The Reserve Bank of India (the RBI) established the framework for borrowing by Indian companies through the issuance of Indian Rupee (INR) denominated, US dollar (USD) settled bonds overseas (Masala Bonds) through its September 2015 circular, which has been further amended on 13 April 2016 and 16 February 2017 (together, the “Masala Bonds Framework”). The Masala Bonds Framework is also contained and summarised in paragraph 3 of the RBI’s January 2016 Master Direction on External Commercial Borrowings (the ECB Master Direction). Our initial client alert on the Masala Bonds framework is available here. Our subsequent client alert on the Masala Bonds framework is available here.
On 7 June 2017, the RBI issued a circular amending the regulatory framework for Masala Bonds (the June 2017 Amendment). The June 2017 Amendment requires all eligible entities that wish to issue such bonds to approach the RBI’s Foreign Exchange Department in relation to any proposal to issue Masala Bonds.
Set out below is a summary of the other key changes made pursuant to the June 2017 Amendment.
Entities which are classified as a related party within the meaning of Ind-AS 24 will not be eligible anymore to invest in Masala Bonds. This effectively limits any intra-group transactions in relation to these instruments.
The minimum maturity period for Masala Bonds, which was earlier reduced to a period of three years from five years in order to increase the marketability of Masala Bonds, has been amended again. Pursuant to the June 2017 Amendment, the minimum maturity period for Masala Bonds up to an INR equivalent of USD 50 million in a financial year will be three years. The minimum maturity period for Masala Bonds above an INR equivalent of USD 50 million in a financial year will be five years.
The all-in-cost ceiling for Masala Bonds was earlier required to be commensurate with prevailing market conditions. Rather than a prescriptive ceiling approach (as is the case with non-Rupee external commercial borrowings), such an approach was helpful in determining the pricing for these bonds.
Masala Bonds are now subject to an all-in-cost ceiling, which must be 300 basis points over the prevailing yield of Government of India securities of corresponding maturity.