Masala Bonds: An Overview

Sharda Balaji
Sharda Balaji, Founder
Posted on Tue, 23 May 2017


Masala bonds are bond instruments denominated in Indian Rupees, issued outside India, and typically used by Indian corporate entities as a mode to obtain rupee-denominated borrowings in overseas markets (the “Masala Bond(s)”). The concept of Masala Bond was first introduced in the financial market, during 2014-15, by the International Finance Corporation (IFC), which is the investment arm of the World Bank. The IFC issued ₹1,000-crore bonds to fund infrastructure projects in India, which eventually were listed and traded on the London Stock Exchange (LSE). [caption id=attachment_2335 align=aligncenter width=300]MasalaBonds Image Credit: MoneyExcel[/caption] The name, although rather odd, is not the first of its kind, and have been inspired from the Chinese dim-sum bonds or the Japanese samurai bonds. The attractiveness of Masala Bonds lies in the fact that they are issued to foreign investors and settled in United States Dollars, thereby shifting the currency risk from the issuer to the investor, unlike in case of External Commercial Borrowings (ECBs), where Indian companies borrow in foreign currency. Although ECBs are advantageous for obtaining lower interest rates in international markets, it is argued by many that the opportunity cost of limiting currency risk could be significant, thereby reducing the overall cost of borrowing. Recognising the potential advantages that Masala Bonds may have in increasing the value of the Indian Rupees (‘INR’) in a global trade and investment scenario, the Reserve Bank of India (‘RBI’) deemed it prudent to ‘put in place a framework for issuance of Rupee denominated bonds overseas within the overarching ECB policy’, and thereby issued its Notification dated September 29, 2015 to facilitate the same. The most recent moment of fame for this instrument has been when HDFC concluded the largest Masala Bond programme by any Indian issuer, raising INR 3,300 crore through unrated bonds sold to investors in Europe and Asia, during March 2017. We have also recently come across a few instances of private limited companies in India raising money through the issuance of Masala Bonds. It is in this context that we bring to you this current post on an overview of things to keep in ind and compliances required for issuing Masala Bonds.

Issuance of Masala Bonds

1) Legal Framework: The Masala Bonds which is denominated in Indian Rupees may be issued overseas under the general framework prescribed under the following regulations:

  • Master Circular on External Commercial Borrowings and Trade Credits;
  • The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000;
  • The SEBI (Issue and Listing of Debt Securities) Regulations, 2008 (in case of listed entities).

2) Eligibility: A) As an Issuer:

  • Any corporate (entity registered as a company under the Companies Act, 1956/ 2013);
  • Body corporate (entity specially created out of a specific act of the Parliament)
  • Indian banks*.
  • Real Estate Investment Trusts (‘REITs’) and Infrastructure Investment Trusts (‘InvITs’) coming under the regulatory jurisdiction of the Securities and Exchange Board of India (‘SEBI’)

Other resident entities like Limited Liability Partnerships and Partnership firms, etc. are not eligible to issue these bonds. * Indian banks can issue these bonds in the forms of (i) Perpetual Debt Instruments (PDI) qualifying for inclusion as Additional Tier 1 capital and debt capital instruments qualifying for inclusion as Tier 2 capital, and (ii) Long term Rupee Denominated Bonds overseas for financing infrastructure and affordable housing. Indian banks, can also act as arrangers/underwriters, provided their holding (subject to applicable prudential norms) is not more than 5% of the issue size after 6 months of issue and for bonds issued by an Indian bank, another Indian bank cannot act as an underwriter. B) As a Lender: Masala Bonds can only be issued in a country and can only be subscribed by a resident of a country:

  • That is a member of Financial Action Task Force (‘FATF’) or a member of a FATF-Style Regional body; and
  • Whose securities market regulator is a signatory to the International Organization of Securities Commission's (‘IOSCO’s’) Multilateral Memorandum of Understanding or a signatory to bilateral Memorandum of Understanding with the SEBI for information sharing arrangements; and
  • Should not be a country identified in the public statement of the FATF as: (i) a jurisdiction having a strategic anti-money laundering or combating the financing of terrorism deficiencies to which counter measures apply; or (ii) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies.

3) These bonds can either be placed privately or listed on exchanges as per host country regulations; could be sold, transferred, pledged overseas; and cannot have any optionality clause for prepayment before completing applicable maturity. 4) Minimum Maturity Period: Earlier, the minimum maturity period for issuance of Masala Bonds was 5 years. However, pursuant to the RBI Circular dated April 13, 2016, the minimum maturity period has been brought down to 3 years. In case of the amount being borrowed in different tranches, the minimum average maturity period shall also be 3 years. 5) Restriction on end use of proceeds of Masala Bonds: In addition to provisions of other applicable laws, the proceeds can be used for all purposes except for the following:

  • Real estate activities other than for development of integrated township / affordable housing projects;
  • Investing in capital market and using the proceeds for equity investment domestically;
  • Activities prohibited as per the Foreign Direct Investment (FDI) guidelines; On-lending to other entities for any of the above objectives; and
  • Purchase of land.

6) Reporting Requirements: The issuer shall have to make an application to in Form 83 to the Reserve Bank of India through its authorised dealer category-I bank to obtain the Loan Registration Number (‘LRN’). Also, the issuer shall have to file ECB-2 return monthly starting from the date of initial draw down. In addition to this, actual inflows / outflows (principal only) should be reported on the date of transaction itself by email along with related LRN. The broad process for the issuance involves (i) passing of the relevant board and shareholder resolutions; (ii) drafting and executing the relevant documents which include, the offer letters, acceptance letters, agreement (if any), security documents (if any); (iii) obtaining a credit rating; and (iv) complying with certain procedural filing requirements. 7) Benefits & Draw-Backs: A) Advantages:

  • Security: Rupee Bonds can be secured as provided under Indian law.
  • Pricing: The regulations do not provide for any limit on the rates or structure of return / interest.
  • Liquidity: Subject to the restrictions as provided herein above, the subscriber to these bonds will have greater flexibility to transfer / sell the Rupee Bonds to a third party (domestic or offshore).
  • Listing: These bonds can be listed on recognized stock exchange. With this the subscribers will have greater flexibility to sell these shares on trading platform.
  • Tax Benefits: The Ministry of Finance its Union Budget 2017 has extended its concessional with-holding rate of 5% on interest earned by foreign entities in Masala Bonds upto 30 June 2020. Prior to this budget, the concessional rate was available upto 30 June 2017. Further, effective from 1 April 2018, any gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company held by a non-resident, shall be ignored for the purposes of computation of capital gains.

B) Disadvantages:

  • Listing Compliance: The issuer of the Masala Bonds, if listed on any recognized stock exchange, will be considered as a ‘Listed Company’ under the Companies Act, 2013 and will be required to adhere to all applicable provisions for listed companies.
  • Exchange Risk to the investors.

8) Compliance Under Other Statutes: Companies Act 2013: The Ministry of Corporate Affairs vide its circular dated 3 August 2016, has clarified that the issuance of rupee denominated bonds are being regulated under ECB policy framework. Accordingly, the Chapter III of the Companies Act 2013 and Rule 18 (Issuance of Debentures) of the Companies (Share Capital and Debenture) Rules 2014 shall not be applicable. However, it is pertinent to note that such other provisions in relation to availing loans and creation of charge etc. are applicable to the Indian Companies. Authors: Ashwin Bhat D, Senior Associate and Sohini Mandal, Junior Partner Disclaimer: The information contained in this post is for dissemination purposes only and shall not be relied upon as any opinion or advice, in any way. For any help or assistance please email us on

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