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Earendil Business Services | Masala Bonds Blog

MASALA BONDS

  • Masala Bonds are the bonds issued outside India, by an Indian entity, in Indian currency.
  • Indian corporate ususally issue masala bonds to raise funds from foreign investors.
  • The major objectives of Masala Bonds are to fund infrastructure projects, ignite internal growth (via borrowings) and internationalize the Indian rupee.
  • The first masala bond was issued in 2014 by IFC (International Finance Corporation) for the infrastructure projects in India.

MASALA BONDS

CHARACTERISTICS OF MASALA BONDS

  • Masala bonds are bonds issued outside of India that are rupee denominated bonds.
  • They are debt products that aid in the raising of funds in local currency from overseas investors.
  • Both the government and commercial entities can issue these bonds.
  • These bonds can be purchased by any citizen of the country, however there are some restrictions.
  • Only those masala bonds whose security market regulator is a member of the International Organization of Security Commission can be subscribed to by investors.
  • these bonds are also available for purchase by regional and multilateral financial institutions

BENEFITS OF MASALA BONDS

  • It contributes to the development of foreign investors trust in the Indian economy.
  • It provides greater Interest rates.
  • It contributes to the country's foreign investment strength by increasing investor confidence in Indian currency.
  • The tax on capital gains from rupee denominations is mainly free.
  • If the value of the rupee rises at maturity, investors will receive the highest possible return.

To the borrowers (Companies)

  • It has low-credit risk and high rupee-linked yield for investors
  • It helps borrowers save money because it is issued outside of India at a cheap interest rate of less than 7%.
  • The borrower can mobilize a huge amount of funds.
  • Companies issuing masala bonds do not have to worry about rupee depreciation, which is usually a big worry while raising money in overseas markets.

LIMITATIONS OF MASALA BOND

  • RBI has been making periodical rate cuts in Masala Bonds which has made it a bit less appealing to the investors.
  • The money raised through these bonds cannot be used everywhere.
  • There are fixed fields where the money can be invested.
  • As per Moody’s, the sustainability of financing via Masala Bonds is a challenge as investors are expected to be cautious in taking on currency risks from emerging markets.

MATURITY PERIOD

  • The minimum original maturity period for bonds raised up to 50 million US Dollars equivalent in INR per financial year should be 3 years.
  • The minimum original maturity period for bonds raised above 50 million US Dollars equivalent in INR per financial year should be 5 years.

ELIGIBILITY

  • Investors from outside of India who are interested to invest in Indian assets are eligible to invest in Masala bonds.
  • HDFC, NTPC, India bulls Housing Finance, are a few Indian entities who have raised funds using Masala Bonds.