The Reserve Bank of India has made changes in Rupee denominated bond issue guidelines, enhancing the utility of RDBs from the Indian angle. RBI’s new regulations for RDBs – which are now a hit in the international market, aims at ensuring longer maturity period, lowering interest cost and to ensure that there is no malpractice in utilization of the proceeds among end users.
Ever since the launch of the hit rupee denominated bonds by the IFC (International Finance Corporation) by the name ‘Masala bonds’, the RDBs are becoming attractive tool for both Indian issuers and for foreign investors. Most of the funds procured through RDBs are used to finance infrastructure projects.
The first change is regarding maturity period. For Masala bonds (RDBs) up to $50 million equivalent in rupees per financial year, the minimum maturity period should be three years. Above $50 million issuance per financial year, the minimum maturity period should be five years.
Raising the maturity period of bonds will make them more stable and reliable source of finance.
The second regulatory change is on interest rate. Here, the RBI introduced an all-in cost ceiling in terms of interest rate difference from government securities of corresponding maturities. According to the RBI, the interest rate ceiling for any RDB should be 300 basis points over the prevailing yield of the Government of India securities of corresponding maturity. For example, if the yield of a five-year government bond is 7.5%, the interest rate of five year RDB should be less than 10.5%.
The third change is on end user restrictions. Here the effort of the RBI is that if a particular institution issues RDBs, the amount should not be transferred to a related entity. If that happens, it will be some type of money laundering.