Liberalized Regime for Issuance of Masala Bonds

An attractive option for Indian companies raising
finances is to issue rupee-denominated bonds to persons residing outside India.
Popularly known as “masala bonds”, some of these may even be listed on foreign
stock exchanges. Naturally, the legal regime governing these bonds, particularly
from the purview of corporate law, securities regulation and foreign exchange
laws is of relevance. Over a period of time, various regulators appeared to
have worked together to make this option more attractive for Indian issuers.
The Reserve Bank of India (RBI) paved the way by
permitting the issuance of rupee-denominated bonds as part of its Fourth
Bi-Monthly Policy Statement for the year 2015-16
on September 29, 2015.
While the RBI pronounced on the issue from the perspective of foreign exchange
regulation, particularly that governing external commercial borrowings (ECBs), several
other issues remained, including whether the issuance of masala bonds were to comply
with the provisions of company law as well as securities regulation. These
issues have been clarified by the respective regulators more recently.
On August 3, 2016, the Ministry of Corporate Affairs
(MCA) issued a Circular,
which stated that (i) Chapter III of the Companies Act, 2016, which deals with
prospectus and allotment of securities, and (ii) rule 18 of the Companies
(Share Capital and Debentures) Rules, 2014, which deals with debentures, “would
not apply to the issue of rupee denominated bonds made exclusively to persons
resident outside India” in accordance with the applicable legal regime. Separately,
on August 4, 2016, the Securities and Exchange Board of India (SEBI) issued a Circular,
which laid down the corporate debt limit for all foreign investments in bonds
issued by Indian companies, and also clarified that investments in
rupee-denominated bonds shall not be treated as foreign portfolio investments
(FPI), and hence will not fall within the regime that apply to them.

Through these diverse regulatory pronouncements, the
regime for masala bonds has been made more liberal (see also,
While it provides opportunities to Indian companies to tap foreign financing,
the regulators have displayed limited concerns as it is essentially relating to
investors from foreign jurisdictions. Hence, the applicability of Indian
securities laws and regulations are limited, thereby permitting companies to
overcome the onerous prospectus and other requirements imposed by those.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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