The Reserve Bank of India has issued a much-awaited framework for Indian companies to sell rupee-linked bonds offshore but failed to cheer the market with restrictive guidelines.
The global rupee bonds, known as Masala bonds, will be subject to restrictions on pricing, volume and end use. Banks incorporated in India will also be barred from issuing such bonds.
The RBI has proposed a cap of 500bps above the sovereign yield of the Indian Government bonds of corresponding maturity for Masala bonds.
The bonds will be subject to the existing external commercial guidelines, or ECB, rules. These prevent most Indian borrowers from raising funds from abroad beyond US$750 million per annum.
In addition, borrowings of three to five years have a price cap of 350bp over six-month Libor and those of more than five years have price caps of 500bp over Libor.
Reaction muted
The market reaction to the draft guidelines has been muted, as bankers felt the ECB restrictions take away a lot of advantages of the Masala bonds.
"The guidelines are pretty restrictive. Looks like the central bank wants only the blue-chip Indian firms to access this new market. These companies already have access to alternate and cheaper funding sources," said a DCM banker.
"Even if the amount and maturity restrictions make sense for India which does not have a fully convertible currency, it is pointless to have end use restrictions", said another DCM banker.
Bankers said Masala bonds will suit those companies that remit proceeds to India as these bonds do not carry currency risk to the issuer.
End use restrictions will limit the scope of Indian companies that could access Masala bonds. In global rupee bonds, investors take the currency risk as the issue is settled in US dollars.
Closed doors
The RBI has also categorically denied access to Masala bonds to banks incorporated in India. Some Indian banks have been lobbying to raise their Additional Tier 1 requirements through this new funding route as the local market is facing investor saturation.
Indian banks need to raise Rs 40,000 crore (US$6.2 billion) to Rs 50,000 crore of AT1s in the current financial year ending March 2016, according to rating agency Icra.
Between FY16-19, the requirements of Indian banks for such loss-absorbing Basel III-compliant capital will be Rs 1.6 lakh crore to Rs 2 lakh crore, Icra said earlier this week.
In early April, the RBI announced its decision to allow Indian companies to raise funds through the Masala bond market.
The move was seen as a step towards full currency convertibility and potentially even lowering the cost of capital that is among Asia's highest.
So far, only the Asian Development Bank and the International Finance Corp, an arm of the World Bank, have issued Masala debt last year, allowing investors to access rupee debt outside India.
The draft rules, issued last evening, seek public comments by June 15.