Indian borrowers availing foreign funds via offshore borrowings are usually required to hedge their currency risks in such borrowings, unless they have a natural hedge. As a result, the cost of availing such offshore borrowings would almost be equivalent to the cost of obtaining domestic funds. The Reserve Bank of India (“RBI”) has now permitted issuance of rupee denominated bonds overseas (“RDBs”) by its circular dated September 29, 2015 (“Circular”). Under the Circular, the investment and repayment of RDBs is in rupee, which enables transfer of currency risks from the borrower to the investors.
In its fourth bi-monthly policy statement dated September 29, 2015, RBI announced that Indian entities would be permitted to issue RDBs and subsequently issued the Circular. Some important provisions of the Circular are briefly discussed below.
(a) Eligible Borrowers: The Circular permits (i) corporates, (ii) body corporates, and (iii) real estate investment trusts and infrastructure investment trusts coming under the regulatory jurisdiction of the Securities and Exchange Board of India, to issue RDBs. In fact, the draft framework on issuance of rupee linked bonds overseas dated June 9, 2015, also envisaged that only Indian corporates who are permitted to raise ECBs will be permitted to issue rupee linked bond overseas. However, as mentioned above, the Circular does not restrict ‘eligible borrowers’ to corporates only.
(b) Recognised Investors: In a contrast from the Master Circular on External Commercial Borrowings and Trade Credits dated July 1, 2015 (“ECB Guidelines”), the Circular refers to the foreign entities as ‘recognised investors’ as opposed to ‘recognised/eligible lenders’. Any investor from a Financial Action Task Force (FATF) compliant jurisdiction1 would be permitted to invest in RDBs. The draft framework on ECBs released by RBI on September 23, 2015, proposes to expand the pool of recognised investors to include overseas regulated financial entities, pension funds, insurance funds, sovereign wealth funds and similar long term investors.
However, banks incorporated in India cannot access RDBs and can act only as arrangers and underwriters. In the event banks underwrite issuance of RDBs, they will be permitted to hold only 5% of the issue size after six months from issue.
The conversion rate for foreign currency to rupee would be as per the applicable market rate on the date of settlement. Recognised investors have the option to hedge their rupee exposure with authorised dealer banks in India. Such investors are permitted to access the domestic markets through foreign branches/ subsidiaries of Indian banks or Indian branches of foreign banks.
(c) All-in-cost: The Circular does not impose any specific limit for the cost of RDBs and mentions that they will be subject to prevailing market conditions.
(d) Maturity: RDBs are required to have a ‘minimum maturity’ of five years, as opposed to the concept of ‘minimum average maturity’ under the ECB Guidelines and the draft frameworks mentioned above. This may imply that RBI contemplates that RDBs would be bullet bonds as opposed to bonds which are redeemed in tranches.
Additionally, call/put options against the borrowers (if any), would necessarily have to be exercised post the 5 year period.
(e) End-Use: Unlike the ECB Guidelines, the Circular stipulates a negative list of the purposes for which the proceeds of the RDBs cannot be utilised. It is important to note that utilization of proceeds of RDBs for general corporate purposes (including working capital) and repayment of existing rupee loans is not prohibited under the Circular, as distinct from the ECB Guidelines.
(f) Security: The provision of securities in favour of foreign investors may be possible without obtaining an approval from RBI. In case of secured RDBs, the chances of a good credit rating are high which would be beneficial for the issuer.
(g) Tax: The withholding tax applicable for interest paid under a foreign currency loan under the ECB Guidelines is 5% as specified under Section 194LC of the Income Tax Act, 1961 (“IT Act”). With regard to RDBs, considering they are rupee denominated, the withholding tax applicable on the interest would be 5% only when the subscriber of such bonds are foreign institutional investors and qualified institutional investors (as mentioned in section 194LD of the IT Act), who under the present regulatory regime will also be referred to as foreign portfolio investors. Regular withholding tax will be applicable to the income of all other investors to RDBs and will be eligible for the above mentioned exception.
(h) Miscellaneous: RDBs can be issued for a maximum limit equivalent to USD 750 million per annum under the automatic route. The requirements of the ECB Guidelines on reporting, parking of bond proceeds, securities, guarantees, conversion into equity, corporates under investigation, etc., are required to be adhered to.
In the event Indian companies are issuing RDBs, the provisions of the Companies Act, 2013 (“Act”), may have to be adhered to in relation to such issuances. One would understand that such RDBs would take the colour of debentures under the Act. The borrower would accordingly be required to (a) create a debenture redemption reserve account, and (b) appoint a debenture trustee in case the offer is made to 500 or more of its members or the public. In the event the issuance is on a private placement basis, the process mentioned in Section 42 of the Act along with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 will have to be followed. It is also important to note that the Circular is silent on the pricing of such bonds from a foreign exchange regulations perspective.
Eligible entities would be able to tap on an additional source of funding without being sceptical of the volatile currency rates, since RDBs would be denominated in rupees. Issuance of RDBs will also help India’s capital markets evolve as mature markets and may at a later stage also aid in strengthening the value of the rupee.
By Babu Sivaprakasam, Deep Roy and Megha Agarwal
DISCLAIMER: This article has been authored by Babu Sivaprakasam, who is a Partner, Deep Roy, who is an Associate Partner and Megha Agarwal, who is an Associate at Economic Laws Practice (ELP), Advocates & Solicitors. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.