The “Masala” in Rupee Denominated Bonds

[Anirudh Singh is a 4th year B.A LL.B (Hons.) student at NALSAR University, Hyderabad]


Rupee Denominated Bonds (RDBs),more commonly known as “Masala Bonds”, are debt securities denominated in Indian rupees issued by Indian entities to overseas investors but settled in foreign currency. In other words, they are rupee denominated bonds issued to overseas buyers. Though these bonds are issued to investors in offshore jurisdictions, still they are denominated in Indian currency. Therefore, the term “Masala” has been ascribed to these bonds to give an Indian flavor to the same. The Chinese variant of this type of bonds are “Dim Sum Bonds” and similarly the Japanese version “Samurai Bonds”.   These bonds are attractive for foreign investors as they will provide a higher interest rate compared to the standard interest rate prevailing in the market. Moreover, it encourages globalization of the Indian Rupee as foreign buyers will deal more in rupees while buying these bonds. Interestingly, currency risk is assumed by the investor and, hence, during the repayment of bond coupon and maturity amount, if rupee depreciates, the Reserve Bank of India (RBI) will realize marginal saving.

One can understand the working of RDBs as follows. Suppose an Indian company issues the rupee denominated bond worth Rs. 1000 in US, the buyer can purchase the bond paying an equivalent amount in dollars. Assuming that the exchange rate is equivalent to Rs 50 for $1, the bond purchaser will have to pay $20 to buy the rupee denominated bond. Suppose the interest rates applicable on these bonds are 10%, the Indian company has to pay Rs 100 annually and this is paid by the issuer (an Indian company in this case) at the prevailing exchange rate at the time of payment. However, if the exchange rate deprecates to 1$= Rs 75, the buyer’s interest revenue of Rs 100 amounts to approximately $1.3 and it incurs losses in terms of dollars. The same buyer could have got $2 had the deprecation of exchange rate not occurred.

The International Finance Corporation, an arm of the World Bank and a significant global financial organization that encourages private sector development in developing countries, has witnessed its rupee-denominated borrowing in international markets during year fiscal 2015. Thereafter, it came up with two bond issues: “Maharaja Bonds” which were issued to Indian investors and “Masala Bonds” that were issued to overseas investors. Further, on July 14, 2016, HDFC was the first Indian company to issue masala bonds and, on August 4, 2016, NTPC issued green masala bonds to finance renewable power projects. Moreover, HDFC was first to list its masala bond on the London Stock Exchange in 2016.

The Masala Bond market confers major advantages for issuers. First, with most countries facing relatively low interest rate regimes at present, they can abate their cost of borrowing vis-à-vis domestic bond borrowing as India’s interest rate levels are still very high as compared to western counterparts. Second, the bonds are denominated in rupee, so there is no exchange rate risk for the issuers as is the case with External Commercial Borrowings (ECBs). Finally, issuing Masala Bonds helps the Indian corporates to diversify their bond portfolio. While the bond issue is in the off-shore market, it facilitates Indian companies to  attract a large number of investor base.

Even for investors, these bonds serve a lucrative purpose as an investor overseas can earn better returns through Masala Bonds compared to the investment returns from its home country. An investor benefits from the Masala Bond if the rupee appreciates at the time of maturity. In order to foster the interest of investors towards these bonds, rupee denominated bonds are building interest in investors who are unwilling to invest in the offshore market. This can be bolstered from the fact that in order to attract and benefit more foreign investors, the Ministry of Finance has cut the withholding tax (a deducted tax at source on populace outside the country) on interest proceeds of bonds from 20% to 5%. Moreover, capital gains from appreciation of rupee are also exempted from tax.

Legal Framework of Masala Bonds

Masala Bonds are debt securities under section 2(30) of the Companies Act, 2013 (‘Act’). Therefore, provisions as applicable to issuance of debt securities shall apply to Masala Bonds as well. However, the Ministry of Corporate Affairs (MCA) through its General Circular No: 09/2016 dated August 3, 2016 has issued a clarification regarding the applicability of provisions of Chapter III (Prospectus and Issue of Securities) of the Act with respect to the issuance of Rupee denominated bonds to overseas investors by an Indian company. Accordingly, Indian companies issuing Rupee denominated bonds overseas (Masala Bonds) under RBI’S policy on External Commercial Borrowing (ECB) Guidelines will not be required to comply with provisions of Chapter III of the Act and provisions governing the issue of secured debentures under Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014. In addition to the above, listed entities in India shall also comply with the provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 with respect to issuance of debt securities.

According to the guidelines issued by Reserve Bank of India (RBI) in September 2015 and modified policy in August 2016, the money borrowed under Masala Bonds can only be used for infrastructure funding purposes. In order to achieve the capital needs and to accumulate funds for the infrastructure projects, the RBI allowed banks to issue Masala Bonds or RDBs in August 2016. The overall guidelines underlying for rupee denominated bonds will be similar to that for ECBs.

Considering the fact that Masala Bonds are governed by the RBI and in order to further streamline the regime, the Securities and Exchange Board of India (SEBI) through its circular dated August 4, 2016 has clarified that foreign investment in Masala Bonds will not be treated as investment by Foreign Portfolio Investors (FPIs), and will not be covered under the purview of the amended SEBI (Foreign Portfolio Investors) Regulations, 2014.


Though the benefits of RDBs are coupled with some risks involved with rapid shifts in capital flows and that the overseas market may portray liquidity away from the domestic market, the issuance of Masala Bonds could be a major advancement for the Indian economy. The recent opportunity for Indian banks to raise foreign currency through RDBs is also an enlightening step towards the growth. Depending on the Masala Bonds for obtaining foreign investment is beneficial to some extent, but too much dependence will lead to a negative exposure and ultimately affect the investments into India.

Anirudh Singh

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