RBI allowed issue of Rupee Denominated Bonds known as Masala Bonds

Recently, some changes have been made in the foreign exchange regulations regarding overseas debt funding.  The Reserve Bank of India has recently issued a circular on issuance of bonds overseas in Indian currency normally known as “masala bonds”.

Salient features of this instrument are as under:

1)      These are Rupee denominated bonds settled in USD. Since it is denominated in Indian currency, there is no foreign exchange fluctuation risk for the borrower.

2)      Any corporate or body corporate is eligible to issue Rupee denominated bonds overseas.

3)      Any investor from a Financial Action Task Force (FATF) compliant jurisdiction can invest in these bonds.

4)      Minimum lock in period would be 5 years however funds can be raised in tranches.

5)      Interests paid on these bonds are subject to tax @ 5% only. Further these bonds are exempt from capital gains tax

6)      Maximum USD 750 million per annum can be raised under automatic route. Cases beyond this limit will require prior approval of the Reserve Bank.

7)      Bond issue in India requires interest between 7.5-8.5 % to attract investors. These Bonds can be issued at less than 7% interest. Rate of interest could be kept low such as Libor + 300 basis point ( maximum) however it may be kept as low as 5-6%

8)      Liberal end use restrictions - can be used for working capital purposes. However, cannot be used for following purposes:

                    i.            Real estate activities other than for development of integrated township / affordable housing projects;

                  ii.            Investing in capital market and using the proceeds for equity investment domestically;

                iii.            Activities prohibited as per the foreign direct investment (FDI) guidelines;

                iv.            On-lending to other entities for any of the above objectives; and

                  v.            Purchase of land.

Given the above, and considering that every company requires working capital loan, one may consider exploring the possibility of raising funds via debt funding from overseas company instead of equity. 

We may provide end to end assistance including drafting of loan agreement, compliances with RBI and FEMA; assistance with the AD etc

I am the senior partner in EzyBiz India Consulting LLP. For any queries relating to Direct Tax, Indirect Tax, ROC and FEMA kindly drop a mail @ anil@ezybizindia.in or contact@ezybizindia.in and we would be happy to assist.