1. Chew On this: Don’t Pan a Masala Bond
Masala bonds
Masala bonds, the flavour of the moment
.
Mortgage lender Housing Development Finance
Corp HDFC) has raised Rs 3000 crore by issuing
masala bonds; the first company to do so since the
RBI green-flagged it in September last year..
Is that a big enough advantage?
Of course. Quite a few Indian companies that had
raised money abroad in 2007 by issuing Foreign
Currency Convertible Bonds found themselves in a
soup when the rupee depreciated sharply following
the global financial crisis.
These are rupee-
denominated bonds issued
to overseas buyers in
offshore capital market.
The bonds can be either
placed privately or listed
on exchanges as per host
country regulations.
What is the advantage of
borrowing abroad in
rupees?
Companies issuing masala
bonds do not have to
worry about rupee
depreciation, which is
usually a big worry while
raising money in overseas
markets. 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.
What exactly are
masala bonds?
What is in it for the buyer of the bond?
The buyer will earn a higher yield (coupon rate) to compensate for the risk of currency depreciation.
Deutsche Bank - PCC_GCO FEMA DESK THINK TANK Friday,21/10/2016
An Innovative
Financial Instrument
First Company to issue masala bonds
Issuance of Rupee denominated
Bonds Overseas

2. 2
a)Eligible
borrowers?
b)Recognised
Investors?
For what all purposes the
proceeds of Rupee bonds can be
used?
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a) Any corporate
(entity registered as a
company under the
Companies Act, 1956/
2013) or body
corporate (entity
specially created out
of a specific act of the
Parliament) is eligible.
b) The Rupee
denominated bonds
can only be issued in a
country and can only
be subscribed by a
resident of a country:
i. that is a member of
Financial Action Task
Force (FATF); and
ii. whose securities
market regulator is a
signatory to the
(IOSCO’s) Multilateral
Memorandum of
Understanding.
iii. should not be a
country identified in
the public statement
of the FATF.
What would be the
minimum maturity of
such bonds?
The minimum
maturity period for
such bonds will be 3
years.
Whether the Rupee
bonds can provide
option for prepayment
to the issuer?
The bonds cannot have
any optionality clause
for prepayment before
completing applicable
maturity.
Indian banks cannot
have access to these
bonds as an issuer or
investor. They, however,
can act as
arrangers/underwriters.
Can Indian banks
participate in the process
of issuance of these
bonds?
The maximum amount
that any eligible
borrower can raise
through issuance of
these bonds under
automatic route is INR
50 billion or its
equivalent during a
financial year. This limit
is over and above the
amount permitted to be
raised under the
automatic route by an
entity eligible to raise
External Commercial
Borrowings (ECB).
What would be the
maximum amount that can
be raised through issuance of
Rupee denominated bonds
under automatic route?
The process of
issuance/servicing of such
bonds requires dual
reporting by the issuer
through its Authorised Dealer
Category-I bank:
i.Bonds can be issued only
after obtaining LRN from the
Reserve Bank. The reporting
through ECB 2 Return will
also be required.
ii.In addition, actual inflows /
outflows (principal only)
should be reported on the
date of transaction itself by
email along with related LRN.
What are the reporting
requirements in
respect of such bonds?
Is there any
ceiling on the all-
in-cost of such
bonds?
What will be the exchange rate for foreign
currency-Rupee conversion for such
bonds?
The foreign currency-Rupee conversion will be at
the market rate on the date of settlement of
transactions undertaken for issue and servicing of
the bonds, including its redemption.
The all-in-cost of
such borrowings
should be
commensurate
with prevailing
market
conditions and
should be
comparable with
the cost at which
the borrowing
company is able
to raise funds
domestically.
The proceeds can be used for all purposes
except for the following:
i. Real estate activities other than for
development of integrated township /
affordable housing projects;
ii. Investing in capital market and using the
proceeds for equity investment domestically;
iii. Activities prohibited as per the Foreign Direct
Investment (FDI) guidelines;
iv. On-lending to other entities for any of the
above objectives; and
v. Purchase of land.