6 July, 2016
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
Summary of the Guidelines
The main features of the Guidelines are as follows:
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Eligible issuers |
Banks incorporated in India may not issue Masala bonds. |
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Eligible |
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:
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. |
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Type of |
Only “plain vanilla” bonds are permitted (the term “plain vanilla” has not been defined in the Guidelines). |
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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. |
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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. |
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End-uses |
The proceeds from a Masala bond issuance can be used for all purposes, except for the following:
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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.
Note
1 See https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=10049 and https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10350&Mode=0.
For further information, please contact:
Wei Chern Tham, Director, Duane Morris & Selvam
wctham@selvam.com.sg
