Masala bonds are Indian rupee denominated bonds issued to buyers outside India, where the currency risk lies with the investor and not the issuer.

To facilitate Masala bond issuances, the Reserve Bank of India (“RBI”) amended the External Commercial Borrowings (“ECB”) policy by way of guidelines issued on September 29, 2015, which have been further supplemented by guidelines issued on April 13, 2016 (collectively, “Guidelines”).1

Eligible issuers

1. any corporate or body corporate;
2. real estate investment trust regulated by the Securities Exchange Board of India (“SEBI”); and
3. infrastructure investment trusts regulated by SEBI.

Banks incorporated in India may not issue Masala bonds.

Eligible investors

Indian persons and companies are not eligible investors in Masala bonds. Masala bonds may only be issued in a country and may only be subscribed by the resident of a country:

1. that is a member of the FATF (FATF compliant jurisdictions include the United States, Canada, United Kingdom, Singapore, Hong Kong and Australia) or a member of an FATF Style Regional Body;
2. whose securities market regulator is a signatory to the International Organization of Securities Commission’s (“IOSCO”) Multilateral Memorandum of Understanding (Appendix A signatories) or a signatory to bilateral Memorandum of Understanding with the SEBI for information sharing arrangements; and
3. that is not identified in the public statement of the FATF as:
   1. a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or
   2. a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.

Banks incorporated in India may act as arrangers and underwriters for Masala bonds, and Indian banks have a limited exemption for purchasing Masala bonds in their capacity as underwriters.

Type of instrument

Only “plain vanilla” bonds are permitted (the term “plain vanilla” has not been defined in the Guidelines).

Maturity

The bonds must have a minimum maturity period of three years, and no call and put options can be exercised prior to the completion of the minimum maturity.

All-in-cost

The all-in-cost for Masala bond issuances must be commensurate with prevailing market conditions. This is a welcome change from the prescriptive approach followed for non-rupee ECBs, which had the effect of restricting issuers from accessing the international bond markets.

End-uses

The proceeds from a Masala bond issuance can be used for all purposes, except for the following:

1. real estate activities other than for development of integrated township/affordable housing projects;
2. investing in capital markets and using the proceeds for equity investment domestically;
3. activities prohibited as per the foreign direct investment guidelines;
4. on-lending to other entities for any of the above objectives; and
5. purchase of land.

Amount

An issuer may raise the equivalent of Rs. 50 billion per annum under the automatic route—a capital raising above this amount requires the RBI’s approval.

In addition to reporting requirements, the Guidelines stipulate that the issuer of a Masala bond must incorporate a clause in the agreement/offer document that enables it to obtain information on the primary bond holders, and such information must be provided to the regulatory authorities in India as and when required.

In a paper titled “Development of India’s Corporate Bond Market” published by the India-UK Financial Partnership (“IUKFP”) in November 2015, the IUKFP has made certain recommendations to improve the Guidelines. The key recommendations are to remove the cap on the maximum amount an issuer may raise per year, to abolish the minimum maturity period for the bonds and to include Indian banks as eligible issuers.

Taxation

The Government of India issued a press release on October 29, 2015, to clarify that withholding tax at the rate of 5 percent, which is in the nature of final tax, is applicable to Masala bonds (in the same way as it is applicable for offshore U.S. dollar denominated bonds). Capital gains on Masala bonds are exempt from capital gains tax in India.

Benefit to Issuers of Masala Bonds

By issuing Masala bonds, Indian companies will benefit from the diversification of funding sources, away from their traditional reliance on equity and bank loans.

Benefits of Listing Masala Bonds on the Singapore Stock Exchange

Singapore continues to provide a deep and liquid debt capital market for companies in the region to meet their financing needs. The demand for offshore bond issuances is fuelled by a broad community of asset managers and institutional investors seeking investment opportunities in Asia.

The Monetary Authority of Singapore (“MAS”) issued a report on the development of Singapore’s corporate debt market titled “Singapore Corporate Debt Market Development 2015.” In the report, the MAS highlighted that Singapore’s bond market has continued to attract issuances in foreign currencies and of them, non-SGD debt issuance accounted for 87 percent (SGD 174 billion) of total debt issuance in 2014, up slightly from 86 percent in 2013. In the report, the MAS also set out its belief that issuances of Masala bonds will be integral to the growth of the Singapore corporate debt market, highlighting that more than 80 percent of overseas Indian bonds are listed on the Singapore Stock Exchange. The MAS indicated its willingness to work with financial institutions, issuers and investors to encourage Masala bond issuances in Singapore

Singapore’s stable political environment, its conducive regulatory and tax framework (with streamlined prospectus requirements and no capital gains tax) make a compelling argument for listing Masala bonds on the Singapore Stock Exchange.

Duane Morris & Selvam Capablities

Duane Morris & Selvam has an active India desk that helps to connect global businesses to India and Indian businesses to the world. Our Indian Capital Markets practice regularly advises on the international aspects related to securities offerings by Indian issuers. Lawyers in our Singapore office advise on bond listings on the Singapore Stock Exchange. The combination of our India capital markets experience and our Singapore Stock Exchange listing experience makes us ideally placed to assist clients with Masala bond issuances.

About Duane Morris & Selvam

Duane Morris & Selvam LLP has an active India Practice Group that helps to connect global businesses to India and Indian businesses to the world. We have a team of dedicated lawyers with India practice experience and longstanding capabilities in advising on inbound and outbound transactional work related to India. We collaborate with local counsel as needed and aim to offer seamless support for all India-related initiatives.

The content of this update is of general interest and is not intended to apply to specific circumstances. The content should not therefore, be regarded as constituting legal advice and should not be relied on as such.