The Reserve Bank of India (“RBI”) has recently issued guidelines (the “Guidelines”) for the issue of Rupee denominated bonds (so-called Masala bonds) by Indian corporates outside of India. These Guidelines, issued on 29 September 2015, are significant for India’s capital markets as for the first time Indian corporates are able to issue Rupee denominated-dollar settled bonds, in the international capital markets.

In a paper entitled “Development of India’s Corporate Bond Market” published by the India-UK Financial Partnership (a partnership launched by the Indian Finance Minister and the UK Chancellor of the Exchequer) (the “IUKFP”) on 2 November 2015 (the “IUKFP Paper”), the IUKFP has also recommended certain improvements to the Guidelines which, if implemented, will facilitate corporate India in accessing the international debt capital markets.

1. Summary of the Guidelines

We set out below the main features of the Guidelines (RBI/2015-16/193 A.P. (DIR Series) Circular No. 17):

Eligible Issuers

Eligible issuers include: 

  1. any corporate;
  2. body corporate;
  3. real estate investment trust regulated by the Securities and Exchange Board of India (“SEBI”); and
  4. infrastructure investment trust regulated by SEBI.

This list is so wide that in effect almost any company in any industry will be able to issue Masala bonds under the new Guidelines (including Indian banks). However, in the IUKFP Paper, it has been suggested that given Indian banks are not specifically mentioned as being permitted to issue Masala bonds under the new Guidelines, the RBI should clarify the issue and make it clear that Indian banks should be permitted to access this market. Allowing the Indian banks into this market will, according to the IUKFP, “ ... develop more confidence in such instruments … since their issuances constitute the majority of Indian investment grade overseas bond issuances and often set the benchmark for such issuances, being viewed by the market as the most stable and creditworthy issuers”.

Types of permitted Instruments

By contrast, the types of instruments which can be issued under the new Guidelines are, unfortunately, quite restricted. The Guidelines only allow so-called plain vanilla bonds to be issued. Accordingly, the usual range of debt capital products such as asset-backed securities, credit-linked notes, equity-linked notes (including convertible bonds and exchangeable bonds), hybrid securities (including perpetual securities, subordinated bonds or other regulatory capital securities), sukuk and other Islamic compliant securities may not be issued under the new Guidelines. This is less than ideal as it restricts the ability of the companies to use these new Masala bonds to efficiently manage their capital structure.

Use of Proceeds 

The Guidelines impose restrictions on the use of the proceeds of a Masala bonds issue. In particular, they may not be used for any of the following purposes: 

  1. real estate activities other than for development of integrated township/affordable housing projects;
  2. investing in capital market and using the proceeds for equity investment in India;
  3. activities prohibited by the foreign direct investment guidelines;
  4. on-lending to other entities for any of the above objectives; and
  5. purchase of land.

Aside from these restricted activities, the proceeds of and issue of Masala bonds may be used for capital investment purpose, for working capital and general corporate purposes as well as for the repayment of existing Rupee-denominated loans and bonds.

Maturity of Bonds 

Bonds issued pursuant to the new Guidelines must have a minimum maturity of 5 years. This means that Masala bonds issued pursuant to the Guidelines may not contain put or call options exercisable within the first 5 years of the bonds. 

This minimum maturity period will affect the ability to include the standard international change of control put to be given to investors as well as the typical tax call option which gives the issuer the right to redeem the bonds should there be a change in the tax laws which triggers an obligation on the issuer to gross up. The former will affect pricing on these bonds and the latter could result in a tax burden for the issuer which would be required to gross up until able to redeem. 

This minimum maturity period would also prevent issuers from buying back their bonds prior to the 5 years and/or issuing callable bonds. This would affect the ability of issuers to manage their liability as well as to take advantage of the market conditions to buy-back their bonds. 

In the IUKFP Paper, it was recommended that “there should be no minimum maturity period” for Masala bonds in order to “generate greater investor interest and also given that any exchange risk is being taken by the investor”. 

Maximum Amount 

The maximum amount that may be raised by an issuer in any year is US$750 million. Should the issuer wish to raise more than that amount, it would need to obtain the prior approval of the RBI. 

The IUKFP Paper recommends that “[g]iven …the risk for Indian companies will be in Indian rupees and not foreign currency so that they are not exposed to currency risk, the amount that can be raised by individual issuers should not be capped”. Alternatively, should the RBI “feels strongly that a cap needs to be imposed”, it was recommended that “an overall cap on the total amount of borrowing” be imposed by the Indian corporate instead of a cap on amount of Masala bonds issuance. 

Pending the removal of the cap of the total issue amount, a possible way of minimising the impact of this restriction might to raise funds through two or more subsidiaries. However, it is uncertain if the RBI would be strict in its implementation of this restriction on the maximum amount of issuance for a related group of companies and apply its restrictions to not just the direct issuer but also to the group in which the issuer belongs as was the case in the Greenko issue. 


There is no cap on the all-in-cost for such issue. Pricing just needs to be commensurate with prevailing market conditions. This is a welcome relaxation as the all-in pricing caps which apply to external commercial borrowings have precluded many smaller/high yield issuers from raising funds through international bond market.

Conversion Rate

The conversion of Rupees to a foreign currency needs to be at market rate on the date of payment. In other words, the issuer will always pay a fixed Rupee amount which is converted into the relevant foreign currency at the time of payment at the current spot rate. The effect of this is to put the exchange rate risk onto investors and it will be interesting to see how pricing norms develop for these instruments.


Under the Guidelines, overseas investors of Masala bonds will be eligible to hedge their exposure in Rupee through permitted derivative products with certain banks in India. Investors will also be able to access the domestic Indian market through branches and/or subsidiaries of Indian banks abroad or branches of foreign banks with an Indian presence on a back-to-back basis. It remains to be seen how such hedging will be priced and how this will affect the eventual pricing for the Masala bonds issued under the new Guidelines.

2. Withholding Tax

Following the issuance of the Guidelines, the Government of India issued a press release on 29 October 2015 on the subject of taxation of income derived from overseas Masala bonds, stating that: 

“[i]n so far as taxation of interest income from these INR off-shore bonds in the case of non-resident investors is concerned, it is clarified that withholding tax at the rate of 5 per cent, which is in the nature of final tax, would be applicable in the same way as it is applicable for off-shore dollar denominated bonds” and “capital gains, arising in the case of appreciation of rupee between the date of [issue] and the date of redemption against the foreign currency in which the investment is made … would be exempted from capital gains tax”. 

Once incorporated into law, these welcome tax changes will go a long way to promote the development of the Masala bond market in the international capital markets space.

3. Moving forward

As noted in the IOSCO Staff Working Paper dated 25 September 2015 titled “Corporate Bond Markets: An Emerging Markets Perspective” India’s corporate bond market is comparatively shallow compared to other emerging markets. The IOSCO paper states that while it is currently growing rapidly, the size of the Indian corporate bond market was less than 10% of gross domestic product (as against 45% for China and 40% for Brazil). In our view, continued diversification away from over-reliance on the equity and loan markets will strengthen India’s financial sector. It is hoped that the Masala bonds (hopefully with the adoption of the IUKFP recommendations) will assist in the diversification and further strengthening of the Indian financial sector and assist in providing capital to India’s vibrant corporate sector.