India: Masala Bonds As A Tool To Finance Indian Joint Ventures Receives Budget Boost

In our previous Newsflash dated 8 October 2015, 21 April 2016 and 8 August 2016, we had discussed the broad contours of issuance of Rupee denominated bonds overseas (Masala Bonds) under the Reserve Bank of India's (RBI) policy on external commercial borrowings (ECB) and how amendments introduced to the Masala Bond regime have paved the way for Indian issuers to access alternative sources of funds from the international market.

The Finance Act, 2017 was enacted on 31 March 2017 (Budget), which has provided further impetus to the issuance of Masala Bonds, especially considering the growing interest by offshore companies looking to debt-fund their Indian joint venture or sole venture operations in India.

Tax incentives

  1. Withholding Tax

    Under Section 194LC of the Income Tax Act, 1961 (IT Act), interest income earned by a non-resident/foreign company is liable to withholding tax at a concessional rate of 5% (subject to applicable surcharge and education cess), in case the debt is raised by an Indian company in foreign currency. While earlier the applicability of this provision to Masala Bonds was ambiguous, the Budget has now clarified that Masala Bonds would be eligible for withholding at the prescribed concessional rate. This amendment will extend to interest earned on Masala Bonds issued before 1 July 2020.
  2. Exemption from Capital Gains

    In a welcome move, the Budget has also amended Section 47 of the IT Act, exempting the transfer of Masala Bonds, from one non-resident bond holder to another from applicability of capital gains tax in India.
  3. Thin capitalisation norms

    The Budget, to the relief of many stakeholders, did not introduce any 'minimum capitalisation' requirements. It did, however, introduce 'thin capitalisation' norms under Section 94B of the IT Act, which would impact an Indian issuer's ability to deduct the interest expense on the Masala Bonds. In terms of the Budget, interest paid by an Indian company or permanent establishment of a foreign company to its 'associated enterprise' offshore, will not be allowed as deduction in computing the borrower entity's taxable income to the extent it arises from 'excess interest'. This is applicable to interest in excess of INR 10 million and where the total interest paid or payable is in excess of 30% of earnings before interest, taxes, depreciation and amortisation (EBITDA) of the issuer entity in the previous year or interest paid or payable to 'associated enterprises' for that previous year, whichever is less. The Budget has, however, permitted the Indian issuer entity to carry forward and set off such interest so disallowed, for 8 assessment years.

Raising Capital by Indian Joint Ventures

While the taxation benefits set out above have placed Masala Bonds at par with Rupee denominated non-convertible debentures (NCDs) issued in India and foreign currency bonds under the ECB regime, the following reasons make the Masala Bonds route more attractive for Indian joint ventures looking to raise funds from their non-resident shareholders:

  1. Eligible Borrowers and Subscribers

    Unlike the ECB regime, Masala Bonds can be issued by any Indian company, irrespective of the sector they are engaged in. Further, unlike Rupee denominated NCDs, Masala Bonds can be subscribed by any person from a FATF and IOSCO compliant jurisdiction without the requirement to register and be regulated by any regulator in India.
  2. Compliance requirements

    Issuers of Masala Bonds are exempted from several compliance requirements under the Companies Act, 2013 (such as requirement to maintain a debenture redemption reserve, issuance of private placement offer letter, etc), which are otherwise applicable in case of Rupee denominated NCDs. Additionally, in contrast to the ECB regime, there is no requirement under the Masala Bond regime for the issuer to maintain a liability to equity ratio in relation to the borrowing.

The Firm has advised several multinational companies and Indian joint venture partners on debt-funding Indian operations using Masala Bonds. We have seen that the above-mentioned advantages have resulted in fast deal timelines and closings in a manner that are beneficial to all parties.

Khaitan Comment

The Budget has provided the necessary fillip to investments in Masala Bonds as a mode of debt financing. With the concessional withholding tax rate, exemptions from compliance requirements under the Companies Act and a wider pool of eligible issuers, Masala Bonds are likely to be the flavour of the season for some time to come.

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 legalalerts@khaitanco.com

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

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

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions