What is RBI’s new Policy on Masala Bonds?

The RBI has modified its policy on the issue of masala bonds by Indian entities in August 2016. Earlier, the RBI has issued an initial and detailed guideline for the issue of rupee denominated bonds in September 2015.

A rupee denominated bond is a bond issued by an Indian entity in foreign markets and the interest payments and principal reimbursements are denominated (expressed) in rupees. The rupee denominated bond is known as masala bonds after the International Financial Corporation (IFC) issued rupee denominated bond under the name masala bond.

As per the RBI’s regulation on masala bonds, the money can be used only for infrastructure financing purposes. In August 2016, the RBI allowed banks to issue masala bonds to procure money to meet their capital needs and to collect fund to finance infrastructure projects. The overall guidelines for rupee denominated bonds will be same as that for External Commercial Borrowings.

Who can issue rupee denominated bonds?

Any corporate (entity registered as a company under the Companies Act) or body corporate created out of a specific act of the Parliament is eligible to issue Rupee denominated bonds overseas. Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) coming under the regulatory jurisdiction of the SEBI are also eligible (September 2015 regulation). In the latest regulation, banks are also allowed to issue such bonds to finance their tier 1, tier 2 capital and infrastructure financing (August 2016 regulation).

Regulations for the issue of Rupee denominated bonds by banks

The RBI has liberalized issuance of rupee denominated bond or masala bond regime further on August 2016 by allowing banks to issue rupee denominated bonds overseas to mobilise additional tier I capital and Tier 2 capital. Similarly, they can issue such bonds for financing infrastructure and affordable housing.

Corporate issue of Rupee denominated bonds

Indian corporates eligible to raise ECB are permitted to issue Rupee linked bonds overseas. For them, the Masala bond issue procedure follows ECB guidelines for them. The corporates who avail ECBs under approval route need RBI permission to issue RDBs, whereas those who can get ECBs under automatic route can issue masala bonds without RBI permission.

The subscription, coupon payments and redemption may be settled in foreign currency. The proceeds of the bonds can be parked as per the guidelines of ECBs.

Maturity period and end use restrictions

Amount and average maturity period of rupee denominated bonds should be as per the extant ECB guidelines. End use restrictions (the purpose for which rupee denominated bonds can be issued) also are the same as that of ECB guidelines

Interest payment

The interest payments (coupon payment) for the rupee denominated bonds should not be more than 500 basis points above the sovereign yield of the Government of India security of corresponding maturity. This means if the interest rate of a five-year G Sec is 7%, the interest rate for rupee denominated bond should not be above 12%.

For USD-INR conversion, the Reserve Bank's reference rate on date of issue will be applicable.

Maximum amount

The maximum amount that any eligible borrower can raise through issuance of these bonds under automatic route is INR 50 billion or its equivalent during a financial year. This limit is over and above the amount permitted under the automatic route for External Commercial Borrowings (ECB).

The fund raised through rupee denominated bonds should not be used for real estate activities (except development of townships and housing projects) and in areas restricted for FDI.

Regulation for international financial institutions where India is a member

International Financial Institutions where India is a shareholding member need not require the prior permission of the RBI to issue rupee denominated bonds if they allocate the entire proceeds from the bond issuance in India.

In other cases, where an International Financial Institution (of which India is a member) wishes to retain the freedom to deploy the issue proceeds in any member country shall require prior permission from the Reserve Bank / Government of India.

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