SEBI temporarily suspends issuance of the popular ‘masala bonds’

The Securities and Exchange Board of India (SEBI) issued a circular dated 20 July 2017 (July 2017 Circular), temporarily suspending the issuance of rupee denominated bonds, i.e. ‘masala bonds’, by Indian corporates overseas until the limit utilisation of foreign portfolio investors (FPIs) falls below 92% (ninety two per cent).

The July 2017 Circular is addressed to FPIs, the National Securities Depository Limited and the Central Depository Services (India) Limited (Depositories), and the Bombay Stock Exchange and the National Stock Exchange (Exchanges) and also refers to SEBI’s circular dated 4 August 2016 by which the corporate debt limit of INR 2,443,230,000,000 (Indian Rupees two trillion four hundred forty three billion two hundred and thirty million) for FPIs was redefined as the combined corporate debt limit (CCDL) for all foreign investments issued both onshore and overseas by Indian corporates. Modifying the aforesaid SEBI circular, the July 2017 Circular provides that CCDL would be available on tap for investment by FPIs till the overall investment reaches 95% (ninety five per cent), pursuant to which the auction mechanism would be initiated for allocation of the remaining limit, in the following manner:

  • The Depositories would have to direct the custodians to halt all FPI purchases in corporate debt securities and inform the Exchanges regarding the unutilised debt limits for conducting an auction. Upon receipt of such information, the Exchanges would have to conduct an auction for the allocation of unutilised debt limits on the second trading day from the date of receipt of intimation from the Depositories. Thereafter, the auction would be conducted alternately on both the Exchanges.
  • The auction would be held only if the unutilised debt limit is greater than or equal to INR 1,000,000,000 (Indian Rupees one billion). However, in the event the unutilised debt limit remains less than such cap for 15 (fifteen) consecutive trading days, then an auction would be conducted on the sixteenth trading day in the prescribed manner, to allocate the unutilised debt limits.
  • Once the unutilised debt limits are auctioned, the FPIs will have an utilisation period of 10 (ten) trading days to make the investments. In the event the unutilised debt limits are not utilised within such period, they would be brought back to the pool of free limits.
  • Upon sale/ redemption of the debt securities, the FPI will have a reinvestment period of 2 (two) trading days. In the event the unutilised debt limits are not utilised within this period, they would be brought back to the pool of free limits.
  • Also, a single FPI/ FPI group is not allowed to bid for more than 10% (ten per cent) of the unutilised debt limits being auctioned.

The July 2017 Circular also states that the auction mechanism would be discontinued and limits would once again be available for investment on tap when the debt limit utilisation falls below 92% (ninety two per cent), and in such instances the reinvestment facility (as mentioned in bullet number 4 above) would be terminated and cannot be availed for the same limits when the utilisation crosses 95% again (ninety five per cent).

Also, the July 2017 Circular modifies SEBI’s circular dated 28 February 2017 and mandates that the FPI investments in unlisted corporate debt securities must be in dematerialized form and subject to a minimum residual maturity of 3 (three) years.

The July 2017 Circular may be accessed through the following link: