India: Welcome News For Indian Borrowers: RBI Allows Issue Of Rupee Denominated "Masala" Bonds Overseas By Indian Entities

In 2014, the Reserve Bank of India (RBI) had permitted 2 multilateral institutions, the International Financial Corporation (IFC) and the Asian Development Bank (ADB), to issue rupee denominated bonds in the overseas market. Spurred by the robust demand for such rupee denominated-dollar settled instruments (or 'Masala Bonds' as they are colloquially called) 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 (ECBs), to issue such bonds under an appropriate regulatory framework.

This proposal has now been taken forward by the RBI vide its circular dated 29 September 2015, introducing guidelines for issuance of Rupee denominated bonds by Indian Corporates 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 rupee-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.

Key features of the Rupee Bond Guidelines and their implications for Indian borrowers and foreign investors:

Expanded definition of eligible borrowers: Any Indian corporate or body corporate, Real Estate Investment Trusts and Infrastructure Investment Trusts have been permitted to issue Masala Bonds. Banks, Non-banking Financial Companies (NBFCs), infrastructure or investment holding companies and companies in the service sector which were otherwise not permitted to raise ECBs have not been restricted from issuing Masala Bonds. However, corporates under investigation by any enforcement authority in India continue to require prior RBI approval for issuing Masala Bonds.

Potentially wider pool of investors: The previous ECB regime set out a list of eligible lenders. These included banks and significant shareholders, but did not explicitly refer to debt funds, for example. In contrast, any investor from a Financial Action Task Force (FATF) compliant jurisdiction can invest in such bonds ( which may pose a challenge given that (i) the investments would be from investors from various foreign jurisdictions; and (ii) such instruments would be freely transferable in the secondary market. However, Indian banks cannot "have access" to Masala Bonds in any manner, other than as underwriters or arrangers of the bonds. These changes ought to widen the market of borrowers and investors, a key regulatory condition to the creation of a more liquid debt market for Indian corporates.

Nature of instrument: Vanilla fixed rate / floating rate bonds denominated in rupees and settled in a foreign currency (freely convertible) issued in a FATF compliant financial centres can be issued (

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.

Minimum Maturity: Masala Bonds will have a minimum maturity period of 5 years. Exercise of call and put options, if any, shall only be possible upon completion of minimum maturity period. The Rupee Bond Guidelines use the term "minimum maturity" as opposed to "minimum average maturity" used in the erstwhile ECB regime for foreign debt which implies bullet bonds rather than amortised bonds.

All-in-cost ceilings not to apply: Drawing a sharp contrast to the existing ECB route, no cap for all-in-cost has been specified for such issuance. The Rupee Bond Guidelines broadly envisages that the all-in-cost shall be in line with prevailing market conditions and can be determined through the book building method. Therefore, whilst the move to a more market based approach is welcome news, much will depend on the RBI's approach, i.e., whether the RBI will evolve its own informal standards (which would defeat the purpose of the relaxation) or whether it will take a less interventionist approach and allow the market to price Masala Bonds. The pricing of debt instruments will depend on the individual credit risk of the borrower, the security features of the bond, the Indian and global interest rate environment and country risk, amongst others. It becomes difficult to apply formulaic references to the pricing of comparable transactions as reference points in this regard. Interested parties will need to closely monitor the RBI's practice as it evolves.

Underwriting restrictions: Where an Indian bank underwrites an issue of Masala Bonds, it will not be able to hold more than 5 per cent of the issue size after completion of 6 months of the issue subject to applicable prudential norms. This is not stated to apply to non-Indian banks.

Limited End-Use Restrictions: There are no restrictions on the end use of the proceeds for general corporate purposes, working capital, repayment of rupee debt raised from Indian banks. The Rupee Bond Guidelines significantly ease the restrictions under the extant ECB regime and set out a limited restricted list which prohibits the use of proceeds for real estate activities other than for development of integrated township / affordable housing projects, investment in capital market, acquisition finance, activities prohibited under the prevailing foreign direct investment guidelines, on-lending to other entities for any of the above objectives and the purchase of land.

Amount: The maximum limit which could be raised in any financial year has been set out at USD 750 million per annum under the automatic route. Specific RBI approval would be required beyond the limit of USD 750 million per annum.

Security for the Bonds Available without prior RBI approval: Creation of charge on immovable assets, movable assets, financial securities and issue of corporate or personal guarantees in favour of bond trustee, to secure the rupee bonds is permitted with prior no-objection of the authorised dealer. Issuance of guarantee or letter of comfort by banks, financial institutions and NBFCs is not normally permitted for ECBs and may not be permitted for such Masala Bonds as well.

Hedging by Investors allowed: The overseas investors will be permitted to hedge their rupee exposure through permitted derivative products with Authorised Dealer Category – I banks in India. The investors can also "access" the domestic market through branches / subsidiaries of Indian banks situated abroad or branches of foreign banks in India on a back to back basis. From an issuer perspective, since the entire bond would be raised in Rupees and repayment would also in Rupees the exchange rate fluctuation risk does not arise.

Conversion Rate: The currency conversion rate shall be at the market rate on the date of settlement for issue and servicing of the Masala Bond.

Continued applicability of ECB norms for some aspects: Reporting requirements (including obtaining Loan Registration Number (LRN), parking of bond proceeds, conversion into equity in accordance with the existing ECB norms will continue to apply to the Masala Bonds.

Will provisions in relation to issue and listing of debentures under the Companies Act apply to Masala Bonds? The provisions of the Companies Act, 2013 including the provisions of private placement of debentures are likely to apply to the rupee denominated Masala Bonds i.e., for private placements restrictions such as no specific disclosure requirements for private placement offer letter, eligible investors, requirement of creation of debenture redemption reserve, appointment of a Securities and Exchange Board of India (SEBI) registered debenture trustee, prescribed form of debenture trust deed, restriction on roadshows and announcement of offer on financial websites etc. The Ministry of Company Affairs (MCA) in its circular dated 13 November 2014 had stated that unless provided under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipts Mechanism) Scheme, 1993 (Scheme) and by the RBI through its regulations, provisions of Chapter III will not apply to the issue of foreign currency convertible bonds (FCCBs) or 'foreign currency bonds' made exclusively to persons resident outside India. Further, on 18 March 2015, the MCA clarified that unless provided under the Scheme or by the RBI through its regulations, provisions contained in Rule 18 of the Companies (Share Capital and Debenture) Rules, 2014 would not apply to the issue of FCCBs or 'foreign currency bonds'. The terminology used in both clarifications is 'foreign currency bonds' and clarity may be required if Masala Bonds will come within the purview of bonds issued to persons resident outside India pursuant to RBI regulations.

Benefit of Reduced Withholding? In case of foreign currency loans, a general withholding tax rate of 20% applies; and in case of rupee-denominated loans, a general withholding tax rate of 40% (for non-resident corporates other than Qualified Foreign Investors (QFIs) or Foreign Institutional Investors (FIIs)) and 30% (for non-resident non-corporates other than QFIs or FIIs) applies subject to lower withholding tax rate under the applicable tax treaty. A concessional withholding tax rate of 5% is available under Sections 194LC and 194LD of the Income Tax Act, 1961 on foreign currency loans borrowed from sources outside India (subject to conditions) and on rupee denominated bonds of an Indian company or a Government security payable to FIIs or Foreign Portfolio Investors (FPIs) or QFIs (subject to conditions) respectively. Where the prescribed conditions are not met, the general rates mentioned above will apply. All the tax rates mentioned above will have to be increased by applicable surcharge and cess.

The definition of 'foreign currency' has been provided in Section 2(m) of the Foreign Exchange Management Act, 1999 (FEMA) which states that 'foreign currency' means any currency other than 'Indian currency'. Therefore, clarification issued under Indian Tax Laws may be required to ascertain if the benefit of reduced withholding tax at 5% (plus applicable surcharge and cess) will be available to rupee denominated (and dollar settled) bonds listed on foreign stock exchanges.

Capital gains implications: Gains arising from the transfer of such bonds may be taxable in India, subject to relief under any treaty or suitable clarification issued under Indian Tax Laws.


The Rupee Bond Guidelines for issuance of 'Masala' Bonds by Indian companies is a welcome liberalisation of the ECB framework companies and appears to be an attempt by the RBI to harmonise the regime with the framework governing the investment by foreign portfolio investors in debt market in India and has the potential to boost foreign investment in Indian companies and should attract interest of the global investors given the limited restrictions on the pricing and end use. However, there remain certain areas where clarity is required from the regulators (in order to align the Rupee Bond Guidelines with other Indian laws) and much will depend on the RBI's approach and also on how the market for such Masala Bonds evolves.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.