RBI has proposed to allow Indian corporates to tap another source of funding by issuing rupee linked bonds overseas.
The central bank in its first bi-monthly monetary policy meeting of the year last week had expressed intention to expand the scope of issuance of rupee bonds by the international financial institutions as also to permit Indian corporates, eligible to raise external commercial borrowings (ECB), issue such bonds with an appropriate regulatory framework.
While International Finance Corp. (IFC), World Bank’s private sector arm was the first to launch $1 billion equivalent rupee linked bond programme in 2013, Asian Development Bank followed with a Rs 300 crore issue in late 2014. The bonds are expected to help India raise funds to go forward with its infrastructure projects.
In a draft note on Tuesday, RBI has stipulated that such bonds may be floated in a jurisdiction that is financial action task force (FATF) complaint.
“The coupon on the bonds should not be more than 500 basis points above the sovereign yield of the Government of India security of corresponding maturity as per the FIMMDA yield curve prevailing on the date of issue,” RBI said.
For the international financial institutions, it said that those institutions which intend to deploy entire proceeds of funds in India shall not be required to gain permission from RBI, but for those deploying funds in other countries will require permission from RBI or the Indian government.
RBI said that banks incorporated in India shall not have access to these bonds.
“Any investor in these bonds will be eligible to hedge both the foreign currency risk as well as credit risk through permitted derivative products in the domestic market. The investor can also access the domestic market through branches of Indian banks abroad or branches of foreign bank with Indian presence,” RBI further added.
RBI has invited comments on the draft guidelines by June 15, 2015.
Opening up another channel of cheap credit for India Inc by the RBI moves India closer to fuller capital account convertibility but what remains to be seen is whether local companies will be able to attract capital via this route given their depressed earnings and rising cost of funds in international market. Moreover, depreciating currency poses a challenge for issuing rupee linked bonds.