RBI adds more masala to the bonds: issues circular to further rationalise Masala Bonds Framework, by Vallari Dubey

The Reserve Bank of India vide its powers given under Section 10(4) and Section 11(1) of the Foreign Exchange Management Act, 1999, has issued a circular A. P. (DIR Series) Circular No.47, dated 7th June, 2017[1] bringing in fresh amendments to the existing provisions for ‘Issuance of Rupee denominated bonds overseas’ and as we call it in normal parlance, ‘Masala Bonds’.

The circular strives to amend the provisions laid down in the Master Direction on Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers, dated January 1, 2017[2] and several other supporting circulars released thereafter, with immediate effect of the issue of recent circular.

The amendments brought by the circular are listed below in form of a comparative to existing framework:

Particular Existing Provision Amendment
Minimum Maturity period: 3 years Masala Bonds raised upto USD 50 million equivalent in INR per financial year – 3 years
Raised above USD 50 million equivalent in INR per financial year – 5 years
All-in-cost ceiling: The all-in-cost of borrowing by issuance of Rupee denominated bonds should be commensurate with prevailing market conditions. The all-in-cost ceiling for such bonds will be 300 basis points over the prevailing yield of the Government of India securities of corresponding maturity.
Recognised investors: The Rupee denominated bonds can only be issued in a country and can only be subscribed by a resident of a country:

i. that is a member of Financial Action Task Force (FATF) or a member of a FATF-Style Regional Body; and

ii. 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

iii. 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.


Entities permitted as investors under the provisions of paragraph 3.3.3 of the Master Direction but should not be related party within the meaning as given in Ind-AS 24.

Further to these amendments, the circular also provides for the following new provision:

“It has been decided that any proposal of borrowing by eligible Indian entities by issuance of these bonds will be examined at the Foreign Exchange Department, Central Office, Mumbai.”

Key Takeaways

Listed below are key takeaways from the circular:

·        The main purpose

The Reserve Bank on a review of the laid down framework for issuance of Rupee denominated bonds overseas (Masala Bonds) and on the findings thereafter has come up with this circular, in order to harmonize the various elements of the ECB framework. As is evident, the Master Directions have been amended from time to time to effect to modifications, as and when required. Standardisation and harmonization are the keys to strengthening our regulatory framework and allowing it to be used in the most effective way in order to achieve the best.

  • While minimum maturity period for masala bonds raised upto $50 million remains at 3 years, the same has been increased to 5 years for issuances over and above $50 million, where earlier to the amendment a common 3 years minimum maturity period was provided.
  • Interestingly, unlike before, now the all-in-cost ceiling shall be capped corresponding to the prevailing G-Sec yield. Where earlier, the all-in-cost ceiling did commensurate with prevailing market conditions, the same has been replaced with 300 basis points over the prevailing yield of Government securities.
  • Additionally, the list of eligible investors remains the same with a small but significant addition for fulfilling the criteria of not being a related party as per IND-AS 24. That means the issuer now has to be extremely cautious in issuing bonds to overseas investors making sure it does not trigger the related party issue.
  • On an analysis of the nature of amendments made by virtue of this circular, we understand that given the rise in issuance of Masala Bonds and exposure of Indian Entities abroad, RBI has sought to be more prudent and stringent in its working by making sure any mismatches and any loopholes are covered and suitably provided for.

[1] https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10994&Mode=0

[2] https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10204#C49

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