Product Note on: Masala Bonds

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Product Note on: Masala Bonds 1006-1009 Krishna 224 AJC Bose Road Kolkata 700017 Phone 033-22811276/ 22813742/ 22817715 Vinod Kothari Consultants Private Limited Special credits to Mr.

1 Product Note on: Masala Bonds Krishna 224 AJC Bose Road Kolkata Phone / / Vinod Kothari Consultants Private Limited Special credits to Mr. Saurabh Jain 601C, Neelkanth, 98, Marine Drive, Mumbai Phone: A/11, Huaz Khas (Opposite Vatika Medicare) New Delhi Phone:

2 What are Masala Bonds? Masala Bonds are debt securities denominated in INR issued by Indian entities to overseas investors but settled in foreign currency. In other words, they are rupeedenominated bonds issued to overseas buyers. While masala bonds are issued to overseas investors, still the same is denominated in Indian rupees. Accordingly, the term masala is used to give Indian flavour to the said bonds. These are Indian rupee denominated bonds issued in offshore capital markets. The issuance of rupee denominated bond is an attempt to shield issuers from currency risk and instead transfer the risk to investors buying these bonds. Interestingly, currency risk is borne by the investor and hence, during repayment of bond coupon and maturity amount, if rupee depreciates, RBI will realize marginal saving.

3 From where does Masala Bonds Originate? International Finance Corporation, an arm of the World Bank and a major global financial institution that fosters private sector development in developing countries, has seen its rupee-denominated borrowing in international markets during fiscal 2015 (year ended June, 30, 2015); It came up with two bond issues: Maharaja Bonds which were issued to Indian investors and the other one was Masala Bonds that were issued to overseas investors. Further, in July 14, 2016, HDFC was the first Indian company to issue masala bonds and in August 04, 2016, NTPC came up with green masala bonds to support renewable power projects. HDFC was first to list its masala bond on the London Stock Exchange on August 08, 2016

4 Product Snapshot Product Summary The proposed offering is INR denominated fixed rate bonds settled in foreign currency like USD, EUR, SGD etc. distributed to international institutional investors The investors assume both credit and exchange rate risk in this product as exchange rate is fixed on every coupon payment date based on pre agreed formula The documentation for the proposed offering is governed by international law like English law or New York Law and follows distribution format like Reg S only or 144A / Reg S The bonds are settledthrough Euroclear, Clearstreamor DTC Issuer Consideration INR Borrowing: Issuer does not have to bear the hedging cost for cross currency conversion it s an INR borrowing for them Investor Diversification: the investor base for offerings beyond existing FPI investors Pricing Benefit: Might expect benefit over local funding costs No FPI License: Offshore investors who do not have access to the domestic INR market through FII/FPI license but want INR exposure and do not want to go through the exposure to certain Indian issue in FCY Want Offshore Settled process but want credits who do not It further diversifies INR denominated Bonds: Offshore local investors and some pricing Potential Investor investors who want INR exposure but do not access domestic markets as they are required by mandate to buy into papers settled through Euroclear/Clearstream and prefer foreign law governed documents (English / NY law) Pricing Arbitrage: Potential arbitrage opportunity in terms of pricing 10

5 INR Offshore/Masala Bonds as a Financing Source The INR Offshore bond market is a significant source of funding for many sovereigns, corporates and banks throughout the world. The primary reasons for why this is the case are set out below Long tenors are achievable (investment grade corporates can potentially raise up to a 10 year tenor for a senior issue) Flexibility Typically bonds are repaid with a bullet repayment on maturity as opposed to amortizing over the life of the debt Diversifies Funding Diversifies funding source away from bank funding, which is typically concentrated on relationship based lending Typical investors are pension funds, insurance companies, asset managers, central banks, commercial banks and private banks. These investors focus on performance and risk Provides access to a global investor base which presents a significant alternative to the local currency debt and foreign currency loans Profile Raises the issuer s profile in the global markets Showcases the credit story internationally Validation of Credit The issuance process involves a comprehensive diligence process examining all aspects of an issuer s business By issuing a Masala bond, an issuer is providing a signal to the market that it is able to successfully withstand high levels of scrutiny Investor demand validates the strength of the credit 3

6 INR Offshore/Masala Bonds as a Financing Source Provides Price Reference A bond issue provides a reference price for other peers of the issuer looking to borrow in the international market Price is a reflection of the market s assessment of the issuer s credit Quick Process For publicly listed companies, the execution process can be fairly quick Ongoing equity reporting requirements means minimal effort required in preparation Sustainable Funding Platform Can provide a long term sustainable funding platform 3

7 Key Documentation & Process The first step is to initiate a No Deal Road Show with Joint Lead Manager (JLM) in order to gather feedback from various investors from overseas market. If JLM shows a thumps up then next step is towards appointment of a relevant parties as briefed below: Core Team Formation 1 Joint Lead Managers 2 Issuer International counsel 3 Issuer Domestic counsel 4 Joint Book Runner International counsel 5 Auditors 6 Trustee and Paying Agent 7 Trustee counsel 8 Printer 9 Singapore Counsel/ listing agent 10 Tax International Once all parties are on board, Issuer needs to start preparing Offer Document as per Overseas Standard

8 Key Documentation & Process Key Documentation Features Step by Step process is as below: List of activity Reconfirm appointment of counsels, trustee, paying agent and printers Arrange a call between Auditor and counsel on deliverables Circulate DDQ questionnaire Update status of internal/ regulatory approvals Start updating disclosures in OC Circulate revised drafts of Transaction Documents to JLM group Management DD call/ meeting Circulate revised draft of Investor Presentation and Investor FAQ Circulate draft arrangement letter and comfort letter Provide comments on Transaction Documents and circulate revised versions Prepare SGX listing application Auditors to provide comments on Arrangement Letter & Comfort Letter Circulate updated version of OC Provide comments on Investor Presentation Submit Deed of Covenants to Central Depository Pte ( CDP ) for review Provide comments/ markups and circulate revised version of OC DD call on Latest Result Conduct Auditor DD call Finalise form of arrangement and comfort letters Parties involved Issuer Issuer/ Auditor / Counsels Counsels/ JLMs Counsels/ Issuer Issuer Counsels ALL JLMs Counsels ALL Issuer Auditors Issuer / Counsels Issuer / JLMs Counsels Issuer / Counsels ALL ALL Auditors/ Counsels

9 Continue Step by Step process is as below: Circulate revised / near final version of OC Circulate draft Signing Agenda for the programme for review Pay listing fees to SGX Submit listing application Finalise OC Finalise Investor Presentation and Investor FAQ Circulate draft Signing Agenda for the programme for review Execute and deliver Legal Opinions for the programme Execute the transaction documents Submit soft copy to the Singapore Exchange Securities Trading Limited Programme established Road Show in respective country Launch Transaction/pricing/allocation Deliver Pricing Comfort letter Printing Final offer Circular Final Legal Opinion, Bridgedown comfort letter & Execute all documents Sign Subscription agreement Closing of transactions Auditors/ JLMs/ Counsel Counsels Issuer Issuer to HSF All JLMs Counsels Counsels All Issuer/ Counsel Issuer Issuer/ Joint Book Runner Issuer/ Joint Book Runner All Printer Issuer, Joint Book runner, Counsels Issuer/ Joint Book Runner All

10 Global INR Mechanics Flow 1: Issue Date Assumptions: INR 64 bn equivalent size 10Y Global INR Coupon: 8.000% per annum USD/INR Rate: Calculation Agent 1 Investors 2 USD 1 bn cash Bonds with notional amount of INR 64 bn delivered Settlement Agent INR 64 bn cash - expenses Bonds with notional amount of INR 64 bn delivered 4 Global INR 4 Bonds 3 Issuer Description Calculation Agent sets Reference FX Rate Investors Pay USD Subscription Amount Settlement Agent Remits Proceeds to Issuer Issuer Delivers Bonds to Investors Calculation Agent determines the Reference FX Rate for settlement as per documentation Reference FX rate will be determined preceding the Rate Calculation Date Assume Calculation Agent sets the USD/INR Rate at for an equivalent bond size of INR 64 bn of 10Y Global INR Bonds. The INR notional principal amount will be used to calculate the coupon payments on each coupon payment date and the bullet repayment on maturity date Investors pay USD 1 bn to the Settlement Agent as subscription to the Global INR bonds The Settlement Agent remits INR proceeds of INR 64 bn less expenses to Issuer Issuer delivers Bonds with a notional amount of INR 64 bn to Investors

11 Global INR Mechanics (Cont d) Flow 2: Maturity Date Assumptions: INR 64 bn equivalent size 10Y Global INR Coupon: 8.000% per annum USD/INR Rate: Calculation Agent 1 Investors 3 USD mn cash Paying Agent INR 64 bn cash 2 Issuer Description Calculation Agent sets Reference FX Rate and Computes Bullet Payment that Needs to be Made at Maturity Issuer Pays USD Principal to Paying Agent Paying Agent Pays USD Principal to Investors CalculationAgent determines the Reference FX Rate for settlement as per documentation Reference FX rate will be determined preceding the Rate Calculation Date Assume Calculation Agent sets the USD/INR Rate at for the Maturity Date Notional principal amount is INR 64 bn which was calculated based on the Reference FX Rate determined on Issue Date USD amount that will be paid to investors will be calculated based on Notional Principal Amount (INR 641 bn) / Reference FX Rate determined 3 days prior to Maturity Date (70) = USD mn Issuer pays INR principal of INR 64 bn to Paying Agent Paying Agent pays USD principal of USD mn to Investors

12 Key Considerations for Investors Limitation of Access Global INR Bonds is a important investment route for Offshore investors who do not have access to domestic market through FII / FPI license and are not able to currently take exposure in INR denominated credit risks Settlement Transactions are settled through Euroclear / Clearstream Risk Investors who have a view on the currency (USD INR) and India Credit would be best placed to invest in Global INR Bonds This product become very attractive as the current view is positive on the Indian growth story going forward. Arbitrage Due to market dynamics, different markets could be pricing same credit differently and this provides a window of opportunity to investors to take exposure in Global INR Bonds Liquidity Investors would prefer liquidity in secondary market to manage their exposure based on their views on credit and FX rate, thus size of the offering will an important parameter for investors Fungibility of Offshore INR bonds with onshore bonds will help induce liquidity

13 Provisions of Companies Act, 2013 applicable to Masala Bonds Masala Bonds are debt securities under section 2(30) of the Companies Act, 2013 ('Act'). Therefore, provisions as applicable to issuance of debt securities shall apply to Masala Bonds as well. However, MCA vide its General Circular No: 09/2016 dated 3rd August, 2016 has issued a clarification regarding the applicability of provisions of Chapter III (Prospectus and Issue of Securities) of the Act with respect to the issuance of Rupee denominated bonds to overseas investors by an Indian company; Accordingly, Indian companies issuing Rupee denominated bonds overseas (Masala Bonds) under RBI S policy on ECB Guidelines will not be required to comply with the following: o Provisions of Chapter III of the Act; and o Provisions governing the issue of secured debentures under Rule 18 of the Companies (Share Capital and Debentures) Rules, In addition to the above, listed entities in India shall also comply with the provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 with respect to issuance of debt securities.

14 Peep into the relaxations given through MCA s clarification In broad terms issuance of Masala Bonds will not require compliance relating to : o Issue of private placement offer letter (PAS-4); o Preparation of list of allotees (PAS-5); o Filing of return of allotment (PAS-3); o Mentioning the prescribed particulars in the prospectus; o Various other requirements mentioned under Chapter III of the Act; and o Provisions of rule 18 of the Companies (Share Capital and Debentures) Rules, 2014.

Process Chart under Company Law to issue bonds 1 Reg 29(1) of SEBI LODR, 2015 - In case of an equity listed co. - Prior intimation to recognised St. Ex.

2 Section 179(3) - Calling of a board meeting / committee meeting, as may be the case 3 Section 117 (3) - File e-form MGT-14 with the Registrar of Companies within 30 days of passing the above

15 Process Chart under Company Law to issue bonds 1 Reg 29(1) of SEBI LODR, In case of an equity listed co. - Prior intimation to recognised St. Ex. atleast 2 working days in advance about the board meeting in which proposal for issuing bonds is to be considered. 2 Section 179(3) - Calling of a board meeting / committee meeting, as may be the case 3 Section 117 (3) - File e-form MGT-14 with the Registrar of Companies within 30 days of passing the above resolution. 4 5 Reg 30 of SEBI LODR, Intimation to the stock exchange regarding the outcome of board meeting within 30 minutes of the conclusion of the meeting. Section 71 and 180(1)(c) - Call extra-ordinary general meeting In case the bonds are to be issued with an option for conversion into equity shares, pass SR; and if current as well as the proposed borrowing exceed aggregate of the paid-up capital and free reserves, pass SR for the same. 6 Section 117 (3) - File e-form MGT-14 with the Registrar of Companies within 30 days of passing SR. 7 Section 77 - File CHG-9 within 30 days of creation of charge, in case of issue of secured bonds.

16 Applicability and non-applicability under the Companies Act, 2013 after relaxations given through MCA s clarification MCA s clarification on Rupee denominated bonds Relaxations given Provisions still applicable Sections of the Companies Act, 2013 Rule 18 of the Companies (Share Capital and Debenture) Rules, 2014 Sections 71, 117 and 179 of the Companies Act, 2013

17 Masala Bonds V/s Foreign Currency Bonds- (1/2) Basis of Difference Masala Bonds Foreign Currency Bonds Denomination Indian rupee Foreign currency Guiding Regulation RBI s ECB Policy on Issuance of Rupee denominated bonds RBI s Issue of Foreign Currency Exchangeable Bonds Scheme, 2008 and Master Direction on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers Risk owned by Overseas investors Eligible issuers or borrowers

18 Masala Bonds V/s Foreign Currency Bonds- (2/2) Apart from the differences mentioned in the previous slide, both masala bonds and foreign currency bonds are similar with respect to the following: Both are issued by Indian companies under ECB route; Both are issued to person resident outside India and compliant with the disclosure requirements pursuant to laws of the foreign investor s jurisdiction; and Both are listed on offshore stock exchanges, if listing is contemplated.

19 SEBI s circular on Rupee denominated bonds- Considering the fact that Masala Bonds are governed by RBI and in order to further streamline the regime, SEBI vide its circular SEBI/HO/IMD/FPIC/CIR/P/2016/67 dated 4 th August, 2016 has clarified the following: Foreign investment in Masala Bonds will not be treated as investment by Foreign Portfolio Investors (FPIs) ; and Will not be covered under the purview of SEBI (Foreign Portfolio Investors) Regulations, 2014, as amended. Foreign investments in Masala Bonds will be calculated against the existing corporate debt limit set for investment by FPIs, presently INR 244,323 crore and will be available on tap to the foreign investors.

Introduction to Masala Bonds. B S Rathi Director Sumedha Fiscal Services Ltd /

Introduction to Masala Bonds. B S Rathi Director Sumedha Fiscal Services Ltd / Introduction to Masala Bonds by B S Rathi Director Sumedha Fiscal Services Ltd 9867751705/022 40332400 bs_rathi@sumedhafiscal.com 1 Agenda Origination of Masala Bonds Masala Bonds Key Features Overseas