This article was originally published in ICMA Quarterly Magazine, 10 October 2019 and is reproduced with permission from the publisher.


Borrowing by Indian entities from the overseas market or “External Commercial Borrowings” (commonly referred to as ECBs), is regulated by the Reserve Bank of India (RBI) and is governed by the various rules specified by the RBI.

In 2015, the RBI issued regulations (the Rupee Bond Guidelines) which allowed Indian issuers to raise funding through the issuance of rupee-denominated debt instruments – which are now widely referred to as “Masala Bonds”. Further to the Rupee Bond Guidelines, a market has developed for Masala Bonds with a wide variety of issuers from India accessing the international fixed income markets. With the aim of further easing the regulatory constraints relating to ECBs, the RBI revised the framework for ECBs and Masala Bonds in March and July 2019 (the ECB Framework).

The ECB Framework now divides ECBs into two categories - foreign currency denominated ECB and Indian rupee-denominated ECB (which also includes Masala Bonds). This article outlines some key features of Masala Bonds and the recent changes brought about by the ECB Framework for issuance of Masala Bonds.

Features of Masala Bonds

Issuers: The ECB Framework now allows a greater universe of issuers to issue Masala Bonds. Eligible issuers under the ECB Framework include all entities eligible to receive foreign direct investment (FDI), port trusts, units in special economic zones, specialised financial institutions such as small industries development bank of India (SIDBI) and the Export Import Bank of India, and registered units engaged in micro-finance.

Minimum maturity: The ECB Framework generally prescribes a minimum maturity of three years with prepayment (whether voluntary or mandatory) possible only after the three years from the date of issuance. The ECB Framework however prescribes different minimum maturities, specific categories of issuers and their use of proceeds.

Underwriting: Overseas branches or subsidiaries of Indian banks can act as an arranger and/or underwriter for Masala Bond issuances. However, underwriting by overseas branches or subsidiaries of Indian banks for issuances by Indian banks is not allowed.

Structure: The Masala Bonds should also be “plain vanilla bonds”. Whilst there is no clear definition available as to what would constitute a “plain vanilla bond”, the expectation is that any note issuance which would have the characteristics of a structured bond issuance may not fall within the definition of “plain vanilla bonds”.

Pricing: The maximum amount which can be borrowed by an entity by issuance of Masala Bonds is USD750 million (approximately INR50 billion). Any increase in the issue size beyond USD750 million in a financial year will require the prior approval of the RBI. In relation to the pricing of Masala Bonds the ECB Framework provides that the all-in costs of an issuance should be capped at prevailing yield of Government of India securities of corresponding maturity plus a 450 basis point spread.

In addition to the all-in cost ceiling, the rate of conversion that will apply between the Indian rupee and the foreign currency in which the Masala Bond will settle and trade will be the prevailing rate at the time any payment is being made on the bonds – thereby shifting the currency risk onto the investors. This feature will have consequences on pricing as investors will want to factor any hedging cost into the price of Masala Bonds.

Tax treatment: Consistent with the tax treatment of bonds issued by Indian issuers, a withholding tax of 5% is applicable to interest income.

Use of proceeds: The proceeds of a Masala Bond issue can be used by the issuer for all purposes except for:

  • real estate activities (including acquisition of land) except development of integrated townships or affordable housing projects;
  • investment in capital markets (including domestic Indian equity investments);
  • activities otherwise prohibited under the existing foreign direct investment regulatory framework; and
  • on-lending to other entities for the purposes of any of the preceding restricted uses.

Additionally, issuance proceeds from issuance of Masala Bonds cannot be utilised for working capital purposes, general corporate purposes or repayment of rupee loans unless the borrowing fulfils certain minimum maturity requirements or if it is from offshore shareholders which again will be subject to minimum maturity requirements.

RBI approval: The ECB Framework currently does not set out any requirement for prior approval of the RBI for issuances of Masala Bonds. However, if any requirements set out under the ECB Framework are not met with, prior approval from the RBI will be required before the issuance can go ahead.

Markets and listing venues: Masala Bonds can only be issued in a jurisdiction and can only be subscribed by a resident of a country (i) which is a member of Financial Action Task Force (FATF) or a FATF-Style Regional Body or (ii) whose securities market regulator is a signatory to the International Organization of Securities Commission’s (IOSCO’s) Multilateral Memorandum of Understanding (MOU) or to bilateral MOU with the SEBI for information sharing arrangements and (ii) should not be a country identified in the public statement of the FATF as a jurisdiction having anti-money laundering or terrorism financing deficiencies or a jurisdiction that has not made sufficient progress in addressing those deficiencies.

As for listing, increased investor visibility and the accompanying benefits via price discovery are the reasons which inform an issuer’s decision to list at a particular venue. Almost all Masala Bonds issuances have been listed on the International Securities Market of the London Stock Exchange and the Singapore Stock Exchange.

Trends and outlook for Masala Bonds

Masala Bonds have been adopted by a variety of issuers. The types of issuers who have accessed funding via Masala Bonds from the international debt capital markets include corporates, quasi-sovereign entities such as the National Highways Authority of India and state level entities such as the Kerala Infrastructure Investment Fund Board. Factors such as a shortfall in supply of credit onshore and a trend towards diversification of funding sources by borrowers in India are expected to encourage more issuers to access the international fixed income markets in this manner. Issuances would also be encouraged by increased investor appetite for better yields from the emerging markets. At the time of writing this article, more than 50 issuances of Masala Bonds have taken place raising more than USD5 billion1 (INR equivalent) from the international debt capital markets.

With the Government of India acting to ease the liquidity shortage in India, it is expected that the requirements for ECBs would be further liberalised. It is expected that Masala Bonds will remain attractive for investors seeking an opportunity to participate in one of the fastest growing economies.


1 Source: London Stock Exchange

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