Reserve Bank of India, as part of a broader plan to develop the corporate bond markets, has allowed banks to raise rupee denominated bonds in the overseas markets to mobilise additional Tier I capital and Tier 2 capital. Banks can also issue such bonds for financing infrastructure and affordable housing. Such bonds, also known as Masala Bonds, allow entities to raise funds overseas in the domestic currency, which reduces the currency risk attached to such borrowings. While corporate were allowed to raise masala bonds starting June 2015, it was only in August this year that RBI proposed to extend this provision to banks.
A rupee denominated bond is a bond issued by an Indian entity in foreign markets and the interest payments and principal reimbursements are denominated (expressed) in rupees. The rupee denominated bond is known as ‘Masala Bond’ after the International Financial Corporation (IFC) issued rupee denominated bond under the name Masala Bond. Funds raised through this route would fall under the foreign investment limit for corporate bonds which currently stands at Rs. 2.44 lakh crore. The overall guidelines for rupee denominated bonds will be same as that for External Commercial Borrowings.
The interest payments (coupon payment) for the rupee denominated bonds should not be more than 500 basis points above the sovereign yield of the Government of India security of corresponding maturity. This means if the interest rate of a five-year G Sec is 7%, the interest rate for rupee denominated bond should not be above 12%.
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 under the automatic route for External Commercial Borrowings (ECB).
The fund raised through rupee denominated bonds should not be used for real estate activities (except development of townships and housing projects) and in areas restricted for FDI.
International Financial Institutions where India is a shareholding member need not require the prior permission of the RBI to issue rupee denominated bonds if they allocate the entire proceeds from the bond issuance in India.
In other cases, where an International Financial Institution (of which India is a member) wishes to retain the freedom to deploy the issue proceeds in any member country shall require prior permission from the Reserve Bank / Government of India.
HDFC has already raised Rs. 5000 crore through such bonds and has RBI permission to raise another Rs. 3000 crore from this newly emerging route and is awaiting better timing to raise the fresh money.
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