In the past, rupee denominated bond issuances have essentially been available to multilateral institutions, of which the International Finance Corporation (IFC) had availed of them. Now, the Reserve Bank of India (RBI) has announced a draft framework, which allows Indian companies as well to tap this avenue for raising debt. Indian corporates that are eligible to avail of external commercial borrowings (ECBs) will now be able to issue rupee-linked bonds overseas in any jurisdiction that is Financial Action Task Force (FATF) compliant. There is a cap on pricing of the bonds in that the coupon should not be more than 500 basis points above the sovereign yield of corresponding Government of India security. Other terms such as requirement of regulatory approvals and end-use restrictions are similar to ECBs. Investors in such bonds are allowed to hedge both currency risk as well as credit risk through permitted derivative products in the domestic market. There are more relaxed requirements for international financial institutions issuing such bonds depending upon whether or not the proceeds are being deployed in India.
This proposal could have the effect of expanding fund-raising opportunities for Indian corporates, especially to fulfill financial demand in sectors such as infrastructure. This is particularly the case given the relative shallowness of the domestic bond market. At the same time, the tight restrictions such as cap on pricing and other conditions that are pegged to the ECB policy may act as a dampener against significant inflow of funds through this route.
This framework is yet under consideration, and comments to the RBI are due by June 15, 2015.