RUPEE

DENOMINATED

BOND OVERSEAS

Prerared by:- CA. Deepender kumar

Managing Partner Deepender Anil and Associates Email Id: deepanilassociates@gmail.com

CONTENT

PARTICULARS PAGE NO.

1. Introduction to Masala Bond 3-4

2. Masala Bond Framework 5-8

3. Notifications and Master Directions issued by RBI 9-11

4. Benefits of Investing and Issuing 12

5. MCA’s notification 13

6. SEBI’s Circular 14

7. Regulatory framework 15

5. Recent Masala Issuance 16

INTRODUCTION TO MASALA BOND

Masala, or rupee denominated, bonds are an exciting new financial

instrument that transfers the currency risks from the issuer to the investors.

Its success will depend on the investors’ confidence in the Indian growth

story.

Masala bonds are bonds issued outside India but denominated in Indian

Rupees, rather than the local currency.

Masala is an Indian word and it means spices. The term was used by IFC to

evoke the culture and cuisine of India.

The first Masala bond was issued by the World Bank backed International

Finance Corporation in November 2014 when it raised 1,000 crore bond to

fund infrastructure projects in India. Later in August 2015 International

Financial Corporation for the first time issued green Masala bonds and

raised Rupees 3.15 Billion to be used for private sector investments that

address climate change in India.

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Masala Bond was the first Indian Bond to get listed on London Stock Exchange.

In July 2016 HDFC raised 3,000 crore rupees from Masala Bond and thereby become the first Indian Company to issue Masala Bond.

Axis Bank and NTPC also raised funds through Green Masala Bond. Its helps Indian Companies to cut down cost. In India any bond

carries interest rate of 7.5% to 9% whereas Masala Bond issued outside India is issued below 7% interest Rate.

Its help the Indian Companies to tap the large number of investors as this bond are issued in the offshore market.

An offshore investor earns better returns by investing in Masala Bond rather than by investing in his home country.

Risk will be borne by the foreign investor, whereas the Indian issuer does not face currency risk.

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MASALA BOND FRAMEWORK

i. ELIGIBLE BORROWER: Any corporate or body corporate as well as Real

Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).

ii. MATURITY: Minimum maturity raised up to USD 50 Million

equivalent in INR per financial year should be 3 years( earlier it was 5 and modified vide Circular No.60) and raised above USD 50 Million should be 5 years.

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ii. RECOGNISED INVESTORS:

Masala Bond can only be issued in a country and can only be subscribed by a resident of a country, which is:

A member of FATF or a member of a FATF-Style Regional Body;

whose securities market regulator is a signatory to:

International Organization of Securities Commission's (IOSCO’s) Multilateral MOU; or

bilateral MOU with the SEBI for information sharing arrangements; and

should not be a country identified in the public statement of the FATF as:

Jurisdiction having strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or

Jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies.

iv. All-In-Cost:

The all-in-cost ceiling for such bonds will be 300 basis

points (earlier it was as per prevailing market conditions modified vide circular No.47) over the prevailing yield of the Government of India securities of corresponding maturity.

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Minimum Maturity Prevailing yield of the Government

3 years 6.678

5 years 6.878

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v. Amount: Under the automatic Route by issuance of these

bond will be Rs. 50 billion (earlier it was USD 750 Million updated vide notification A.P. (DIR Series) Circular No. 06) per annum. Cases beyond this limit will require prior approval of the Reserve Bank of India. Now overall limit is prescribed in Rupee Limit.

vi. Flexibility to issue unlisted instruments: These bonds can be privately placed or listed on

exchanges as per the host county regulations.

Cont..

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vii. END-USES: The proceeds of the borrowing can be used for all

purposes except for the following: • Real estate activities other than for development of

integrated township / affordable housing projects; • Investing in capital market and using the proceeds for

equity investment domestically; • Activities prohibited as per the foreign direct

investment (FDI) guidelines; • On-lending to other entities for any of the above

objectives; and • Purchase of land.

Notifications issued by Reserve Bank of India on Masala Bond

S.No Date of notification

Notification No.

Updation /Modification

1. September 29,2015

A.P. (DIR Series) Circular No. 17

Bank incorporated in India will not be have access to these bonds in any manner only as a arranger and underwriter

2. April 13, 2016 A.P. (DIR Series) Circular No. 60

Earlier approval prescribed in USD but now in Rupees.

Definition of Recognized Investor has been modified

Minimum maturity has been reduced to 3 year

3. November 03,2016

A.P. (DIR Series) Circular No. 14

Modification for the limited purpose of treating Indian Banks as eligible borrowers

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S.No Date of notification

Notification No. Updation/Modification

4. February 16,2017

A.P. (DIR Series) Circular No. 31

In order to provide more choices of investors to Indian entities for issuing Masala Bond-Multilateral and Regional Financial Institutions are permitted to act as Investors

5. June 07, 2017 A.P. (DIR Series) Circular No. 47

Maturity period was decided as per amount All-in-cost Ceiling Recognized Investor

6. September 22,2017

A.P. (DIR Series) Circular No. 05

The limit of Investment by Foreign Portfolio Investors (FPIs) in corporate bonds is Rs. 244,323 crore this includes issuance of Masala Bonds also of Rs. 44,001 Crore but w.e.f 3th October, 2017 Masala Bond will no longer form a part of limit of FPIs,only ECBs will form a part.

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RESERVE BANK OF INDIA ISSUED MASTER DIRECTIONS

Master Direction issued on External Commercial Borrowings, Trade Credit, Borrowings and Lending in Foreign Currency by Authorized Dealers and persons other than Authorized Dealers on January 01, 2016 and Para 3 of the said Direction talks about Framework of Rupee Denominated Bond Overseas vide FED Master Direction No. 5/2015-16 updated as follow:

(updated as on March 30,2016) (updated as on April 13,2016) (updated as on May 11,2016) (updated as on June 30,2016) (updated as on September 19,2016) (updated as on October 20 ,2016) (updated as on November 15 ,2016) (updated as on February 23 ,2017) (updated as on June 09,2017) (updated as on October 09,2017)

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Benefits of issuing

Benefits of investing

Withholding tax on interest income has been reduced for the investors from 20% to 5%.; Capital gains from rupee appreciation are exempted from tax; The buyer will earn a higher yield (coupon rate) to compensate for the risk of currency depreciation

Cheaper funding than domestic markets;

Helps to tap a large number of investors as these

bonds are issued in the offshore market;

Companies issuing Masala bonds do not have to

worry about rupee depreciation. If the rupee

weakens by the time the bonds come up for

redemption, the borrower (company) will need to

shell out more rupees to repay the dollars.

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Masala Bond are debt securities covered under 2(30) of the Companies Act, 2013.

MCA’s clarification on Masala Bond

vide its General circular No: 09/2016 dated 03th

August, 2016

Relaxations Given

Provisions applicable

Section 71, 117 and 179 of the Companies act

20163

Rule 18 of Companies

(Share Capital and

Debentures) Rules, 2014

Section 23-42 of the

Companies Act 2013

SEBI’S CLARIFICATION ON MASALA BOND

SEBI’s has been clarified vide circular SEBI/HO/IMD/FPIC/CIR/P/2016/67 dated August 04,2016 that Foreign investments in Masala Bond shall now be reckoned against the Combined Corporate debt limit of INR 244,323 cr. However, these investments shall not be treated as FPI investments and hence shall not be under the purview of the SEBI (Foreign Portfolio Investor), Regulations, 2014.

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Masala Bond

Regulatory Framework As per Chapter V the Companies (Acceptance of Deposits) Rules,

2014 under Companies Act, 2013. Any amount received from foreign Governments, foreign or

international banks, multilateral financial institutions, foreign Governments owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of FEMA , 1999 and rules and regulations made there under; is not considered as Deposits .

As per Section 194 LC and 194 LD of the Income tax Act 1961: The income by way of interest shall be the interest payable on or after

the 1st day of June, 2013 but before 1st day of June, 2015 in respect of investment made by the payee in:-

(i) a rupee denominated bond of an Indian company; or (ii) a Government security:

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Recent Masala Issuance British Columbia

NTPC HDFC Axis Bank

EBRD IFC

Transaction

Details

Issue Date

09 September 2016

10 August 2016

21 July, 2016

01 June, 2016

4 March 2016

21 March 2016 / 10 Aug 2015 / 18 Nov 2014

Issue Size

INR 5 bn INR 20 bn INR 30 bn USD500m

INR 5bn INR 2bn / INR 3.15bn / INR 10bn

Coupon 6.6% 7.375% 7.875% 2.875% 6.4% 7.1% / 6.45% / 6.3%

Maturity 40 months 5 year 37 months 5 year 3 year 15 year / 5 year /10 year

Issuer Profile

Rating AAA / Aaa BBB-(emr)*

AAA/A1+** Baa3 / BBB-

AAA / Aaa

AAA / Aaa

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Honorable Prime Minister Mr. Narendra Modi has also visited UK for issuance of railways rupee bond which is listed on London stock market.

In April 2016 Minister of Power and Coal Piyush Goyal, visited the London Stock Exchange and quoted that “In attempt to raise resources for India’s ambitious green energy programme, state-run firms, such as NTPC Ltd, Neyveli Lignite Corp. Ltd, Power Finance Corp. Ltd (PFC), Rural Electrification Corp. Ltd (REC) and PTC India Ltd, plan to issue Masala bonds to raise $1 billion.”

Masala bond for Indian railway

Thank you