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  • Aman Gupta

Analysing the Contours of Masala Bonds

[Aman Gupta is a third-year student at NLU Jodhpur.]

In 2015, the Reserve Bank of India (RBI) introduced a new kind of external commercial borrowings (ECBs), known as rupee-denominated bonds (RDBs) or masala bonds, which were floated with the idea of aiding the Indian corporate to raise funds from global investors.[1] The RDBs were conceptualised as an attempt to internationalise the Indian rupee with the objective of ensuring a stable currency and also attracting off-shore investors. The first ever masala bond of ₹1000 crores was issued by the International Finance Corporation (IFC) in 2013 to fund infrastructural projects in India. Since then, various Indian companies such as HDFC, NHAI and NTPC have issued masala bonds to raise foreign investment and diversify their portfolio.

The masala bonds raise investments in the rupee equivalent of any other currency and are repaid in the rupee earnings converted to respective currencies. For instance, an issuer corporate issues a RDB valued at ₹5000 for a one-year period with the applicable interest rate of 10% payable annually. Now, the investor investing in dollars has to pay the rupee equivalent of ₹5000 at the prevailing dollar-rupee exchange rate, that is, $71.42 for the existing exchange rate (say ₹70/$). Similarly, the investor is entitled to the annual interest of ₹500 and subsequently will be paid a dollar equivalent of ₹5500 at the end of the year (₹5000+₹500). Now, in case the exchange value depreciates to ₹80/$ at the time of maturity, the investor will be paid $68.75 (5500/80) and not $78.57, which would have been the case had the rate remained unchanged. This conversion facility makes the RDB an extremely corporate-friendly instrument, taking care of the risks associated with the sharp currency fluctuations over a long period of time. On the other hand, ECBs are raised and repaid in the same foreign currency, making them highly burdensome for the Indian corporate earning mainly in rupees.

Transition in the compliance requirements of masala bonds

At the time of its inception, the masala bonds were subjected to certain conditions under the already existing ECB policy such as those relating to maturity period and eligible investors. However, the same were not found to be conducive enough to create a firm base for the masala bonds to become a reliable mode of borrowings. Thereafter, the RBI amended the ECB framework in relation to certain conditions applicable to the RDBs. The press release in this regard mentions the harmonization of various parameters of the RDB bond in consonance with the ECB guidelines as one of the objectives behind the change.[2] Thus, various changes have been made such as-

  • Maturity period – For masala bonds raised up to USD 50 mn equivalent in INR per financial year, the maturity period is 3 years, and for bonds raised above USD 50 mn equivalent in INR per financial year, it is 5 years.

  • All-in-cost ceiling - 300 basis points over the prevailing yield of the Indian government securities of the corresponding maturity.

  • Investors - Entities permitted as investors under the provisions of paragraph 3.3.3 of the Master Direction but should not be related parties within the meaning as given in IndAS 24.

Further, in pursuance of creating a more corporate-friendly framework, the central government, in order to liberalize the ECB in respect of manufacturing and banking sector, brought about more changes in its policy,[3] such as –

  • Manufacturing sector - The existing norm regarding the minimum average maturity period of 3 years is reduced to 1 year for raising ECB up to USD 50 mn or its equivalent. Provided, the above change is applicable only to the borrowers who are in the manufacturing sector.

  • Indian banks - Allowed acting as arrangers, traders, market makers and underwriter for masala bonds, provided that in such a scenario, the holding cannot go beyond 5% of the issue size post 6 months from the date of the issue.

The above-mentioned transition acts as a shred of evidence of the ever-demanding modification of policies and required series of changes. The regulatory bodies have brought upon a more encouraging set of guidelines relating to infrastructure and banking sectors. The RDBs are envisaged as a panacea to help deal with the ill-effects of slowing growth rates and burdening non-performing assets.

Current position pertaining to masala bonds

It is pertinent to note the significance of RDBs in the current currency set-up as well as in the background of assumed risk arising out of external borrowings. The crucial difference between RDBs and the existing ECBs is the risk of currency fluctuations in the global for-ex. The easing of various guidelines and frameworks relating to the issuance of masala bonds by the RBI has opened up a new wave of optimism amongst the Indian corporates who mainly relied on the ECBs for overseas credit.[4] The current fiscal year has witnessed a decline in the RDBs owing to various factors such as the requirement of RBI’s prior approval, comparatively higher interest rates, hedging cost, and depreciation in the Indian rupee, among others. Subsequently, the Current Account Deficit (CAD) and the foreign exchange inflow have been severely affected.

Subsequently, the Central Board of Direct Taxes (CBDT) has introduced certain relaxations and exemptions for masala bonds. Firstly, the government has declared to withdraw the withholding tax on the RDBs issued till March 2019, which already stands at a concessional rate of 5% from the usual 40%. Secondly, the restrictions relating to the underwriting and marketing of masala bonds on Indian banks have been removed. Thirdly, the capital gains tax levied on the offshore transfer of masala bonds from one non-resident to another has also been removed. The above-mentioned changes have been brought at the right hour of the day as foreign investors are shying away from investing in the rupee-bond as they incur substantial risk coupled with an otherwise costlier option. The proposed changes (subject to express legislative action) provide a counter-effect to the volatility in the rupee, increased cost and under-performance.

Various entities ranging from foreign government bodies such as the government of British Columbia in 2016, international organizations like IFC since 2013, banks such as Barclays bank in 2007, domestic corporates to financial and banking bodies have issued masala bonds to raise funds for various projects and plans. On the other side, there exist major implications of the RDBs which run deep into the issue of aggressive money laundering activities and tax evasion behind the sham of foreign investments in RDBs. Moreover, the continuing downward trend of the rupee makes it difficult to lure investors without increasing the premium interest rates. As it has been observed in the past in countries like Russia, Argentina and Venezuela, the future of the RDBs is highly affected by the efficiency of the domestic corporate bond market. There are both advantages and disadvantages related to the masala bonds but it will be reasonable to say that the pros outweigh the cons in terms of the prospective returns.


Masala bonds are considered to be a reliable instrument in attracting foreign investors towards the Indian market and thus revitalizing the weakened rupee. Further, the confidence of offshore investors in these bonds creates a strong base for different avenues of investment for a particular nation.

The regime in India has to make an environment conducive to the issuance of masala bonds. Since the Indian economy is one of the promising investment spots in the world, it is important to capitalize on market sentiments. The coordinated efforts of MCA, SEBI and RBI in adjusting the framework and regulations in consonance with the market outlook and better investment atmosphere show the intent of the regime with respect to the masala bonds. It lies in the future as to how the liberalised policy changes and the big boosts given to infrastructure and banking pan out in relation to the masala bonds.

[1] Reserve Bank of India, External Commercial Borrowings (ECB) Policy - Issuance of Rupee denominated bonds overseas, RBI/2015-16/193 A.P. (DIR Series) Circular No.17 dated: September 29, 2015.

[2] Reserve Bank of India, Issuance of Rupee denominated bonds overseas, RBI/2016-17/316 A. P. (DIR Series) Circular No.47 dated: June 7, 2017.

[3] Reserve Bank of India, External Commercial Borrowings (ECB) Policy – Liberalisation, RBI/2018-19/48 A.P. (DIR Series) Circular No.9 dated: September 19, 2018.

[4] Evaluer, Masala bonds: an investor’s perspective, at https://www.evaluer.co.in/masala-bonds-an-investors-perspective/.


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