In 2014, the Reserve Bank of India (RBI) had permitted 2 multilateral institutions, the International Financial Corporation (IFC) and the Asian Development Bank (ADB), to issue rupee denominated bonds in the overseas market. Spurred by the robust demand for such rupee denominated-dollar settled instruments (or ‘Masala Bonds’ as they are colloquially called) in the international markets, the RBI in its first bi-monthly monetary policy for financial year 2015-16, put forward its intention to expand the scope of issuance of Masala Bonds by international financial institutions as also to permit eligible Indian corporates, (i.e. those eligible to raise external commercial borrowings (ECBs), to issue such bonds under an appropriate regulatory framework.

This proposal has now been taken forward by the RBI vide its circular dated 29 September 2015, introducing guidelines for issuance of Rupee denominated bonds by Indian Corporates to overseas investors (Rupee Bond Guidelines) under the ECB route and significantly relaxing a number of restrictions applicable to ECBs in foreign currency. Allowing companies to issue rupee-denominated bonds abroad has addressed both pricing and currency risks, while opening a window for rupee-denominated instruments to trade abroad. The Rupee Bond Guidelines not only envisage a broad range of investors and borrowers, but also provide greater end use freedom and flexibility for pricing the issue in comparison with the extant guidelines on ECBs. As the bond issue would be Rupee denominated, it would further encourage Indian borrowers who were so far wary of fluctuating currency exchange rates.

Key features of the Rupee Bond Guidelines and their implications for Indian borrowers and foreign investors:

Expanded definition of eligible borrowers: Any Indian corporate or body corporate, Real Estate Investment Trusts and Infrastructure Investment Trusts have been permitted to issue Masala Bonds. Banks, Non-banking Financial Companies (NBFCs), infrastructure or investment holding companies and companies in the service sector which were otherwise not permitted to raise ECBs have not been restricted from issuing Masala Bonds. However, corporates under investigation by any enforcement authority in India continue to require prior RBI approval for issuing Masala Bonds.

Potentially wider pool of investors: The previous ECB regime set out a list of eligible lenders. These included banks and significant shareholders, but did not explicitly refer to debt funds, for example. In contrast, any investor from a Financial Action Task Force (FATF) compliant jurisdiction can invest in such bonds ( which may pose a challenge given that (i) the investments would be from investors from various foreign jurisdictions; and (ii) such instruments would be freely transferable in the secondary market. However, Indian banks cannot “have access” to Masala Bonds in any manner, other than as underwriters or arrangers of the bonds. These changes ought to widen the market of borrowers and investors, a key regulatory condition to the creation of a more liquid debt market for Indian corporates.

Nature of instrument: Vanilla fixed rate / floating rate bonds denominated in rupees and settled in a foreign currency (freely convertible) issued in a FATF compliant financial centres can be issued (

Flexibility to issue either listed or unlisted instruments: Masala Bonds may be placed privately or listed on stock exchanges in accordance with the host country’s regulations.

Minimum Maturity: Masala Bonds will have a minimum maturity period of 5 years. Exercise of call and put options, if any, shall only be possible upon completion of minimum maturity period. The Rupee Bond Guidelines use the term “minimum maturity” as opposed to “minimum average maturity” used in the erstwhile ECB regime for foreign debt which implies bullet bonds rather than amortised bonds.

All-in-cost ceilings not to apply: Drawing a sharp contrast to the existing ECB route, no cap for all-in-cost has been specified for such issuance. The Rupee Bond Guidelines broadly envisages that the all-in-cost shall be in line with prevailing market conditions and can be determined through the book building method. Therefore, whilst the move to a more market based approach is welcome news, much will depend on the RBI’s approach, i.e., whether the RBI will evolve its own informal standards (which would defeat the purpose of the relaxation) or whether it will take a less interventionist approach and allow the market to price Masala Bonds. The pricing of debt instruments will depend on the individual credit risk of the borrower, the security features of the bond, the Indian and global interest rate environment and country risk, amongst others. It becomes difficult to apply formulaic references to the pricing of comparable transactions as reference points in this regard. Interested parties will need to closely monitor the RBI’s practice as it evolves.

Underwriting restrictions: Where an Indian bank underwrites an issue of Masala Bonds, it will not be able to hold more than 5 per cent of the issue size after completion of 6 months of the issue subject to applicable prudential norms. This is not stated to apply to non-Indian banks.

Limited End-Use Restrictions: There are no restrictions on the end use of the proceeds for general corporate purposes, working capital, repayment of rupee debt raised from Indian banks. The Rupee Bond Guidelines significantly ease the restrictions under the extant ECB regime and set out a limited restricted list which prohibits the use of proceeds for real estate activities other than for development of integrated township / affordable housing projects, investment in capital market, acquisition finance, activities prohibited under the prevailing foreign direct investment guidelines, on-lending to other entities for any of the above objectives and the purchase of land.

The maximum limit which could be raised in any financial year has been set out at USD 750 million per annum under the automatic route. Specific RBI approval would be required beyond the limit of USD 750 million per annum.

Security for the Bonds Available without prior RBI approval: Creation of charge on immovable assets, movable assets, financial securities and issue of corporate or personal guarantees in favour of bond trustee, to secure the rupee bonds is permitted with prior no-objection of the authorised dealer. Issuance of guarantee or letter of comfort by banks, financial institutions and NBFCs is not normally permitted for ECBs and may not be permitted for such Masala Bonds as well.

Hedging by Investors allowed: The overseas investors will be permitted to hedge their rupee exposure through permitted derivative products with Authorised Dealer Category – I banks in India. The investors can also “access” the domestic market through branches / subsidiaries of Indian banks situated abroad or branches of foreign banks in India on a back to back basis. From an issuer perspective, since the entire bond would be raised in Rupees and repayment would also in Rupees the exchange rate fluctuation risk does not arise.

Conversion Rate: The currency conversion rate shall be at the market rate on the date of settlement for issue and servicing of the Masala Bond.

Continued applicability of ECB norms for some aspects: Reporting requirements (including obtaining Loan Registration Number (LRN), parking of bond proceeds, conversion into equity in accordance with the existing ECB norms will continue to apply to the Masala Bonds.

Will provisions in relation to issue and listing of debentures under the Companies Act apply to Masala Bonds? The provisions of the Companies Act, 2013 including the provisions of private placement of debentures are likely to apply to the rupee denominated Masala Bonds i.e., for private placements restrictions such as no specific disclosure requirements for private placement offer letter, eligible investors, requirement of creation of debenture redemption reserve, appointment of a Securities and Exchange Board of India (SEBI) registered debenture trustee, prescribed form of debenture trust deed, restriction on roadshows and announcement of offer on financial websites etc. The Ministry of Company Affairs (MCA) in its circular dated 13 November 2014 had stated that unless provided under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipts Mechanism) Scheme, 1993 (Scheme) and by the RBI through its regulations, provisions of Chapter III will not apply to the issue of foreign currency convertible bonds (FCCBs) or ‘foreign currency bonds’ made exclusively to persons resident outside India. Further, on 18 March 2015, the MCA clarified that unless provided under the Scheme or by the RBI through its regulations, provisions contained in Rule 18 of the Companies (Share Capital and Debenture) Rules, 2014 would not apply to the issue of FCCBs or ‘foreign currency bonds’. The terminology used in both clarifications is ‘foreign currency bonds’ and clarity may be required if Masala Bonds will come within the purview of bonds issued to persons resident outside India pursuant to RBI regulations.

Benefit of Reduced Withholding? In case of foreign currency loans, a general withholding tax rate of 20% applies; and in case of rupee-denominated loans, a general withholding tax rate of 40% (for non-resident corporates other than Qualified Foreign Investors (QFIs) or Foreign Institutional Investors (FIIs)) and 30% (for non-resident non-corporates other than QFIs or FIIs) applies subject to lower withholding tax rate under the applicable tax treaty. A concessional withholding tax rate of 5% is available under Sections 194LC and 194LD of the Income Tax Act, 1961 on foreign currency loans borrowed from sources outside India (subject to conditions) and on rupee denominated bonds of an Indian company or a Government security payable to FIIs or Foreign Portfolio Investors (FPIs) or QFIs (subject to conditions) respectively. Where the prescribed conditions are not met, the general rates mentioned above will apply. All the tax rates mentioned above will have to be increased by applicable surcharge and cess.

The definition of ‘foreign currency’ has been provided in Section 2(m) of the Foreign Exchange Management Act, 1999 (FEMA) which states that ‘foreign currency’ means any currency other than ‘Indian currency’. Therefore, clarification issued under Indian Tax Laws may be required to ascertain if the benefit of reduced withholding tax at 5% (plus applicable surcharge and cess) will be available to rupee denominated (and dollar settled) bonds listed on foreign stock exchanges.

Capital gains implications: Gains arising from the transfer of such bonds may be taxable in India, subject to relief under any treaty or suitable clarification issued under Indian Tax Laws.


The Rupee Bond Guidelines for issuance of ‘Masala’ Bonds by Indian companies is a welcome liberalisation of the ECB framework companies and appears to be an attempt by the RBI to harmonise the regime with the framework governing the investment by foreign portfolio investors in debt market in India and has the potential to boost foreign investment in Indian companies and should attract interest of the global investors given the limited restrictions on the pricing and end use. However, there remain certain areas where clarity is required from the regulators (in order to align the Rupee Bond Guidelines with other Indian laws) and much will depend on the RBI’s approach and also on how the market for such Masala Bonds evolves.