India: Masala Bonds Made More Appealing

Last Updated: 7 March 2017
Article by Sudhir Bassi, Manisha Shroff and Dhwani Shah

Most Read Contributor in India, August 2019

In our previous Ergo Newsflashes ( available here) we had outlined the broad contours of Masala Bonds. In addition to these, we provide below a further update on Masala Bonds (named by the International Finance Corporation after a popular perception of Indian culture and cuisine) in two parts viz:

Part I – Broadening the list of 'Recognised Investors'; and

Part II – Proposed Beneficial Taxation.

Part I - Broadening the list of 'Recognised Investors'


Previously, rupee denominated bonds to be issued overseas by Indian entities, popularly known as 'Masala Bonds', could only be issued in a country and subscribed to by the residents of a country which satisfied all of the following criteria:

  • it was a Financial Action Task Force (FATF) compliant jurisdiction or a member of FATF – style regional body;
  • its securities market regulator was a signatory to (i) the International Organization of Securities Commission's (IOSCO's) Multilateral Memorandum of Understanding (Appendix A Signatories); or (ii) the bilateral Memorandum of Understanding with the SEBI for information sharing arrangements; and
  • it was not identified in the public statement of the FATF as a country/ jurisdiction (i) having anti-money laundering or combating financing of terrorism deficiencies to which counter measures apply; or (ii) having not made sufficient progress in addressing the deficiencies; or (iii) having not committed to an action plan developed with the FATF to address the deficiencies.

Scope of recognised investors further expanded

The Reserve Bank of India (RBI) vide a Circular No 31 dated 16 February 2017, amended the (i) A. P. (DIR Series) Circular No. 60 dated 13 April 2016; and (ii) Master Direction No 5 on 'External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers'.

The criteria of recognised investors in the Masala Bonds issued overseas has now been broadened. It has been decided to also permit multilateral and regional financial institutions where India is a member country, to invest in Masala Bonds. Some of such multilateral and regional financial institutions are as follows:

  • World Bank;
  • International Fund for Agricultural Development;
  • Asian Development Bank;
  • Asian Infrastructure Investment Bank;
  • International Monetary Fund; and
  • International Finance Corporation.

Part II – Proposed Beneficial Taxation


The Government issued a Press Release dated 29 October 2015 (Press Release), inter alia indicating that withholding tax at the rate of 5%, which is in the nature of final tax, would be applicable to Masala Bonds and a legislative amendment in this regard would be proposed through the Finance Bill, 2016. However, the Finance Bill, 2016 was silent on extending concessional withholding tax of 5% on Masala Bonds leading to ambiguity in the rate to be charged on such instruments.

Masala Bonds to become more attractive with the much-awaited tax benefits proposed in the Budget this year

In a much-awaited move, the Finance Bill, 2017 (Bill) has, in line with the Press Release, proposed to extend the concessional withholding tax rate of 5% to interest earned on Masala Bonds issued before 1 July 2020. This is a propitious proposed amendment which shall apply retrospectively to all Masala Bonds issuances from financial year 2015-16.

Further, the Bill proposes to provide that an offshore transfer of Masala Bonds issued outside India from one non-resident to another non-resident would not be regarded as a taxable transfer and thus, would not attract tax in India. This amendment is proposed to be effective from financial year 2017-18 and onwards.

Khaitan Comment

The recent change widens the investor base for Masala Bonds and provides clarity regarding investment by multilateral and regional financial institutions in this instrument. This will also lead to enhanced liquidity. Further, it opens up another investment avenue for multilateral and regional financial institutions who are already active investors for both equity and debt investments into India in various sectors.

With the proposed amendments in the Bill, taxation on Masala Bonds will now be aligned with taxation on the other debt instruments used for raising foreign debt i.e. non-convertible debentures and external commercial borrowings. With these clarifications and increased acceptability, the stage is now set to take this instrument to its next level.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

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