The framework governing Masala Bonds has been consolidated under the Master Direction No.5 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', as amended from time to time (ECB Master Direction) and is covered in a separate section within the ECB Master Direction, distinguishing such bonds from the general norms applicable to ECBs regarding available routes of borrowing, eligible borrower, eligible investors, all-in-cost ceilings, maturity prescriptions, end use restrictions etc. With a view to further harmonising the legal framework for rupee denominated bonds issued overseas (or Masala Bonds) with the various elements of the ECB regime, the RBI issued a circular on 7 June 2017 amending certain important aspects governing issuance of Masala Bonds (June 2017 Circular).

Key highlights of the June 2017 Circular are set out below:

Foreign Exchange Department of RBI

It has been stated that any proposals by eligible Indian entities for borrowing by issuance of Masala bonds will be examined at the Foreign Exchange Department (FED) of the RBI, Central Office, Mumbai. While a possible interpretation of this addition is that proposals to issue such bonds will now be considered under approval route, given that approval route has not been specifically mentioned in the June 2017 Circular, a clarification from the regulator will assist in resolving this ambiguity.

Revised Maturity Prescription

Moving away from the prescribed minimum maturity period of 3 years for all Masala Bonds irrespective of amount, the June 2017 Circular provides for an amount-based bifurcation as follows:

  • minimum original maturity period for Masala Bonds raised up to an INR equivalent of USD 50 million per financial year is 3 years; and
  • minimum original maturity period for Masala Bonds raised beyond an INR equivalent of USD 50 million per financial year should be 5 years.

It is interesting to note that the term 'minimum maturity' under the extant framework has been replaced with 'minimum original maturity' which could potentially mean that the maturity period for Masala Bonds may be varied post issuance of the Masala Bonds.

All-in-cost ceilings introduced for Masala Bonds

In a major departure from the earlier regime where coupon rates were uncapped and could be determined based on prevailing market conditions, an all-in-cost ceiling has now been prescribed for such bonds which will be 300 basis points over the prevailing yield of the Government of India securities (G-Sec) of corresponding maturity. The current prevailing G-Sec yield is as follows:

  • for a 3 year instrument - 6.521%;
  • for a 5 year instrument - 6.793%; and
  • for a 10 year instrument - 6.566%.

Accordingly, the corresponding all-in-cost cap for a Masala bond would currently be in the range of 9-10% depending on the tenor of the instrument. Interestingly, the June 2017 Circular does not refer to a similar ceiling for Track III (or rupee denominated ECBs), the all-in-cost for which continues to be 'in line with market conditions'.

Related parties excluded as investors

Henceforth, the list of eligible investors for Masala Bonds under the ECB Master Direction will exclude an investor who is a 'related party' of the issuer, as defined in Ind-AS 24. The definition of 'related party' under this Accounting Standard is wide and would cover a parent and subsidiary, joint venture companies, group companies or associate companies which are controlled by a common entity or any entity which exercises significant influence by directing or controlling the activities of such entity. While this provision restricts related parties from investing in Masala Bonds, it does not restrict such related parties from offering collateral or security for the issuances.

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