Masala Bonds excluded from the limit for investments by FPIs in corporate bonds

The Reserve Bank of India (RBI) on 22 September 2017 released 2 (two) circulars in relation to “Investment by Foreign Portfolio Investors in Corporate Debt Securities – Review” and “Issuance of Rupee Denominated Bonds (RDBs) Overseas” (collectively, “Circulars”), thereby:

  • excluding the Masala Bonds (rupee denominated bonds issued by Indian corporates overseas) from the limit for investments by Foreign Portfolio Investors (FPIs) in corporate bonds with effect from 03 October 2017. Prior to the Circulars, the Masala Bonds were included both in the combined corporate debt limit of INR 2,443,230,000,000 (Rupees two trillion four hundred forty three billion two hundred and thirty million) as well as in the External Commercial Borrowings (ECB) limit for raising Masala Bonds as per the Master Direction issued by the RBI on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers. The Masala Bonds would now be reckoned only as part of the ECB and be accordingly regulated.
  • creating surplus of INR 440,010,000,000 (Rupees four hundred forty billion and ten million) for FPI investment in corporate bonds over the next 2 (two) quarters in such a manner that INR 270,000,000,000 (Rupees two hundred and seventy billion) is available for October – December quarter and INR 170,010,000,000 (Rupees one hundred seventy billion and ten million) is available for January – March quarter.

The Circulars are issued in wake of the circular issued by the Securities and Exchange Board of India (SEBI) on 20 July 2017 whereby:

  • the SEBI suspended issuance of Masala Bonds until the limit utilisation of FPIs fell below 92% (ninety two per cent); and
  • the on tap investment by FPIs in corporate bonds was limited to 95% (ninety five per cent), where after the remaining limit had to be utilized by way of an auction mechanism prescribed by the SEBI.

It is pertinent to note that an amount of INR 95,000,000,000 (Rupees ninety five billion) out of the overall corporate bond limit has been earmarked for investments in the infrastructure sector by long term FPIs (being the sovereign wealth funds, multilateral agencies, endowment funds, insurance funds, pension funds, and foreign central banks), in each of the 2 (two) quarters.

The Circulars may be accessed through the following links: