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Masala Bonds

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"Masala Bonds" are the 10 year off-shore rupee bonds issued by International Finance Corporation (IFC), a member of the World Bank group, in the international capital market in November 2014, to raise funds for supporting private sector infrastructure development initiatives in India. Masala bonds are listed in London Stock Exchange.

Subsequently, on 29 September 2015, RBI put in place a framework for issuance of Rupee denominated bonds overseas within the overarching External Commercial Borrowing (ECB) policy, in order to facilitate Rupee denominated borrowing from overseas. (ECBs refer to commercial loans in the form of bank loans, securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares), buyers’ credit, suppliers’ credit availed of from non-resident lenders with a minimum average maturity of 3 years.)

The term Masala bonds now extends to any rupee denominated bonds issued to overseas buyers even though RBI has not resorted to the use of this name in their guidelines.

The term "masala" stands for Indian spices, which gives Indian cuisine its characteristic flavour, and helped India gain a place in the global trade map.

By usage of the term, Masala Bonds are similar to dimsum bonds -bonds issued outside China but denominated in Chinese currency. But they are different from samurai bonds which are Yen (Japanese currency)-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations.


Masala bonds, like any other off-shore bonds, are intended for those foreign investors who want to take exposure to Indian assets, yet constrained from doing it directly in the Indian market or prefer to do so from their offshore locations. The settlement of the bonds will be in US dollars but since they are pegged to the Indian currency -rupee-, investors will directly take the currency risk or exchange rate risks. Settlement is done in US dollars because of the limited convertibility of rupee.

IFC's masala bonds

The first Masala bonds were issued on 10 November 2014 under IFC’s $2 billion offshore rupee program and yields 6.3%.IFC, established in 1956 and owned by 184 member countries, is the largest global development institution focused exclusively on the private sector companies and financial institutions in developing countries. IFC issued the bonds in London, a premier financial center and the investment banker, J.P. Morgan was the sole arranger for the bond. The vast majority of investors in masala bonds are European insurance companies. Proceeds from this 10-year, 10 billion Indian rupee bond (equivalent to $163 million) will be used to support a forthcoming infrastructure bond issuance by Axis Bank, back in India. Thus, Masala bonds pave the way for more foreign investment to help meet India’s private sector development needs.

Masala bonds are the first rupee bonds listed on the London Stock Exchange. They are the longest-dated bonds in the offshore rupee markets, building on earlier offshore rupee issuances by IFC at three-, five-, and seven-year maturities. However, these earlier bond issuances were not issued under the nomenclature of masala bonds. Further, as on date, the present issue of masala bonds is a one-time issue. Hence, subsequent issuances of the off shore rupee bonds by IFC may also not be under this nomenclature.

Advantages and Disadvantages

Offshore bonds have its own set of advantages and disadvantages for both the issuer and the investor as well as for the economy. Competition from offshore markets may induce improvements in domestic bonds markets such as strengthening of domestic market infrastructure, improving investor protection and removing tax distortions that hinder domestic market development etc. Against these benefits come the risks associated with financial openness and sudden shifts in capital flows, and the risk that offshore markets may draw liquidity away from the domestic market.

RBI Framework for issuance of rupee denominated bonds overseas

As per the September 2015 and the April 2016 guidelines of RBI, any corporate or body corporate as well as Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) can issue such off-shore rupee denominated bonds. They can issue only plain vanilla bonds and the issue has to be either placed privately or listed on exchanges as per host country regulations.

The Rupee denominated bonds can only be issued in a country and can only be subscribed by a resident of a country:

(i) A jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or

(ii) 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 will not have access to these bonds in any manner whatsoever. Indian banks, however, can act as arranger and underwriter. In case of underwriting, holding of Indian banks cannot be more than 5 per cent of the issue size after 6 months of issue. Further, such holding shall be subject to applicable prudential norms.

The minimum maturity period is 3 years, (till April 2016 it was 5 years). The call and put option (the right to buy/sell at a future point of time), if any, cannot be exercisable prior to completion of minimum maturity.

The proceeds can be used for all purposes except for the following:

Companies can raise under the automatic route (i.e., without prior approval) an amount equivalent to USD 50 billion (till April 2016 it was USD 750 million) per annum. Cases beyond this limit would require prior approval of the Reserve Bank. The issuance of Rupee denominated bonds overseas will be within the aggregate limit of foreign investment permitted in corporate debt as notified from time to time.

The foreign currency - Rupee conversion will be at the market rate on the date of settlement for the purpose of transactions undertaken for issue and servicing of the bonds.

The Finance Act, 2016, inter-alia, amended section 48 of the Income Tax Act with effect from the 1 April, 2017 so as to provide that the gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company subscribed by the non-resident, shall be ignored for the purpose of computation of full value of consideration.

In order to further provide relief in respect of gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company to secondary holders as well, it was proposed in Finance Bill, 2017 to amend section 48 providing that the said appreciation of rupee shall be ignored for the purposes of computation of full value of consideration.Further, with a view to facilitate transfer of Rupee Denominated Bonds from non-resident to non-resident, it is proposed to amend section 47 so as to provide that any transfer of capital asset, being rupee denominated bond of Indian company issued outside India, by a non- resident to another non- resident shall not be regarded as transfer. These amendments will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.

RBI as at the end of September 2017 has given approvals for issuance of bonds worth Rs. 44,000 crore (i.e. USD 6.8 bn) and companies have raised about Rs. 32,000 crore (i.e. USD 5 bn) through the masala bond route till then.

As the limit for FPI investment in corporate bonds (Rs. 244,323 or USD 37.5 bn) crore were getting exhausted and since masala bonds were also a part of this limit, further issuances had to be put on hold. In order to ensure that the financing needs of the corporate sector are not hurt, it was decided that with effect from October 3, 2017, Masala bonds will no longer form a part of the limit for FPI investments in corporate bonds. They will form a part of the ECBs and will be monitored accordingly. Thus issuance of masala bonds can restart. Further, the amount of Rs. 44,001 crore (USD 6.8 bn) arising from shifting of Masala bonds will be released for FPI investment in corporate bonds over the next two quarters, i.e. Rs. 27,000 crore (USD 4.2 bn) in Q3 of FY 2018 and Rs.17,001 crore (USD 2.6 bn) in Q4 of FY 2018. Out of the increased limits, an amount of Rs. 9,500 crore (USD 1.5 bn) in each quarter will be available only for investment in infrastructure sector by long term FPIs (i.e., Sovereign Wealth Funds, Multilateral Agencies, Endowment Funds, Insurance Funds, Pension Funds and Foreign Central Banks).


  1. IFC Issues First Masala Bonds in London, Attracting International Investment for Infrastructure in India, Press release, IFC dated 10 November 2014
  2. Why issue bonds offshore? by Susan Black and Anella Munro, BIS Working Papers, No 334
  3. September 2015 and the April 2016 guidelines of RBI

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