RBI allows Indian companies to issue rupee bonds overseas

The Reserve Bank of India (RBI) on Tuesday unveiled a proposal to allow companies to sell rupee-denominated bonds overseas, at a coupon not exceeding 500 basis points than that offered by Indian government bonds of similar maturity.

One basis point is one-hundredth of a percentage point.

Banks incorporated in India will not have access to these bonds in “any manner whatsoever”, the RBI draft circular said. However, investors can hedge their risk by tapping the domestic market.

“Any investor in these bonds will be eligible to hedge both the foreign currency risk as well as credit risk through permitted derivative products in the domestic market,” RBI said.

“The investor can also access the domestic market through branches of Indian banks abroad or branches of foreign banks with an Indian presence,” the draft circular said.

RBI first proposed bringing such a draft on 7 April at its first bimonthly monetary policy statement for 2015-16.

In the draft released on Tuesday, RBI said only those Indian companies eligible to raise money through the external commercial borrowing (ECB) channel can issue rupee-linked bonds in the overseas markets.

Firms permitted to raise ECB without prior RBI permission can continue to raise money through bonds without informing RBI, while firms that need approval will have to seek permission from the central bank before they issue such bonds.

Institutions like the International Finance Corporation (IFC), in which India is a shareholding member, will not require any permission from RBI if the issue proceeds are entirely invested in India, but it will have to take permission if it is raising money in rupees to fund any member country other than India.

IFC was the first to come up with the rupee bond idea, and has plans to raise $2 billion worth of rupee bonds offshore, of which it has already raised about $1.6 billion so far.

In November 2014, IFC raised $250 million equivalent through 10-year “masala bonds” at 6.45% and listed them on the London Stock Exchange. Before that, IFC had floated rupee bonds of 3-7 year maturity in the overseas market. The investor response for the bonds has been overwhelming.

The subscription, coupon payments and redemptions can be settled in foreign currency.

“The amount and average maturity period of such bonds should be as per the extant ECB guidelines. The call and put option, if any, shall not be exercisable prior to completion of applicable minimum average maturity period,” RBI said in its draft. End-use restrictions will be as applicable under the extant ECB guidelines.

The dollar-rupee conversion will be based on RBI’s reference rate as on date of issue, the central bank said.

“The coupon allowed on these bonds is very attractive for any investor, but demand may still be subdued because investors may not want to take a risk of the rupee depreciating. However, there are many investors who have rupee resources and for them this is a wonderful investment,” said Prabal Banerjee, president (finance and strategy) at Bajaj Group.

“This is also a lifeline for Indian companies as the depth of the bond market in India is shallow. RBI here is creating a diversified investor base for Indian companies, as well as trying to attract more foreign investors to the country’s infrastructure space through these bonds,” he added.

The draft is open for comments and feedback till 15 June.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.