indian banks will also be eligible to issue Masala Bonds for the purposes of financing infrastructure and affordable housing, subject to conforming to the guidelines issued by the RBI.

Indian banks can act as arranger and underwriter. In the case of an Indian bank underwriting an issue, its holding cannot be more than 5% of the issue size after six months of issue. However, underwriting by overseas branches or subsidiaries of Indian banks for issuances by Indian banks is not allowed.

Use of proceeds

The proceeds of a Masala Bond issue can be utilised by the issuer for all purposes except for:

  • Real estate activities (including acquisition of land) except development of integrated townships or affordable housing projects
  • Investment in capital markets (including domestic Indian equity investments)
  • Activities otherwise prohibited under the existing "foreign direct investment" regulatory framework
  • On-lending to other entities for the purposes of any of the preceding restricted uses


Masala Bonds can only be issued in a jurisdiction and can only be subscribed by a resident of a country:

  • Which is a member of Financial Action Task Force (FATF) or a FATF-Style Regional Body
  • Whose securities market regulator is a signatory to the International Organization of Securities Commission’s (IOSCO’s) Multilateral Memorandum of Understanding (MOU) or to bilateral MOU with the SEBI for information sharing arrangements
  • Should not be a country identified in the public statement of the FATF as a jurisdiction having AML or terrorism financing deficiencies or a jurisdiction that has not made sufficient progress in addressing those deficiencies

Further, multilateral and regional financial institutions where India is a member country can also be investors of Masala Bonds.

The Masala Bonds should also be "plain vanilla bonds". What does not constitute "plain vanilla bonds" is not clear at present, as the term is not defined in the Rupee Bond Guidelines.

Pricing parameters

The Rupee Bond Guidelines prescribe a minimum maturity of three years with prepayment (whether voluntary or mandatory) possible only after the three years from the date of issuance.

The maximum amount which can be borrowed by an entity by issuance of Masala Bonds is INR 50 billion (approximately US$750 million). Any increase in the issue size beyond INR 50 billion in a financial year will require the prior approval of the RBI. In relation to the pricing of Masala Bonds the Rupee Bond Guidelines provide that the "all-in costs" of an issuance should be commensurate to the "prevailing market conditions". There is a lack of clarity as to what this means. In any event, it is expected that once a market develops for Masala Bonds, the RBI may revisit this all-in cost ceiling.

In addition to the all-in cost ceiling, the rate of conversion that will apply between the Indian Rupee and the foreign currency in which the Masala Bond will settle and trade will be the prevailing rate at the time any payment is being made on the bonds – thereby shifting the currency risk onto the investors. This feature will have consequences on pricing as investors will want to factor any currency volatility into the price of Masala Bonds.

Tax treatment

Consistent with the tax treatment of bonds issued by Indian issuers, a withholding tax of 5% is exigible on interest income. This concessional rate was initially only available until 30 June 2017, but in the Union Budget for 2017-18, the Finance Minister extended this concessional rate to June 2020. An additional tax benefit has been extended to Masala Bonds with the Union Budget for 2017-18 proposing to exempt them from taxation for transfers between non-residents.

In order to provide relief in respect of gains arising on account of appreciation of the Indian Rupee against a foreign currency at the time of redemption of Masala Bonds to secondary holders, the Indian government has indicated its intention to amend the Income Tax Act. The proposed amendment would be effected to ensure that the appreciation of the Indian Rupee will be ignored for the purposes of computation of the full value of consideration.


The publication of the Rupee Bonds Guidelines certainly provide an avenue for a vast variety of issuers to raise capital from the international debt markets. Provided that the cost of borrowing onshore is higher that the pricing of the Masala Bonds, it would certainly be of interest to Indian companies who wish to raise financing at a lower cost. Equally, given the relatively high cost of borrowing onshore in India, especially for smaller mid-cap companies, there is the expectation that even an aggressively-priced bond may appear palatable to both investors and the issuer alike. There is also the need for fund raising to address India’s infrastructure needs, which Masala Bonds may address if a robust market develops for these bonds. Also, given the regulatory restrictions which limit their ability to accept deposits, it is expected that Indian non-bank finance companies may look towards the international debt capital markets to address their funding requirements.

To conclude, the advent of Masala Bonds may herald a new phase in investor appetite to participate in one of the world’s fastest growing economies.

Indian Rupee Bonds on the Main Market of the London Stock Exchange

As of February 2017, 30 Masala Bonds are listed on the London Stock Exchange with a combined outstanding value of US$3.5 billion.* Some of the notable transactions are listed below.

*Source: London Stock Exchange Masala Bonds List (January 2017)

Issuer Issue Date Amount
(INR billions)
Housing Development Finance Corporation (HDFC) 9 Sep 2016 15 7 4
Province of British Columbia Canada 9 Sep 2016 5 6.6 4
National Thermal Power Corporation (NTPC) 10 Aug 2016 20 7.375 5
Housing Development Finance Corporation (HDFC) 21 Jul 2016 30 7.875 3
International Finance Corporation (IFC) 21 Mar 2016 2 7.1 15
European Bank for Reconstruction and Development (EBRD) 4 Mar 2016 5 6.4 3
International Finance Corporation (IFC) 10 Aug 2015 3.15 6.45 5
International Finance Corporation (IFC) 30 Apr 2015 18 6.45 3.5
European Bank for Reconstruction and Development (EBRD) 2 Feb 2015 3.11 5.1 2
International Finance Corporation (IFC) 18 Nov 2014 10 6.3 10
European Bank for Reconstruction and Development (EBRD) 28 Oct 2014 5.5 5.625 2.4
European Bank for Reconstruction and Development (EBRD) 19 Sep 2014 3 5.75 3.5
Inter-American Development Bank (IDB) 5 Sep 2014 8.5 6 3
Inter-American Development Bank (IDB) 15 May 2007 1.5 8.25 10