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Rupee Denominated Bonds- A New Source of Funding

Finsec Law Advisors

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The Central Government acting through the Ministry of Finance, on August 01, 2014, has issued a notification declaring ‘onshore rupee bonds’ issued by multilateral institutions like the Asian Development Bank (ADB) and the International Finance Corporation (IFC) as ‘securities’ within the meaning of sub-section (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956.

The notification assumes significance in the backdrop of internationalisation of the Indian Rupee. Last year, with an aim of attracting greater foreign capital flows into India, the government approved a proposal from IFC to launch its US$ 1 billion Offshore Rupee Bond Program. Under this program, international savings have been channelized towards development of capital markets in India by broadening the international investor base for investments in India.

Offshore rupee bonds, typically, are financial instruments issued by foreign multilateral institutions, such as ADB and IFC, which allow foreign investors to take exposure to Indian currency. These bonds are denominated in rupees but settled in a foreign currency i.e. the investment is made in the foreign currency which is then converted into Indian rupees and invested in India. These offshore rupee bond programmes are intended to provide an alternative source of funding for Indian companies. Previous rupee bond issues made by IFC have met with overwhelming responses from a diverse range of foreign investors. This is reflective of the growing confidence of international investors in the Indian economy. In addition to attracting foreign capital, the success of offshore rupee bonds signifies India’s economic strengths in comparison to foreign capital markets.

Simultaneously with the development of the offshore rupee market, the August 1st notification indicates the intention of the government to develop the onshore market for rupee denominated bonds issued by developmental institutions such as ADB and IFC. Allowing multilateral institutions to offer onshore rupee bonds in India would ensure that new investors such as pension and insurance funds, which can only invest in quality paper, are encouraged to make investments in the infrastructure sector without being apprehensive about the fears ordinarily associated with debt funding of infrastructure.

The specific inclusion of “onshore rupee bonds” within the meaning of “Securities” under Section 2(h) of the SCRA appears to be the groundwork for facilitating future listing and trading of such onshore rupee bonds on an institutional platform. However, as opposed to offshore rupee bonds, which fall within the regulatory purview of a foreign regulator, onshore rupee bonds would have to be regulated by a domestic regulator. In this light, several questions regarding the issuance and listing requirements, eligibility of investors, regulatory oversight etc. remain unanswered and further clarity is required.