The Reserve Bank of India (RBI) has recently promulgated rules for issuance of Rupee denominated bonds by Indian corporates to overseas investors and significantly relaxed a number of restrictions applicable to the external commercial borrowing (ECB) regime in foreign currency.

Some market commentators believe letting Indian companies issue Rupee denominated bonds overseas largely addresses pricing and currency risks, as well as opens a frame for Rupee denominated instruments to trade overseas. The salient facts of the new regime, also referred in market-speak as Masala Bonds are:

  1. Larger Borrower Base: A larger cross-section of Indian corporates can now issue Masala Bonds, many of whom did not have such fundraising avenues under the ECB regime.
  2. Flexible Instrument: A plain vanilla fixed rate or floating rate bond denominated in Rupees and settled in a foreign currency (freely convertible) can be issued. They may be placed privately or listed on stock exchanges in accordance with the host country’s regulations.
  3. No All-in-Cost Ceiling: Unlike the ECB regime, no cap for all-in-cost has been specified for such bond issuance.
  4. Narrower End-Use Limitations: Unlike the ECB regime, there are no restrictions on the end use of the bond issuance proceeds for general corporate purposes, working capital and repayment of Rupee debt raised from Indian banks.
  5. Overall Amount: The maximum amount that could be raised in any financial year has been set out at USD 750 million per annum under the automatic route.
  6. Security Creation Sans RBI Nod: Creation of charge on immovable assets, movable assets, financial securities and issuance of corporate/personal guarantees in favour of the bond trustee to secure the Rupee bonds is permitted with advance consent of the authorised dealer.
  7. Reporting Requirements: The ECB regime requirements, such as obtaining Loan Registration Number, parking of bond proceeds and conversion into equity, will be applicable as to these bond issuances.

In conclusion, this appears to be a transformational move, a more souk-based approach, and once the first Masala Bond crosses the finish line, one will be able to gauge the RBI’s regulatory approach. Given the latitude in the regulations, the pricing of such debt instruments will be contingent on the single credit risk of the borrower, the security topographies of the bond, the Indian and global interest rate milieu and country risk—and not on the regulatory ceilings as per the earlier ECB norms.