ABCD Manufacturing and Exporting Ltd desires to use Masala Bonds for further Augmentation of funds. Would you guide the Company as to the concept and exceptions that bars raising funds through such bonds ?

Masala bonds are rupee denominated bonds sold to offshore investors, who assumes foreign exchange risk to earn higher interest rates compared with dollar based overseas bond. In 2017, Reserve Bank of India (RBI) revised the norms for masala bonds. The RBI declared that from October 03, 2017 masala bonds will no longer form part of the limit for Foreign Portfolio Investment (FPI) in corporate bonds and it will form part of External Commercial Borrowings. However, Masala Bond Proceeds cannot be utilised for the purpose of Real Estate Activities, Capital Market or Domestic Equity Investment, Purchase of Land, certain activities prohibited as per Foreign Direct Investment guidelines and relending for the activities prohibited. HDFC was the first to issue such bonds, followed by National Highways Authority of India and National Thermal Power Corporation. Thus, the raising of funds through Masala Bonds is to tap overseas cheap funds.