RBI's new rules may make India Inc shun masala bonds

Key Highlights: 

• RBI makes three changes in rupee-denominated bonds. 
• Masala bonds issuance stood at Rs 19,120 crore in Q4FY17

The Reserve Bank of India (RBI) has made three changes to its rupee-denominated bonds popularly known as masala bonds. However, these changes haven't gone down well with India Inc. 

BP Kanungo, Deputy Governor of RBI said, “RBI has decided that it (masala bonds) should be brought in harmony with ECB guidelines and certain qualitative parameters which were applicable to the ECB guidelines will now be applicable to masala bonds issuance also.”

These new guidelines are: minimum original maturity period for masala bonds raised up to $50 million (over Rs 300 crore) has been extended to 5 years, secondly, cost ceiling for such bonds would be 300 basis points over the prevailing yield of the Government of India securities of corresponding maturity and lastly, entities permitted as investors under the regulatory provisions for these should not be related party within the meaning as given in Ind-AS.

Issuance under masala bonds increased to Rs 19,120 crore in March 31, 2017 quarter from Rs 5,570 crore from previous quarter (Q3FY17) and stood at an aggregate Rs 30,620 crore for entire FY17.

During Q4FY17, the masala bonds accounted for 39% of the total external commercial borrowings (ECBs) which stood at  $7.39 billion reported during Q4FY17, as per RBI. 

Care Ratings, however, said that the changes may make India Inc cautious in raising money via masala bonds.

Madan Sabnavis and Rucha Ranadive, economists at Care Ratings said, “The cost of borrowing of masala bonds will be contingent on the interest rate environment in global markets as well as the risk perception of such issuances.”

They said, “It does appear that the limits set by the RBI would provide enough elbow room for companies which are raising funds from these markets. However, they would be comparing such rates with domestic interest rates when taking a final decision.”

At present, base rate of banks is between 9.1-9.6% and overnight MCLR is 7.75-8.10%. 

Care Ratings said, “It will be interesting to see how firms react to these two sets of interest rates.”