With the recent enactments as well as the Regulators spate to deepen and strengthen the bond market in India, the bond market in India is in for a major revamp. Masala bonds, one such instrument has been on the eye of the corporate(s) for enabling a proper bond market regime. My presentation looks intends to bring the corporate bond market into light and also analyses what masala bonds exactly are.

1. Rupee denominated bonds: Ushering a
catalytic bond regime
A presentation by:
Saurabh Dugar
(Assistant Manager - Research)
Mehta & Mehta | Company Secretaries

2. A bond is a debt security, in which issuer owes to the
holder a debt in the form of periodic interest and
repayment of principal amount at a later date, though
predetermined.
Corporate bonds are issued to public.
Corporate bonds are listed on exchanges and are traded in
the secondary market.
Can be secured and unsecured.
Possesses a broad base of issuers and investors (including
retail investors).
Corporate Bonds: A Run Through
Ralph Waldo Emerson (May 25,
1803 – April 27, 1882) was an
American essayist, lecturer, and
poet who led the
Transcendentalist movement of
the mid-19th century.

3. Helps generate funds at the low cost and take the benefit of their credit
rating without diluting equity.
Can substitute part of the bank loan market
Ability to relieve the stressed banking system in a developing country of
unbearable burden.
When bank lending and corporate debt is more balanced in an economy,
the market gets an opportunity to assert itself, thereby providing a more
effective hedge against un-diversifiable volatility risk.
Derivatives and Swap markets are critical for the development of corporate
bond markets. These tools broaden the investor base and lend the much
needed liquidity to the market. These instruments also play a pivotal role in
reducing costs, enhancing returns and managing risk; particularly interest
rate risk.
Corporate Bond Market: Its importance

4. State of Corporate Bond Market in India

5. Bond issuance over the years
0.79
0.92
1.15
1.74
1.90 1.92
2.51
3.52
2.71
4.33
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
InRupeetrillions
Source: Prime Database
The surge in the issuance is because of RBI and NHB allowing NBFCs and Housing Finance Companies to
issue unsecured debentures after satisfying certain conditions;
The trend is supposed to grow in current financial year and thereafter after the amendments in
Companies (Acceptance of Deposit) Rules, 2014.

6. Bond Market as a part of corporate Funding
71.80% 69.70% 69.50% 66.80% 65.50%
9.40% 10.70% 11.10% 12.10% 12.10%
18.70% 19.60% 19.30% 21.10% 22.40%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY 11-12 FY 12-13 FY 13-14 FY 14-15 FY 15-16
Banks ECBs Corporate Bonds
It can be seen that bank borrowing is a popular method of borrowing as compared to bond financing;
The trend in foreign companies is rather opposite;
One attributable reason behind this is inadequacy of security on borrowings;
Until recently, regulators pressure was immense which lead to corporates favoring bank financing.
Source: RBI, SEBI and Ministry of Finance

7. Routes of Issue
Source: Securities and Exchange Board of India
94.51
365.1
169.82
423.83
97.13
338.12
238.93
2187.85
2612.82
3614.62
2760.54
4041.36
4580.73
4294.37
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
FY 2010-11 FY 2011-12 FY 2012-13 FY 2013-14 FY 2014-15 FY 2015-16 FY 2016-17*
Public Issue Private Placement
Source: Securities Exchange Board of India
In Rs. billions
*issued up to November 2016

8. Financial Entities v. Non Financial Entities
17,925.99
12,041.24
22,451.14
9,601.73
10,395.92
17,648.72
4,940.81
20,329.76
111.70
25,866.00
-
5,000.00
10,000.00
15,000.00
20,000.00
25,000.00
30,000.00
FY 2011-12 FY 2012-13 FY 2013-14 FY 2014-15 FY 2015-16
Financial Entities Non-Financial Entities
Source: Reserve Bank of India
Note:
Figures of non financial entities includes issuance of PSUs as well. The volume of issuance by PSUs
has been presented in a tabular format below:
FY 2011-12 FY 2012-13 FY 2013-14 FY 2014-15 FY 2015-16
Volume (in Rs. Crores) 17,648.72 4,846.17 19,964.29 0 25,866.00
In Rs. Crores

9. Corporate Bond as a % of GDP
33.1
28.0
37.8
48.7
62.4
53.1
58.6
49.1
13.0 12.1
31.4
77.5
43.1
37.0
15.9
5.4
China Brazil Hong Kong Korea Malaysia Singapore Thailand India
Government bonds Corporate bonds
Source: Bureau of International Settlements

10. What exactly is Indian Bond Market lacking?
Multiple issuances through different ISINs in almost same period;
No market making schemes;
No centralized database for corporate bonds;
Lack of debt market index;
No rationalisation in stamp duty;
FPIs are not allowed to invest in securitisation PTCs;
Employees’ Provident Funds Organisations (EPFO), NGPFs are not allowed to
invest in AT1 securities issued by Banking and Financial entities;
Lack of market robustness.

11. Masala Bonds: Adding masala to the bland Indian
Bond Market

12. What are Masala Bonds?
Masala Bonds are debt securities which are INR denominated issued
by eligible entities in India to overseas investors, however, settled in
foreign currency. In other words, they are rupee denominated bonds
issued to overseas buyers.
Though masala bonds are issued to overseas investors, still the same
is denominated in Indian rupees. Accordingly, the term ‘masala’ is
used to give Indian flavor to the said bonds.
The best part: Currency risk is borne by the investor and hence,
during repayment of bond coupon and maturity amount, if rupee
depreciates, RBI will realize notional saving.
A form of
covered bonds
and source of
on balance
sheet funding

13. Snapshot of the Product
Helps in reducing borrowing cost by 150-200 bps due to transfer of risk as coupon rate
offered to Indian investors is marginally higher as compared to off shore funding.
In 2013, the IFC launched the first ever Rupee Linked Offshore Bond programme in
various maturities of 3,5 & 7 Yrs. These bonds described as “Masala bonds” marked the
first rupee bonds listed on the London Stock Exchange.
What give these bonds the name and flavour is that they are issued to foreign investors
in INR and settled in US dollar Hence the currency risk lies with the investor and not
the issuer, unlike ECBs.
The Reserve Bank of India in its bimonthly monetary policy state for 2015-16 presented
on April 7, 2015 proposed the introduction of a draft for the issuance of Rupee linked
bonds overseas. Final notification was issued on September 29, 2015.

14. What’s it and what not?
Eligible Issuers
• Any corporate;
• Real Estate Investment trusts (REITs) and
• Infrastructure Investment trusts (InvITs).
Eligible Investors
• Any investor from a FATF complaint jurisdiction;
• Banks incorporated in India will not have access to these bonds.
Maturity
• Minimum maturity period is of 3 years (previously 5 years);
• Call or put option shall only be exercisable after minimum maturity period.
Amount
• Under Automatic Route: Rs. 50 billion per annum (previously USD 750 Mn.);
• Beyond the above limit, prior approval of RBI required (approval route)
End use
• Proceeds shall not be used for:
• Real estate activities (however allowed in integrated township/AHP);
• Investment in capital market domestically; Purchase of land;
• Activities prohibited as per FDI guidelines.

15. Why Masala Bonds?
 Withholding tax on interest income has been reduced for the investors from 20% to
5%;
 Capital gain tax on appreciation of rupee has been exempted;
 Any investor issuing in foreign bonds are offered interest ranging from 2.5% to 4.5%
per annum, which is significantly lower than the interest offered by the Indian
issuers.
 So leverage of same is available to the investors.
Reason for
investing
 Helps to diversify their bond portfolio as previously they one issued corporate
bonds. Masala bonds are an addition to their bond portfolio.
 Helps to tap a large number of investors as these bonds are issued in the offshore
market.
 Help the company attain marginal cost saving as interest cost of raising funds in India
is relatively higher than that compared to offshore funding.
Reason for
issuing

16. Taking stock of developments
As per a report of London Stock Exchange 14 masala bonds issues are active on their
terminal. The overall figure is 33 with 19 already matured.
HDFC was the first Indian corporate to tap these bonds and has already issued bonds
worth Rs. 45 billion in 3 separate tranches listed on LSE.
HDFC was followed by entities like NTPC whose bonds are traded on LSE as well as
Singapore Stock Exchange.
Companies like Indiabulls, Adani Transmission, Fullerton India Credit Company have issued
these bonds.
A total of USD 1.24 Bn bonds are traded over LSE and SGX.
Entities like IRFC, NHAI, Yes Bank, DHFL, Shriram Transport, etc are expected to come with
more masala bonds issuance in near future.
Not barred by Indian regulators, financial institutions like Inter-American Development
Bank, International Finance Corp., and European Bank for Reconstruction and
Development, have issued rupee bonds outside India for more than a decade.

17. Not much love though, until now !!
India’s attempt to diversify its debt market and leverage benefits has not been at the level it was
thought to be;
A global pullback from emerging markets, volatility in the rupee currency among other backdrops
has made them unattractive to both investors and issuers.
This volatility has been adding to investors’ concerns over investments in the currency.
Dewan Housing Finance Corporation Limited (DHFL) had conducted road shows in Singapore and
Hong Kong to gauge investors’ mood has put its plans on hold “due to unfavourable market
conditions.” Among others, Indian Railway Finance Corp. (IRFC), Shriram Transport Finance, Yes
Bank, Srei Infrastructure Ltd had all wanted to explore the masala bonds market with no success.
Initially, HDFC, Adani Transmission and NTPC had also put their plans on rest, but later revisited
these plans and successfully issued masala bond.
Lessening the withholding tax and exemption from capital gains also were supposed to attract
investors, but currency depreciation has the them under concern.

18. Flowchart - Issuance
Euroclear or
Clearstream
Calculating
Agent
Settlement
Agent
Investors Issuer
1 1
2 3
44
USD 500 Mn Cash INR 32 Bn Cash - expenses
Bonds with notional value
of INR 32 Bn are delivered
Bonds with notional value
of INR 32 Bn are delivered
Assumptions:
oIssue Size: INR 32 billion
oTenure: 10 years
oDate of issue: April 1, 2016
oUSD/INR Rate: INR 64.00
Description
1 Settlement rate
Calculation Agent determines the reference rate for settlement as per
documentation
2 Subscription Amount
Investors pay USD 500 million to the Settlement Agent as subscription to the
Global INR bonds
3 Remittance of proceeds
The Settlement Agent remits INR proceeds of INR 32 million less expenses to
Issuer
4 Delivery of Bonds
Issuer delivers Bonds of a notional amount of INR 32 million to Euroclear /
Clearstream who in turn issues the same to the investors

19. Flowchart - Maturity
Assumptions:
oUSD/INR Rate: INR 70.00
Description
1 Settlement rate
• Calculation Agent determines the rate for disbursal to each investor;
• USD to be paid to investors will be notional principal amount / reference
rate.
2 Payment to Paying Agent Issuer pays INR principal of INR 32 billion to Paying Agent
3 Payment to investors Paying Agent pays USD principal of USD 914.28 million to Investors
Calculating
Agent
Paying AgentInvestors Issuer
1 1
USD 457.14 Mn Cash INR 32 Bn Cash 23

20. Provision applicable to Masala Bonds
Bonds being debt securities are covered under the ambit of debentures under section 2(30) of the
Companies Act, 2013. Technically speaking too, the difference between bonds and debentures is in
the name only.
Therefore, provisions pertaining to debentures are applicable to issuance of masala bonds as well.
However, MCA vide General Circular No: 09/2016 stated that Indian issuer companies will not only
be required to comply with the procedural norms relating to public issue and private placement
disclosures but are also exempted to from complying with the provisions governing issue of
debentures.
Also, provisions mainly pertaining to issue of secured debentures as per Rule 18 of Companies
(Share Capital and Debentures) Rules, 2014 shall not apply to issue of Masala Bonds.
Previously, similar notifications were issued wherein companies issuing FCCBs and FCBs will not be
required to comply with the above mentioned requirements.
This was done with a motive to streamline the processes and lay the regimen of these bonds under
the purview of Reserve Bank of India.

21. Overall Compliance Relaxation
So in broad terms issuance of Masala Bonds will not require compliance relating to:
Issue of private placement offer letter (PAS-4);
Preparation of list of allotees (PAS-5);
Filing of return of allotment (PAS-3);
Mentioning the prescribed particulars in the prospectus;
Various other requirements mentioned under Chapter III of the Act;
Provisions of rule 18 of the Companies (Share Capital and Debentures) Rules, 2014.
SEBI vide its circular SEBI/HO/IMD/FPIC/CIR/P/2016/67 dated 4th August, 2016 has
clarified the following:
Foreign investment in Masala Bonds will not be treated as investment by Foreign Portfolio
Investors (FPIs) ;
Will not be covered under the purview of SEBI (Foreign Portfolio Investors) Regulations, 2014,
as amended.

22. Compliance Flowchart
1
• Regulation 29 of SEBI LODR Regulations, 2015: Incase of listed company prior intimation to STx atleast 2 working
days in advance about the Board meeting the Board Meeting where the proposal for issuance of such bonds is to be
considered
2
• Section 179(3): Calling a Board meeting. However, a committee meeting may also be called incase proper delegation
is given by the Board of Directors.
3
• Section 117(3): Filing of form MGT-14 with ROC within 30 days of passing of the aforestated resolution.
4
• Regulation 30 of SEBI LODR Regulation, 2015: Intimation to stock exchange within 30 minutes of the conclusion of
Board Meeting.
5
• Section 180(1)(c): Calling of EoGM for passing of special resolution if the aggregate of monies borrowed as well as
proposed masala bonds issue is more than the aggregate of PUC + FR of the company as per the latest audited
balance sheet.
6
• Section 117(3): Filing of form MGT-14 with ROC within 30 days from the date of passing of EGM.
7
• Section 77: Filing of Form CHG-9 within 30 days of creation of charge, incase the bond issuance is secured for
investors.

23. Conclusion
The advent of much talked about masala bonds market is a positive precursor for corporates
as it has opened up potentially significant new sources of funding over External Commercial
Borrowings (ECB).
This will also integrate financial markets in India further with the rest of the world.
For this, RBI must be lauded for coming up with yet another avenue for raising international
finance for Indian corporates.
But !!!!
Too much of reliance on external debt by way of raising funds through masala bonds along
with issuances of traditional ECBs can have a negative impact on the global image of India
from economy traction.
This can be a catastrophic problem with respect to attracting investments to India.

24. THANK YOU !!!
Saurabh Dugar
Assistant Manager – Research
Mehta & Mehta | Company Secretaries
cs.saurabhdugar@gmail.com
(M): +91-9867110199
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