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Masala bonds
Masala bonds are bonds issued outside India but denominated in Indian rupees. Masala is a Hindi word meaning spices. The term was first used by the International Finance Corporation (IFC) to evoke the culture and cuisine of India. For global investors, masala bonds are a high yield investment opportunity that offers easy access to India’s asset market and its rapidly growing economy.
Features of Masala bonds
The following are the key features of masala bonds-
- Masala bonds are issued in foreign markets but denominated in Indian rupees.
- Malasa bonds give an opportunity to Indian issuers to raise the fund in foreign countries.
- Masala bonds allow investors outside India to invest in Indian assets without taking on the currency risk associated with Indian rupees.
Types of masala bonds
Masala bonds may be classified in terms of maturity period and interest. The bonds may be short term bonds and long-term bonds. The bonds may be fixed interest or floating interest.
Maturity period
The Reserve Bank of India vide its circular No. AP (DIR Series) Circular No. 47, dated 07.06.2017 provides the provisions for the following-
- Maturity period: Minimum original maturity period for Masala Bonds raised upto USD 50 million equivalent in INR per financial year should be 3 years and for bonds raised above USD 50 million equivalent in INR per financial year should be 5 years.
- All-in-cost ceiling: The all-in-cost ceiling for such bonds will be 300 basis points over the prevailing yield of the Government of India securities of corresponding maturity.
- All other provisions of aforesaid circulars dated September 29, 2015, April 13, 2016 and February 16, 2017 remain unchanged. AD Category-I banks may bring the contents of this circular to the notice of their constituents and customers.
Who can issue?
Masala bonds can be issued by corporations, financial institutions or Government backed entities.
Listing
The masala bonds are listed in the stock exchanges situated in foreign countries usually in London or Singapore. The listing allows foreign investors to have access this market indirectly.
Regulators
Even though the masala bonds are issued abroad, they are regulated by the Reserve Bank of India and Securities and Exchange Board of India.
Using the funds
The funds raised through the masala bonds can be used for the following purposes-
- To refinance existing rupee loans and non-convertible debentures;
- To fund the development of integrated townships and affordable housing projects;
- To provide working capital for companies.
Restrictions
The following are the restrictions in using the fund raised by the masala bonds-
- Real Estate Activities beyond integrated townships and affordable housing projects as mandated by Reserve Bank of India.
- Activities prohibited under FDI guidelines.
- Investing in domestic capital market or using the proceeds for domestic equity investments.
- Purchasing land.
- On lending the funds to other entities for any use of the prohibited purposes.
Advantages
The following are the advantages that can be gained by masala bonds-
- It shifts the currency exchange risks to the investors. Therefore, it is useful for the issuers to avoid the risk of currency fluctuations affecting repayment amount.
- This provides Indian issuers to access to foreign capital markets.
- The issue of these funds is cheaper than the funds raised domestically.
- By means of foreign investors investing in these bonds the Indian economic grows.
- These bonds strengthen the Indian rupees reflecting of positive Indian economy.
- It develops Indian capital markets.
Disadvantages
Despite the advantages prevailing some of the disadvantages are these which are shown as below-
- Currency risks involved in these cases to the foreign investors can impact returns to the investors which may defer the investors in preferring this investment.
- Higher rate of interest may increase the borrowing costs to the issuing entities.
- This market is limited when comparing to the other global bonds.
- The regulatory requirements in India and abroad may involve compliances more costing and time consuming.
- Economic instability may reduce the demand to these bonds.
Limitations
- The periodic interest rate cut by the Reserve Bank of India can make the issue of bonds less attractive.
- The Reserve Bank of India may limit the flexibility for borrowers.
- The inherent currency risk may impact the sustainability of the masala bonds.
- Proceeds of these bonds cannot be used for all purposes.
- These bonds are not retail investors friendly.
- The currency risk may reduce the returns of the investors.
Tranches of Masala bond issued
- The first Masala bond was issued by the World Bank-backed IFC in November 2014 when it raised Rs.10 billion (10,00 crore) in bonds to fund infrastructure projects in India.
- In August 2015, the IFC, for the first time, issued green masala bonds and raised Rs. 3.15 billion to be used for private sector investments that addressclimate change in India.
- In July 2016 HDFC raised ₹30 billion from Masala bonds and thereby became the first Indian company to issue masala bonds
- In August 2016, NTPC, a public sector undertaking, issued the first corporate green masala bonds worth Rs. 20 billion.
- In May 2019, the state-owned Kerala Infrastructure Investment Fund Board (KIIFB) debuted its 'masala bond' issue of Rs. 2,150 crore on the London Exchange. Now it is under the scanner of ED.
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