Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

(Updated )

Goldman Sachs Group Inc. is forcing the Reserve Bank of India to make a choice. The central bank will have to decide whether to let the Masala bond market die slowly or gain new life in a different form than was envisaged when it allowed Indian companies to raise debt in rupees overseas.

ReNew Power Ventures Private Ltd., majority owned by Goldman, sold $475 million of five-year bonds at 6 percent using a structure that sidesteps RBI rules restricting the sale of high-yielding offshore debt, Bloomberg's Lianting Tu and Anurag Joshi reported Tuesday, citing a person familiar with the offering.

The practice isn't new: Indian companies can't sell offshore bonds that pay a high coupon, so they use a special purpose vehicle. In ReNew's case, this is an entity called Neerg Energy Ltd.

India's central bank long ago cottoned on to this "solution" and responded by curbing the ability of companies abroad to lend to local ones. No problem: Instead of lending directly, Neerg Energy will use the money to buy rupee-denominated offshore securities, also known as Masala bonds, issued by units of ReNew.

This loophole had supposedly been closed. In 2014, Greenko Group Plc, a renewable energy company, used a similar structure to skirt the external commercial borrowing limits, with an offshore subsidiary buying rupee bonds issued onshore. That meant dollar creditors indirectly owned the rupee debt without incurring currency risk. In response to the transaction, the central bank issued a circular banning onshore companies from guaranteeing offshore debt. 

That stopped a number of companies that had begun to look at such a structure. Greenko itself managed to do a transaction last year similar to the first, after persuading regulators that the guarantee for the offshore debt was given by its overseas listed arm.

Goldman's variation on the theme is that, instead of indirect ownership, the Masala bonds will be held as collateral to support the debt sold by Neerg, which is independent rather than a subsidiary of ReNew.

If the RBI turns a blind eye to the latest maneuver, investors can expect a flood of such issues. That would be welcome news for the Masala bond market, which has failed to take off since India allowed companies to sell offshore rupee debt in September.

Lacking Something
Masala bond issuance has trailed sales of dollar bonds by Indian companies
Source: Bloomberg

A long list of high-yield companies will be keeping their fingers crossed. A spike in Masala issuance would spur a deeper market, widening funding channels for business and potentially lowering borrowing costs -- even though these bonds, as collateral, won't be traded.

It's now up to the central bank. It can continue the game of cat-and-mouse, or accept the adjustment that bankers have made to its idea. Masala spices come in many forms: The bond variety clearly needs a little more kick.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Adds context on Greenko and similar transactions in new sixth paragraph.)

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Christopher Langner in Singapore at

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