IndiaCorpLaw

RBI Proposal on Rupee Linked Bonds

In the past, rupee denominated bond
issuances have essentially been available to multilateral institutions, of
which the International Finance Corporation (IFC) had availed of them. Now, the
Reserve Bank of India (RBI) has announced a draft
framework
, which allows Indian companies as well to tap this avenue for
raising debt. Indian corporates that are eligible to avail of external
commercial borrowings (ECBs) will now be able to issue rupee-linked bonds
overseas in any jurisdiction that is Financial Action Task Force (FATF)
compliant. There is a cap on pricing of the bonds in that the coupon should not
be more than 500 basis points above the sovereign yield of corresponding
Government of India security. Other terms such as requirement of regulatory
approvals and end-use restrictions are similar to ECBs. Investors in such bonds
are allowed to hedge both currency risk as well as credit risk through
permitted derivative products in the domestic market. There are more relaxed
requirements for international financial institutions issuing such bonds
depending upon whether or not the proceeds are being deployed in India.

This proposal could have the effect
of expanding fund-raising opportunities for Indian corporates, especially to fulfill
financial demand in sectors such as infrastructure. This is particularly the
case given the relative shallowness of the domestic bond market. At the same
time, the tight restrictions such as cap on pricing and other conditions that
are pegged to the ECB policy may act as a dampener against significant inflow
of funds through this route.

This framework is yet under
consideration, and comments to the RBI are due by June 15, 2015.