Chahat Jain

Chahat Jain

Masala Bond are reckoned as most evolving and effectual debt instrument for the Indian Corporates with more option to blend their debt portfolio to optimize the borrowings and minimize the cost. The objective of Masala Bonds is to fund big projects and pacing the internal growth of the Corporates. The term ‘Masala’ was used by the International Finance Corporation (IFC) to evoke the culture and cuisine of India.

Masala Bonds are rupee-denominated borrowings by Indian entities in overseas market. The issuance of rupee denominated bonds, protects Indian entity against risk of currency fluctuation, typically associated with borrowing in foreign currency. The currency risk lies with the investor and not with the issuer, unlike external commercial borrowings (ECBs), where Indian companies raise money in foreign currency loans. While ECBs help companies take advantage of the lower interest rates in international markets, the cost of hedging the currency risk can be significant. If unhedged, adverse exchange rate movements can cost heavy to the borrower.

But in the case of Masala bonds, the cost of borrowing can work out much lower. If the value of Indian currency falls, the foreign investor will have to bear the losses, not the issuer which is an Indian entity.

Government’s move to rescue sliding rupee!

The Indian currency has fallen over since the beginning of this year as investors remain concerned over sustained foreign capital outflows. If foreign investors eagerly invest in Masala Bonds or bring money into India, this will help in supporting the rupee.

To curb the downfall, the Finance Ministry, on 15th September’18 has cut the withholding tax (a tax deducted at source on residents outside the country) on interest income of such  bonds to 5 per cent from 20 per cent, making it more attractive for investors.

RBI liberalizes norms for Masala Bonds- Broadening trading scope for Indian Banks!1

Presently, Indian banks, subject to applicable prudential norms, can act as arranger and underwriter for Rupee denominated bonds issued overseas and in case of underwriting an issue, their holding cannot be more than 5 per cent of the issue size after 6 months of issue.

RBI has now permitted Indian banks to participate as arrangers/underwriters/market makers/traders in RDBs issued overseas subject to applicable prudential norms.

The Reserve Bank of India (RBI) permitted the issuance of rupee – denominated bonds as part of its Fourth bi-monthly Policy statement for the year 2015-16 on September 29, 2015.

On August 12, 2016, the Ministry of Corporate Affairs (MCA) issued a Circular2, which stated that Chapter III of the Companies Act, 2013, which deals with prospectus and allotment of securities, and 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

On August 4, 2016, the Securities and Exchange Board of India (SEBI) issued a Circular3, 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.

The Housing Development Finance Corporation (HDFC) was the first Indian company to issue rupee-denominated bonds “masala bonds” on London Stock Exchange in July 2016.


A vibrant bond market can gear up the economy with greater pace. With the falling rupee, Government’s move to withdraw withholding tax will attract more investors thereby internationalizing the Indian currency. Liberalizing the Indian Banks to participate as arranger, underwriters, market makers/ traders in Masala Bond is an amicable move which will enhance liquidity of the Masala bonds, rescuing the falling Rupee.




(Author is associated with Mamta Binani and Associates and can be reached at [email protected] )

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September 2021