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
The Reserve Bank of India issued its A.P. (DIR Series)
Circular No.17 on 29 September 2015 (the 'Rupee
Bond Guidelines'1) 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 with the first real
opportunity to have exposure to the Indian Rupee, which
has been enjoying a lower volatility lately compared to other
Some of the key features of Masala
The Rupee Bond Guidelines allows a greater universe of
issuers to issue Masala Bonds. In addition to companies
(as was the case), any 'body corporate'2, 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 is also eligible
to issue Masala Bonds.
Use of proceeds
The proceeds of a Masala Bond issue can be utilised by the
issuer for all purposes except for:
Issuer and investors
- real estate activities (including acquisition of land) except
development of integrated townships or affordable
- investment in capital markets (including domestic Indian
- activities otherwise prohibited under the existing 'foreign
direct investment' regulatory framework, and
- on-lending to other entities for the purposes of any of the
preceding restricted uses.
Masala Bonds can only be issued in a jurisdiction which is a
Financial Action Task Force (FATF) Compliant Centre, and
only investors from a FATF-compliant jurisdiction are eligible
to invest in accordance with the Rupee Bond Guidelines.
They 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.
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. Masala Bonds can only be issued in a
maximum size of US$750 million. Any increase in the issue
size beyond US$750 million will require the prior approval
of the RBI. In relation to the pricing of Masala Bonds the
Rupee Bond Guidelines provides 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 a currency volatility into the price of Masala Bonds.
Consistent with the tax treatment of bonds issued by Indian
issuers, a withholding tax of 5% is exigible on interest income.
The publication of the Rupee Bonds Guidelines certainly
provides an avenue for a vast variety of issuers to raise
capital from the international debt markets. Provided that
the cost of borrower 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 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 for Indian non-bank finance
companies, funding remains a main weakness, given the
regulatory restrictions which limit their ability to accept
deposits. It is expected that these NBFCs may look towards
the international debt capital markets to address this funding
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 Exchange3
|IFC 7.1% 21/03/2031
|EBRD 6.4% 03/04/2016
|IFC 6.45% 30/10/2018
|EBRD 5.1% 02/02/17
|IFC 6.45% 30/10/2018
|EBRD 5.1% 02/02/17
|IFC 6.3% 25/11/24
|EBRD 5.625% 15/03/17
|EBRD 5.75% 19/03/18
|IDB 6% 05/09/17
|IDB 6.1% 02/09/16
|IDB 8.25% 15/05/17
Disclaimer: 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 Indian-related transactions.
1 The Rupee Bond guidelines for the purposes of this article also include the update to the Rupee Bond Guidelines issued by the RBI on 13 April 2016
2 The Companies Act 2013 includes a cooperative society within the definition of 'body corporate'
3Source: London Stock Exchange Factsheet on Indian Rupee Bonds
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