Pursuant to the circular issued by the Ministry of Corporate Affairs (MCA) on 3 August 2016, Indian companies issuing Rupee denominated bonds overseas (Masala Bonds) under the Reserve Bank of India's (RBI) policy on external commercial borrowings will not be required to comply with the public issue and private placement disclosure and listing norms under Chapter III of the Companies Act, 2013 (Companies Act) as well as the provisions governing the issue of secured debentures under Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 (Debenture Rules). All other provisions of the Companies Act will continue to apply to Masala Bonds. Formal notification by way of amendment to the Debenture Rules is, however, awaited.

The MCA had, on 13 November 2014 and 18 March 2015, clarified that Chapter III of the Companies Act and Rule 18 of the Debenture Rules will not apply to "foreign currency bonds" issued exclusively to persons resident outside India pursuant to regulations of the RBI.

However, Masala Bonds are Rupee denominated but settled in foreign currency, and technically did not fall within the definition of "foreign currency bonds". Apart from the denomination of the bonds and some conditions specifically set out by the RBI, Masala Bonds and foreign currency bonds are of a similar nature, i.e., both are (i) issued by Indian companies under the external commercial borrowing route, (ii) issued to persons resident outside India and compliant with disclosure requirements pursuant to laws of the foreign investor's jurisdiction, and (iii) listed on offshore stock exchanges, if listing is contemplated. Given the above, the prevailing market view was that Masala Bonds would also qualify for the exemptions provided for foreign currency bonds under the Companies Act. The clarification issued by the MCA has settled the ambiguous position which was affecting the marketability of Masala Bonds.

Given that Masala Bonds are governed by the regulations issued by RBI and in order to further streamline the regime, Securities Exchange Board of India (SEBI) also released a circular on 4 August 2016 clarifying that such foreign investment in Masala Bonds will not be treated as investments by Foreign Portfolio Investors (FPIs) and will not come under the purview of the SEBI (Foreign Portfolio Investors) Regulations, 2014, as amended. Foreign investments in Masala Bonds will be reckoned against the existing corporate debt limit set for investment by FPIs, presently at INR 244,323 crore and will be available on tap to the foreign investor. The depositories were advised to put in place systems to receive data on foreign investments in Masala Bonds on a periodic basis.


The clarifications issued by the MCA and SEBI clearly set out that RBI will have oversight of Masala Bond investments and simplifies compliance by Indian issuers such that they can access alternative sources of funds from the international market.

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