India: Update On The Rupee "Masala" Bonds Regime – Alignment With The Foreign Investment In Corporate Bond Regime

The issuance of rupee denominated bonds overseas (Masala Bonds) was permitted by RBI's circular dated 29 September 2015 read with the relevant provisions of the Master Direction dated 1 January 2016 on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers (collectively, the Rupee Bond Guidelines). Refer to our previous Ergo on this subject dated 8 October 2015 which can be accessed here.

The RBI, on 13 April 2016 issued a further circular (the April 2016 Circular) bringing about certain modifications to the Rupee Bond Guidelines, clarifying certain positions and liberalizing the 'Masala Bonds' regime. The April 2016 Circular primarily seeks to bring about greater consistency between the Masala bonds regime and the extant regime for foreign investment in corporate bonds through the foreign portfolio investment (FPI) route (the FPI Regime), in terms of maturity restrictions, aggregate debt limits and investor eligibility. The key highlights of the April 2016 Circular are set out below:

Minimum maturity slashed to FPI NCD levels

In a much-anticipated move, the minimum maturity period for Rupee denominated bonds issued overseas has been reduced from 5 years (as had been prescribed under the Rupee Bond Guidelines) to 3 years thus aligning it with maturity period for corporate bond under FPI Regime. The erstwhile 5-year minimum maturity stipulation for Masala Bonds had proved to be a constraint as procuring a 5 year hedge was expensive which was factored in by investors in the coupon for Masala Bonds thus making it an expensive instrument for Indian issuers. This reduction to a minimum tenor of 3 years under the April 2016 Circular will serve to establish Masala Bonds as an actual alternative to the rupee NCDs issued under the FPI route.

However, it is important to note that the April 2016 Circular continues to be silent regarding amortisation of the Masala Bonds and therefore a plain reading of the Rupee Bond Guidelines together with this circular would indicate that amortisation, if any should start after the 3rd year.

Bringing Masala bonds within the aggregate limits for FPIs in corporate debt

Under the bi-monthly policy review conducted by the RBI in September 2015 (as specified in the Fourth Bi-Monthly Monetary Policy Statement, 2015-16 dated 29 September 2015), it had been clarified that the current limits of USD 51 billion for foreign investment in corporate debt, has been fixed in Rupee terms at INR 2443.23 billion. Therefore, Indian corporates would be able to raise up to INR 2443.23 billion worth offshore rupee debt, as part of the overall corporate bond limit.

The April 2016 Circular accordingly modifies the Rupee Bond Guidelines to the extent that the maximum amount which can be borrowed by each entity in a financial year under the automatic route by issuance of these bonds will be INR 50 billion and not USD 750 million as was stipulated under the Rupee Bond Guidelines. The April 2016 Circular further stipulates that proposals to borrow beyond INR 50 billion in a financial year will be considered by the RBI under the approval route.

Investor eligibility made more stringent

With a view to achieve consistency regarding eligibility of foreign investors in corporate debt, the April 2016 Circular modifies the criteria for investors and location for issuance of Masala Bonds. Accordingly, Masala Bonds can now only be issued in a country and subscribed to by a resident of a country which satisfies all of the following criteria:

  • it is a member of Financial Action Task Force (FATF) or a member of a FATF- style regional body; and
  • its 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 Securities and Exchange Board of India (SEBI) for information sharing arrangements; and
  • it is not a country identified in the public statement of the FATF as:

    1. A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
    2. A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies.

Further, the April 2016 Circular introduces certain specific requirements to monitor investor eligibility compliance in the secondary market, i.e. borrowers issuing Masala Bonds should incorporate a clause in the agreement/ offer document enabling them to obtain the list of primary bond holders and provide the same to the regulatory authorities in India. It also requires the agreement/ offer document to stipulate that bonds can only be sold/ transferred/ offered as security overseas, subject to compliance with aforesaid IOSCO/ FATF jurisdictional requirements.

Foreign bonds are held through international clearing systems such as Euroclear/ Clearstream which in turn have account holders, who have further sub-account holders and so on. Consequently there are multiple depositary levels and holdings below them and neither Euroclear/ Clearstream nor the issuer will know the end investors.  Moreover, such foreign bonds are freely transferrable on the secondary market and so the ultimate beneficial owner constantly keeps changing. At present, it appears that the issuer's obligation in this regard would be limited to stipulation of the aforesaid requirement in the offer documents/ agreements which may be seen as sufficient compliance.


Whilst the April 2016 Circular certainly provides greater clarity and consistency for foreign investment in corporate bonds under the Masala Bond route, certain practical issues and concerns, both from an issuer and investor perspective, continue to exist under the Rupee Bond Guidelines and it is expected that the RBI will issue similar clarifications to address these in future.

Primary Investor List and Secondary Transfers: Owing to the opaqueness of the offshore depository systems it may be practically difficult for the Indian issuers to know the list of primary or secondary investors and we anticipate that this stipulation may be difficult to comply with.

Nature of instrument: The Rupee Bond Guidelines make a reference to 'plain vanilla' bonds. Therefore, rupee denominated loans and convertible instruments would be excluded from its purview. Given the flexible wording adopted regarding the nature and terms of the instruments, there do not appear to be any restrictions under the Guidelines regarding interest step-up or issuance of zero coupon bonds with redemption premium.

Taxation ambiguities: The Government had issued a press release dated 29 October 2015 (Press Release) wherein it had been clarified that in so far as taxation of interest income from these bonds in the case of non-resident investors is concerned, withholding tax (WHT) at the concessional rate of 5%, which is in the nature of final tax, would apply. Suitable amendments to the legislative provisions were expected be proposed through the Finance Bill, 2016 (the Bill), as had been stated in the Press Release. However, the Bill presented on 29 February 2016 remains silent on extending concessional WHT rate of 5% on the interest coupon on such bonds, which was the other clarification made under the Press Release. While this appears to be an inadvertent miss, it has raised ambiguity regarding whether at the time of enactment of the Bill, the benefit of reduced withholding tax would be extended for Masala Bonds.

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

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