Rupee denominated bond / masala bond: substitute funding route for Indian corporates

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Rupee denominated bond / masala bond: substitute funding route for Indian corporates

May 3, 2018


Masala Bond (defined below) is a rupee denominated bond issued by certain Indian entities to the international investors to raise funds in international market. These Masala Bonds are offered to foreign investors who are interested in investing in India. These bonds favors the borrowers as the exchange risk rate is shifted to investors and the borrower has ascertained liability, whereas the investors benefit as the gross domestic product (“GDP”) in India rising when the interest rate overseas remain stagnant. Reserve Bank of India (“RBI”) vide its circular number RBI/2015-16/372 has fixed a minimum maturity period for Masala Bonds, i.e., 3 (three) years.

In the year 2014, the RBI had permitted 2 (two) multilateral institutions, the International Financial Corporation (“IFC”) and the Asian Development Bank (“ADB”), to issue rupee denominated bonds in the international market. Stimulated by the vigorous demand for such rupee denominated-dollar settled instruments (or rather as termed as “Masala Bonds”) in the international markets, the RBI in its first bi-monthly monetary policy for financial year 2015-16, put forward its intention to expand the scope of issuance of Masala Bonds by international financial institutions as also to permit eligible Indian corporates, (i.e. those eligible to raise external commercial borrowings (“ECB”s), to issue such bonds under an appropriate regulatory framework.

RBI vide its circular  RBI/2015-16/193  dated 29 September 2015, had issued guidelines allowing Indian Corporates to issue rupee denominated bonds to overseas investors (“Rupee Bond Guidelines”) under the ECB route and significantly relaxing a number of restrictions applicable to ECBs in foreign currency. Allowing companies to issue rupees denominated bonds abroad has addressed both pricing and currency risks, while opening a window for rupee-denominated instruments to trade abroad. The Rupee Bond Guidelines not only envisage a broad range of investors and borrowers, but also provide greater end use freedom and flexibility for pricing the issue in comparison with the extant guidelines on ECBs. As the bond issue would be Rupee denominated, it would further encourage Indian borrowers who were so far wary of fluctuating currency exchange rates.


1. Eligible Issuer: Any company registered as a company under the Companies Act, 1956/ 2013 or body corporate (entity specially created out of a specific act of the Parliament) and Indian banks are eligible to issue Rupee denominated bonds abroad to international investors. Real Estate Investment Trusts (“REITs”) and Infrastructure Investment Trusts (“InvITs”) which comes under the regulatory jurisdiction of the Securities and Exchange Board of India (“SEBI”) are also eligible to issue Rupee denominated bonds overseas. However, other resident entities like Limited Liability Partnerships and Partnership firms, etc. are not eligible to issue these bonds. On the other hand, the corporates in India, which are under investigation by any enforcement authority in India, is required to obtain prior approval from RBI for issuing Masala Bonds to any person.

2. Potentially wider pool of investors: The rupee denominated bonds can be subscribed / invested by an investor who is a resident of a country satisfying criteria given below herein or by Multilateral and Regional Financial Institutions where India is a member country. The Rupee denominated bonds can only be issued in a country and can only be subscribed by a resident of a country:

  1. that is a member of Financial Action Task Force (FATF) or a member of a FATF-Style Regional body; and
  2. whose securities market regulator is a signatory to the International Organization of Securities Commission’s (IOSCO’s) Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with the SEBI for information sharing arrangements; and
  3. should not be a country identified in the public statement of the FATF as:
  • A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
  • A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.

3. Flexibility to issue either listed or unlisted instruments: Masala Bonds may be placed privately or listed on stock exchanges in accordance with the host country’s regulations.

4. All-in-cost ceilings not to apply: In sharp contrast to the Existing Policy, the Revised Policy does not place any fixed cost restriction; instead, it mentions that the ‘all-in-cost’ ceiling should be commensurate with the prevailing market conditions.

5. Limited end-use restrictions: The revised policy does not carry forward the end-use restrictions placed under the existing policy. Instead, it permits eligible borrowers to utilize funds raised by issuance of Masala Bonds for any purpose, except a small negative list of activities that has been laid down by RBI. The negative list includes the following:

  1. Real estate activities other than for development of integrated township / affordable housing projects;
  2. investing in capital market and using the proceeds for equity investment domestically;
  3. The activities which are prohibited under the Foreign Direct Investment (FDI) guidelines;
  4. On-lending to other entities for any of the above objectives; and
  5. Purchase of land.

End-uses should also be in compliance with other applicable laws and regulations and should be permitted by respective jurisdiction regulator.

6. Approval from RBI: If the amount of the bond is within 50 (fifty) billion per annum, then the route for the investment is automatic. On the other hand, if the amount of the bond goes beyond 50 (fifty) billion per annum, in such case, the issue requires prior approval of RBI.

7. Hedging permitted:International investors are also permitted to hedge their rupee exposure arising as a result of their lending. This should be an added advantage for investors to enter through the Rupee Denominated Bonds route with limited currency fluctuation risk. The non-resident investors are also eligible to hedge their exposure in Rupee denominated bonds provided they operate through permitted derivative products with AD Category – I[1] banks in India. The investors can also access the domestic market through branches / subsidiaries of Indian banks abroad or branches of foreign banks with Indian presence abroad on a back to back basis.


The Revised Policy certainly seems to be a step in the right direction, which should usher a new era of raising debt by Indian corporates. In fact, in light of the comparative advantages between Rupee Bonds vis-à-vis Listed NCDs/ Existing Policy, the Revised Policy seems to thrown open a completely new avenue of debt funding for Indian corporates.

Authors: Prashant Kumar Jain, Co-Founder & Partner; Abhishek Gupta, Associate.

Disclaimer: The content of this article is intended to provide a general guide on the subject matter. Specialist advice should be sought about your specific circumstances. For any queries, the author can be reached at (i) (ii)



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