The Reserve Bank of India (RBI) on Friday changed the rules pertaining to the calculation of the foreign investment limit in so-called masala bonds, potentially opening up space for Indian companies to sell more such securities.

Starting 3 October, masala bonds, or rupee-denominated bonds sold overseas, will not be part of the investment limit for foreign portfolio investors (FPIs) in corporate bonds and will instead be included under external commercial borrowings (ECB), the RBI notification stated.

This decision has been taken in consultation with the government, the central bank added.

Eligible Indian entities that want to sell these bonds can approach RBI’s foreign exchange department, the notification said.

“Such a shift will allow companies to issue masala bonds as they are currently barred by Sebi (Securities and Exchange Board of India). This will also lead to better monitoring of issuances by RBI as the external commercial borrowings framework is restrictive in terms of end-use of funds,” said Soumyajit Niyogi, associate director at India Ratings.

In a 20 July circular, market regulator Sebi had said that issuance of masala bonds would be temporarily stopped until the total foreign holding of corporate bonds falls below 92% of the limit.

As of Thursday, foreign investors had exhausted over 99% of the available cap.

In June, the Reserve Bank of India had tightened the rules on the issuance of masala bonds.

The central bank mandated a minimum maturity of three years for sales of up to $50 million. Issuances above $50 million must be of five years or above maturity.

Currently the limit for FPIs to invest in corporate bonds stands at Rs2.44 trillion. This includes Rs44,001 crore worth of masala bonds sold by Indian entities and even those that are in the pipeline.

With the change in rules, an amount of Rs44,001 crore will be made available for FPI investment in corporate bonds over the next two quarters. Accordingly, an additional limit of Rs27,000 crore will be available from 3 October and another Rs17,001 crore from 1 January 2018.

Separately, the central bank also said that in each quarter, Rs9,500 crore will be available only for investment in the infrastructure sector by long-term FPIs such as sovereign wealth funds, multilateral agencies, endowment funds and foreign central banks.

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