Have you tried Rupee Denominated Bonds yet?

Next time you are consider to raise funds from outside India, do consider the newly permitted Rupee Denominated Bonds (RDBs) as an option. A rupee denominated bond is a bond issued by an Indian entity in foreign markets and the interest payments and principal reimbursements of which are denominated in rupees. RDBs offers lot of advantages over the extant modes of raising funds from overseas. There are least of restrictions placed on RDBs. Be it end use of funds, All in cost etc. or anything else. (Companies which have tried using likes of External Commercial Borrowing[1] (ECBs), Listed non-convertible debentures will know the hassles, pains and cost of raising funds from overseas.)

Looking into ever increasing requirement of Indian Inc. RBI allowed Indian Companies to issue Rupee denominated Bonds. Vide A.P. (DIR Series) Circular No.17 dated September 29, 2015 RBI brought in significant changes in framework of raising funds from outside India by allowing the issue of Rupee denominated bonds (RDBs) overseas.

The ECB policy is very stringent and levies lot of restrictions like the borrowers who can raise overseas debt, the end use restrictions, the restriction in relation to all in cost etc. In contrast to extant policy the new prescribed policy of Rupee Denominated bonds is very liberal and provides ease of funding from overseas investors to Indian corporate houses. While ECBs help companies take advantage of the lower interest rates in international markets, the cost of hedging the currency risk can be significant. If unhedged, adverse exchange rate movements can come back to hit the borrower negatively. But in the case of RDBs, the cost of borrowing can work out much lower.

Rupee denominated Bonds as the name indicates are denominated in Rupees. ‘Denominated in Rupees’ means that the currency risk lies with the investor and not the issuer, unlike External Commercial Borrowings (ECBs). As RDBs bonds are denominated in Rupees they are also called “Masala Bonds” to give it an Indian flavour. The moment you think “Masala” it takes you to Indian cuisines and flavour or anything which is Indian in essence. It is not the first time that the bonds are named after food items we have also seen Chinese bonds, named as Dim-sum bonds or Japanese bonds named Samurai. It is a step towards making Indian currency global.

Having the bonds denominated in Rupees may have its own advantages and disadvantages as it can have implications for the rupee, interest rates and the economy.



Competition from overseas markets may make it compulsory for the government and regulators to speed up the development of domestic bond markets as well. A vibrant bond market can open up new avenues for bond investments by retail savers. We have been harping about fuller rupee convertibility for Indian Rupees, Masala bonds is definitely a steps towards it.


These bonds may have bad after-effects too if companies decide to splurge on them. Too much reliance on external debt (even in rupees) can weigh heavily on rating of India by global agencies.

Broad contours of raising funds by way of issuing Rupee denominate funds.

(i)    Who can raise foreign funds by way of issuance of RDBs: The Eligible borrowers which can issue Rupee denominated bonds overseas are almost everyone being all body corporates, real estate investment trusts and infrastructure investment trusts. The good news is that the entities like LLP which could not rise debt through ECB can now opt for the Rupee Bonds.

(ii)   Who can invest in RDBs:  The Recognised investor is any investor from a Financial Action Task Force (FATF) compliant jurisdiction. The onerous conditions of investors who could lend money to Indian eligible borrowers have been done away with in RDBs. As per the Rupee Bond Framework any investor from an FATF compliant jurisdiction can invest in Rupee denominated Bonds issued by Indian Companies.

        The Rupee denominated bonds can only be issued in a country and can only be subscribed by a resident of a country[2]:

  • that is a member of Financial Action Task Force (FATF) or a member of an FATF- Style Regional Body; and
  • whose securities market regulator is a signatory to the International Organization of Securities Commission’s (IOSCO’s) Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with the Securities and Exchange Board of India (SEBI) for information sharing arrangements; and
  • should not be a country identified in the public statement of the FATF as:

(i)    A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or

(ii)   A jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.

In the beginning, the Banks incorporated in India did not have access to these bonds in any manner whatsoever. Indian banks, could only act as arranger and underwriter. In case of underwriting, holding of Indian banks could not be more than 5% of the issue size after six months of issue. However, in August 2016, the RBI allowed banks to issue these bonds to procure money to meet their capital needs and to collect fund to finance infrastructure projects.

Relevant excerpts relating to above from the Press release of RBI dated August 25th 2016 is reproduced below

“A framework for issuance of rupee denominated bonds overseas, also called Masala Bonds, was put in place in September 2015. With a view to develop the market for rupee denominated bonds overseas, as also to provide an additional avenue for banks to raise Additional Tier I capital and Tier II capital, it is proposed, in consultation with the Government, to permit banks to issue Perpetual Debt Instruments (PDI) qualifying for inclusion as Additional Tier 1 capital and debt capital instruments qualifying for inclusion as Tier 2 capital, by way of rupee denominated bonds overseas. It is also proposed to allow banks to issue rupee denominated bonds overseas under the extant framework of incentivising issuance of long term bonds by banks for financing infrastructure and affordable housing.”

(iii) Maturity:  The minimum period for which the bonds could be issued was 5 years however, to make it more attractive and in order to align with the maturity prescription regarding foreign investment in corporate bonds through the Foreign Portfolio Investment (FPI) route, the RBI reduced the minimum maturity period of such bonds that an Indian company can issue offshore to three years from the previously stated five years.

(iv) All-in-cost: The borrowers have been left to decide the interest rate as per market conditions. The only restriction is that the ‘All in cost’ should be commensurate with prevailing market conditions and should be comparable with the cost at which the borrowing company is able to raise funds domestically. Prevailing market conditions should mean the arm’s length price.

(v) Amount: The maximum amount which can be borrowed by an entity in a financial year under the automatic route by issuance of these bonds will be Rs 50 billion. This limit is over and above the amount permitted under the automatic route for External Commercial Borrowings (ECB). Proposals to borrow beyond Rs 50 billion in a financial year will require prior approval of the RBI.

(vi) End-uses: The end-use restrictions have been substantially relaxed no end-use restrictions except for a negative list. The proceeds can be used for all purposes except for the following:

  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 domestically;
  3. Activities prohibited as per the FDI guidelines;
  4. On-lending to other entities for any of the above objectives; and
  5. Purchase of land.

(vii) Type of instrument: The Rupee Bonds can either be privately placed or it can be listed as well (unlike NCD which needs to be listed on stock exchange). The likely objective is to facilitate increased trading of the Rupee denominated debt instruments. Further, unlike the considerably onerous compliances (such as continuous disclosures, credit rating, etc) to be followed by a company issuing Listed NCDs, compliances to be undertaken by a company issuing privately placed Rupee Bonds are very limited.

(viii) Conversion rate: The foreign currency – Rupee conversion will be at the market rate on the date of settlement for the purpose of transactions undertaken for issue and servicing of the bonds.

(ix)   Hedging: The overseas investors will be eligible to hedge their exposure in Rupee through permitted derivative products with AD Category – I banks in India. The investors can also access the domestic market through branches/subsidiaries of Indian banks abroad or branches of foreign bank with Indian presence on a back-to-back basis.

(x)    Leverage: The leverage ratio for the borrowing by financial institutions will be as per the prudential norms, if any, prescribed by the sectoral regulator concerned.

(xi)   Reporting: All other provisions of extant ECB guidelines regarding reporting requirements (including obtaining Loan Registration Number (LRN) through submission of Form 83 where type of ECB is to be specifically mentioned as borrowing through issuance of Rupee denominated bonds overseas), parking of bond proceeds, security / guarantee for the borrowings, conversion into equity, corporates under investigation, etc., will be applicable for borrowing by issuance of Rupee denominated bonds overseas.

(xii) Borrowers issuing Rupee denominated bonds overseas should incorporate clause in the agreement / offer document so as to enable them to obtain the list of primary bond holders and provide the same to the regulatory authorities in India as and when required. The agreement / offer document should also state that the bonds can only be sold / transferred / offered as security overseas subject to compliance with aforesaid IOSCO / FATF jurisdictional requirements.

        RBI is continuously bringing measures for development of financial markets. To allow issuance of RDBs is example of that. It is easy to raise funds in through RDBs. Lot many companies have raised the overseas funds by issuing RDBs. HDFC was first amongst that.

        For any queries on Rupee denominated Bonds kindly be free to write to me at sudha@taxpertpro.com

[1] External Commercial Borrowings refer to commercial loans in the form of bank loans, securitised instruments (eg. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares), buyers’ credit, suppliers’ credit availed of from non-resident lenders with a minimum average maturity of 3 years.

 [2] As per A.P. (DIR Series) Circular No.60 dated April 13, 2016


    • CA. Sudha G. BhushanCA Sudha Bhushan says

      The Masala Bonds can either be privately placed or it can be listed however NCDs are required to be compulsorily listed on stock exchange. Also, There are onerous compliances such as continuous disclosures, credit rating, etc to be followed by a company issuing Listed NCDs, in comparison to this compliances to be undertaken by a company issuing privately placed Rupee Bonds are very limited.

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