In this article, Pradeep Raja Ravipalli who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses Rupee Denominated Bonds Issued To Overseas Investors


The present article mainly focuses on describing “Rupee Denominated Bonds” and RBI guidelines about the RBDs, Interpretation of the position of RBDs in selected corporates in India, advantages and future of RBDs in India. Rupee Denominated bonds are issued by an Indian entity in overseas markets and the interest payments and principal reimbursements are denominated (expressed) in rupees. The uniqueness of rupee denominated bond is that buying of bonds, interest payments, and repayment all are communicated in rupees. All payments are transformed into corresponding dollar values at the time of payment.

Introduction to Bonds and Rupee Denominated bonds

In the language of finance, “bond” is a form of loan or IOU (“I owe you”). The issuer of the bond is the borrower (debtor) and the owner of the bond is lender (creditor), and the coupon is the interest. The debtor or the borrower will get external funds to finance long-term investments.

Bonds-its features

In order to understand the bonds, we need to know the key features of the bonds and key terminology of this bonds such as coupon amount, bond yield, par or maturity amount, Credit Quality and Market price. Following are the brief description of these key features.


The principal amount is the amount in which the issuer pays the interest and it can be also called nominal, par, or face amount. A redemption amount, which is different from the face amount, is available for some structured bonds and these are linked to performance of particular assets.


Maturity is the date on which the issuer agrees to repay the total amount of money and the length of the time from agreement date to maturity date is called “the term” or “the tenure” or “the maturity” of a bond. The bond maturity is set when it is issued. The maturity can be any length of time, most of the bonds have a term up to thirty years and some bonds have been issued with tenure of fifty years. There are some issues which does not have any maturity date. i.e. irredeemable.


In old days, the bond certificate was issued in a paper and had attached a coupon to it, one for each interest payment. The coupon rate is fixed throughout the bond life. On the due date the bond holder would hand in the attached coupon to the bank in interchange for the interest payment. Hence, the interest rate that the issuer pays to the holder for a bond is called “Coupon”.


The yield is the percentage of return amount from the investment in a bond. For example, let us assume an investor purchase a bond with a 10% annual coupon rate and principal value of a 1000 rupees. Each year bond pays 10% or 100 rupees, in interest. Its annual yield is the interest divided by its principal amount.

Credit Quality 

The issue quality of the bond denotes to the possibility that the holders will obtain the amounts promised at the due dates. It depends on an extensive range of factors. Credit rating agencies graded the high yield bonds as below investment grade.

Market Price

The market price of the bonds will be subjective by many factors such as the currency, amounts, and timing of the interest payments, capital repayment due, the quality of the bond, and the available redemption yield of other comparable bonds which can be traded in the markets.

Some of the important kinds of bonds

Corporate Bonds

Any corporate companies can issue bonds as it can issue stocks. Most of the corporations have much flexibility as to how much debt they can issue and the limit is whatever the market will bear. In general, a short term corporate bond has the par value of less than five years, intermediate is five to twelve years and long term is more than twelve years.

These bonds are characterized by higher yields because of their higher risk of a company defaulting than a government. The companies which are having higher credit quality, the investors receives lower interest. The upside is that they can also be the most rewarding fixed-income investments because of the risk the investor must take on.

Convertible Bonds

A convertible bond may be exchanged for a predetermined amount of the company’s equity usually at the discretion of the bondholder.

Issuing convertible bonds minimizes negative investor interpretation. For example, if a public company selects to issue stock, it’s usually interpreted as a sign that the company’s share price maybe overvalued. Issuing convertible bonds overcomes this negative impression and gives the benefit of converting to equity if the company does healthy.

In view of an investor’s, these bonds have a value-added component built into it and is fundamentally a bond with a stock option hidden inside. Thus, it inclines to offer a lower rate of return in exchange for option to trade the bond into stock.

Callable Bonds

Callable bonds, also known as “redeemable bonds,” can be redeemed by the issuer prior to maturity. A premium is paid to the bond owner as compensation when the bond is called.

The main cause of a call is a decline in interest rates. In order to boost its finances, the company will call its current bonds and reissue new, lower-interest bonds to save money.

Term Bonds

These are the bonds from the similar issue and that share same par dates. These bond can be redeemed at an earlier date than the other issued bonds. There is feature called Indenture agreement in which the bond issuer make with buyers. This agreement provides the schedule and price of redemption plus maturity dates.

Some municipal bonds are examples for this term bonds and this will have ten year call features. It means the issuer of the bond can redeem it at a predetermined price at specific times before the bond matures. These bonds on the other hand is the opposite of a serial bond. It has various maturity schedules at regular intervals until the issue is retired.

Amortized Bonds

An amortized bond is a financial certificate that has been reduced in value for records. Treating a bond as an amortized asset is an accounting method in the handling of bonds. When a bond is issued at a discount – that is, offered for sale below its par – the discount must either be treated as an expense or amortized as an asset. Amortization allows for profiting from the discount rather than treating it as an expense.

As we discussed in Section 4, amortization is a method that gradually and systematically reduces the cost value of a limited life, intangible asset. (To learn more about bond premium amortization, read Premium Bonds: Problems and Opportunities.)

Junk Bonds

Junk bonds typically offer interest rates three to four percentage points higher than safer government issues. These are also called “speculative bond” or “high-yield bond”. These bonds are rated “BB” or lower because of its high risk.

Angel Bonds

These are investment bonds and provides a lower interest rate because of the issuing company’s high credit rating. These are the opposite of fallen angels, which are given a “junk” rating and are consequently much more risky.

Rupee Denominated Bonds

These bonds are issued by an Indian entity in overseas markets and the interest payments and principal reimbursements are denominated (expressed) in rupees. The uniqueness of rupee denominated bond is that buying of bonds, interest payments and repayment all are communicated in rupees. All payments are transformed into corresponding dollar values at the time of payment.

The present article mainly focus to describe about “Rupee Denominated Bonds” and RBI guidelines about the RBDs, Interpretation of the position of RBDs in selected corporates in India, advantages and future of RBDs in India.

  1. Rupee Denominated Bonds

Some Governments, banks, companies and other independent entities may issue bonds in foreign currencies, which appear to be more stable and predictable than their domestic currency. Bonds denominated in foreign currencies will give the ability to the issuers to access investment capital available in foreign markets. Some foreign issuer bonds have their Nicknames such as “samurai bond” – issued by an investor based in Europe and will be governed by Japanese law. “Dim-sum bonds” are the Chinese bonds and dim-sum is a popular dish in Hong-Kong.

The rupee denominated bonds is used to mention to rupee denominated borrowing by the entities in abroad markets to eliminate foreign exchange risk, also, these are called “Rupee debt bonds” or “Masala bonds”. The International Finance Corporation (IFC) named these bonds as “Masala Bonds” to give a local flavour by keeping to mind Indian culture and cuisine. The payment of interest and principle reimbursement are expressed (denominated) in Indian rupees.

It is a significant plus for the Indian economy the rupee denominated bonds were took off. These are issued to foreign investors and settled in foreign currency, so that, the risk lies with the investor and not the issuer, unlike the external commercial borrowings (ECBs).

1.1 Reserve Bank of India’s guidelines on Rupee Denominated Bonds

In September 2015, RBI issued guidelines on Rupee denominated bonds, and modified the guidelines in August 2016, in view of these guidelines, money accumulated by “Masala bonds” to be used only for infrastructure funding purposes. Banks were allowed to issue “Masala bonds” to meet the capital needs and accumulate funds for the infrastructure projects. These guidelines will be similar to that for “External Commercial Borrowings (ECBs)”

1.1.1 Who can issue Rupee Denominated bonds?

  • Any corporate or corporate body i.e. an entity which is registered under India’s companies Act as a company, formed with particular “Parliament Act” is eligible to issue Masala bonds overseas.
  • In accordance with the new RBI guidelines, InvITs (Infrastructure Investment Trusts), REITs (Real Estate Investment Trusts) which are under SEBIs (Securities and Exchange Board of India) jurisdiction are also eligible.
  • In view of recent guidelines (August 2016), banks are allowed to borrow the bonds in order to finance their tier-1 and tier-2 and infrastructure funding.

1.1.2 Who can’t issue Rupee Denominated bonds?

LLPs, partnership firms, co-operative societies, trusts (other than REITs and InvITs), non-profit making organizations and individuals are not eligible issuers of “Rupee denominated bonds”.

1.1.3 Corporate Issuers and Maturity Period

  • The Indian corporate companies, who are authorized to increase ECBs (External Commercial Borrowings), are also permitted to increase off-shore Rupee Denominated Bonds. The RBD (Rupee Denominated Bonds) follows the same guidelines as the corporate companies follows to issue ECBs. The corporates have to take RBI approvals in case to get benefit of masala bonds if they issue ECBs under approval route, but, in the case of they follow the automatic route to issue ECBs, RBI approval is not required.
  • The other payments such as coupons and redemptions are settled in foreign denomination. The money to be issued and the average maturity period i.e. minimum of three years, end use protection are considered according to the guidelines provided for External Commercial Borrowings.

1.1.4 Interest Payments and Maximum Amount

The interest payments i.e. coupon payment must not be more than five hundred basis points. Under consequent maturity the coupon payment should not be above the superior yield of the Indian government’s security.

For example, G-sec five year bond issued with the interest rate of “six percentage”, then the RBD rate of interest must not be above 11%.

In automatic route, any eligible issuer of the rupee denominated bonds can raise a maximum of fifty billion rupees or its equivalents through RDBs during a financial year. The funds generated by RDBs can’t be used for some restricted areas of FDI and for real estate activities but there is an exception the development of housing projects and townships.

1.2 Interpretation of selected corporates in India

1.2.1 International Finance Corporation (IFC)

  • “International Finance Corporation” is the prime investors for development countries. In the last decade, IFC mostly investing about eleven billion US dollars in long term financing for climate smart projects such as energy efficiency, green buildings, sustainable agriculture, private sector adaptation to climate change and renewable power.
  • These issuance of bonds will be used to progress private sector development in India.
  • IFC issued two billion Indian rupees in fifteen year masala bond in March, 2016 which is historic longest dated overseas bond.

  1.2.2 National Thermal Power Corporation (NTPC)

  • The India’s biggest power utility company, the NTPC (National Thermal Power Corporation Limited), was established by Government of India in 1975 and was awarded Maharatna status in May 2010.
  • Green bond structure was initiated by the NTPC and has been certified by climate bonds, which is the associate of London stock exchange independently.
  • NTPC mainly producing and selling electricity to the power distribution companies and electricity boards of the individual states in India. India Government goal is to produce 175 GW of renewable energy by 2022.
  • The issuance of these bond will support solar and wind projects supplementing Indian

1.2.3 Housing Development Finance Corporation (HDFC)

  • HDFC (Housing Development Finance Corporation Limited) is an Indian financial corporation based in Mumbai founded in 1977, and it is a leading provider of Housing Finance and it is established as the first.
  • HDFC has raised a total amount of Rs 5,000 crore through the issue of Rupee denominated bonds (as on October 14, 2016).
  • HDFC is the world’s first Indian corporate issued the Masala bond.

1.2.4 British Columbia

  • The Canadian province “British Columbia”, was the first foreign government unit to issue a rupee denominated bond.
  • The income generated from the bond will be utilized by HDFC (Housing Development Finance Corporation) in India’s housing industry.

1.2.5 European Bank for Reconstruction and Development (EBRD)

  • EBRD was founded in 1991 and is the short form of “European Bank for Reconstruction and Development”, this multilateral international financial institution uses investments as a device to build market economies.
  • EBRD is owned by two governmental institutions (i.e. EU and EIB) and sixty five countries.
  • The European Bank for Reconstruction and Development (EBRD) is one of the important issuer of Indian Masala bonds in London.

1.3. Merits of masala bonds

1.3.1 To Corporate

  • RDBs/Masala bonds helps the corporate companies in India to expand their bond portfolio. RDBs facilitates Indian companies to valve a large number of investor base.
  • RDBs helps to corporate companies to borrow from overseas market because the interest rates are much lower in developed countries compared to India.
  • Indian corporates do not have to bear the risk of currency since the risk is totally lies with the off-shore investor in case of any fluctuation in the currencies.

1.3.2 To Investors

  • Masala bonds are more profitable to investors. They can earn more returns through masala bonds in overseas comparatively their home countries. For example, In US, the bond yields is 3% where as in masala bond it ranges from 5-8%.
  • In order to attract and benefit more foreign investors, the Ministry of Finance has cut the withholding tax (a deducted tax at source on populace outside the country) on interest proceeds of bonds from 20% to 5%. And capital gains from appreciation of rupee are also exempted from tax.
  • An investor benefits from the masala bond if the rupee appreciates at the time of maturity.
  • Those who are not interested to invest in the offshore market are getting attracted because of RDBs.

1.3.3 To India

  • Currently Indian government has put so many goals such as “Make in India”, “digital India” and developing smart cities . . . etc. for these achievements it requires approximately around twenty six lack rupees in next few years. To achieve this RBD is an efficient way to tap foreign capital.
  • RBDs helps to enhance the confidence in off-shore investors and will create reasonable knowledge about Indian economy.
  • In India, many projects in the area of infrastructure and power are delayed due to shortage of capital. To overcome this rupee denominated bonds are the best solutions.
  1. Demerits of Masala Bonds

There are few risks involved with shifts in capital flows, financial candidness, and the risk that overseas market may portray liquidity away from the domestic market.

  1. Rupee Denominated Bonds – Future

RDBs boosts the growth of India economy. RBI enlights the Indian economy by allowing Indian banks to raise their foreign currency through RBDs. The biggest corporate entities in India were attracted by the success of HDFC bank in rupee denominated bonds. Indian railways, Yes bank, are ready to entry in overseas market.

ECBs are the only option to corporate companies to raise foreign currency before the introduction of RDBs. However, the RBDs are more advantageous and leaving the risk of currency to the investors.

  1. Tax implications in respect of RBDs in Budget 2017

Indian finance minister Mr. Chidambaram presented the finance bill 2017 and provided a clarity on the tax implications for rupee denominated bonds. Following are the amendments proposed in Finance bill 2017:

A transfer of RBDs (Rupee denominated bonds) which were made outside India, by a non-resident to another non-resident, will not be considered as a transfer for the purpose of levy of capital gains tax

Concessional rate of 5% withholding tax on interest payment to a Qualified Foreign Investor in respect of investments or a Foreign Institution Investor in Government Securities or rupee denominated corporate bonds to be made available on interest payable before 1 July 2020 (instead of 1 July 2017 earlier)

Rupee Denominated Bonds Concessional TDS rate of 5% will be also applicable to rupee denominated bonds issued outside India (commonly known as Masala Bonds) before 1 July 2020. This amendment is proposed with retrospective effect from assessment year 2016-17.


The revised RBD policy introduced by RBI seems to encourage the growth rate of Indian economy and provided a new era of raising debt by Indian corporates. The revised policy facilitates a new pool of borrowers such as start-ups, to raise overseas currency in a hassle free manner.

The very recent amendments proposed by 2017 finance bill are a welcome move by the government of India and will incentivize the Indian companies to borrow / raise funds from outside India and support initiative like “Make in India”, “Startup India” etc. of the Government of India.

Masala bond will help the Indian entities to lessen its interest cost burden on the liability amount on its balance sheet. The foreign funds can be used for infrastructural development in India. Overall, the development of “a Masala bond market” would be positive for Indian companies, opening up possibly important new sources of funding over External Commercial Borrowings.




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