Mumbai, June 7, 2017

The Reserve Bank of India has revised norms for selling rupee-denominated bonds, popularly known as masala bonds, to bring in more transparency to the bond market where yield-hungry overseas investors are betting big on account of the country’s growth story.

In its bi-monthly policy, the central bank stipulated its minimum maturities at three-and-five years, while an issuer can now offer up to 300 basis points higher over and above similar maturity sovereign papers.

“With a view to harmonise the various elements of the ECB (external commercial borrowings) framework, it has been decided that any proposal of borrowing by eligible Indian entities by issuance of these bonds will be examined,” RBI said.

"Further, it has also been decided to revise the provisions in respect to the maturity period, all-in-cost ceiling and recognised lenders (investors) of masala bonds," it said.

A company that intends to sell masala bonds worth up to $50 million (or equivalent in rupee) per financial year should offer a minimum three-year maturity, the central bank said. The same is five-year for any sum more than it.

“The RBI move ensures a better credit quality to be offered to investors, who will also find it attractive to subscribe with a 300 basis points spread,” said Ajay Manglunia, executive vice-president, Edelweiss Fin. “Masala bond sales will rise this year finding more acceptance across the board.”

With rising masala bond sales, some home-grown companies are seen using this route to obtain funds from their offshore-based parents, who subscribe these bonds in an attempt to avoid “a bit complicated” the ECB route, dealers said.

Many small- to mid-sized companies are seen selling masala bonds privately in a one-on-one deal. This has alerted the RBI that may be smelling “diversion of funds” as well, said a legal expert involved in masala bond sales.

 Masala bonds have gained momentum in the past year with the country’s largest mortgage lender HDFC Ltd hitting the market first. The National Highways Authority of India too have sold such securities. Many government-owned entities including NTPC, IRFC are also lining up. Besides, non-banking finance/housing companies, including ECL Finance, Shriram Transport and Indiabulls Housing Finance, have also tapped this market to raise money.

[The Economic Times]