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More Masala for Foreign Investors

Finsec Law Advisors

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After the overwhelming response received by offshore rupee bonds, colloquially referred to as Masala Bonds, RBI has decided to expand the scope of such bond issues to permit Indian corporates to raise external commercial borrowing (ECB) through the issuance of rupee bonds outside India.

Until now, only few international financial institutions, such as the Asian Development Bank (ADB) and the International Finance Corporation (IFC), were permitted to issue rupee bonds in overseas markets. In this move to enable more entities to raise foreign funds through Masala Bonds, RBI on September 29, 2015 has put in place a framework for the issuance of such bonds within the overarching ECB policy.

Any corporate, REIT or InvIT can now raise up to US $750 million through the automatic route every year. Cases beyond this limit will require prior approval of RBI. The bonds would be plain vanilla bonds issued in FATF (the global anti-money laundering body) compliant financial centres and can be placed privately or listed on exchanges as per regulations in the host country. Indian banks can act as arrangers or underwriters but they are otherwise prohibited from subscribing to these bonds. The minimum maturity period would be 5 years and call and put option would not be exercisable prior to completion of minimum maturity.

This change is a part of the larger drive to deepen the bond markets in India. The bonds are likely to attract Indian issuers due to the liberalised end-use norms. Issue proceeds can be used for all purposes, except for a few specific exclusions, e.g. real estate, equity, land etc. Further, the currency risk shifts from the issuer to the investor as the bonds are denominated in rupees. Practically, any person in a regulated jurisdiction can subscribe to and further trade these bonds, which makes the investor base much wider than foreign portfolio investment. Overall, this is a great step not only towards increasing funding avenues for Indian issuers but also to meet the growing interest in rupee debt amongst international investors.