What is Masala Bond :Everyone Must Know

Masala Bonds: An Overview

Masala Bonds are bonds issued outside India but denominated in Indian Rupees, rather than the local currency. The term "Masala" is an Indian word meaning spices, and was used by the International Finance Corporation (IFC) to evoke the culture and cuisine of India. Unlike dollar bonds, where the borrower assumes the currency risk, Masala Bonds make the investors bear the risk. The first Masala Bond was issued by the World Bank-backed IFC in November 2014, raising ?1,000 crore to fund infrastructure projects in India. The Masala Bond first appeared on the London Stock Exchange, earning the name "The Masala Bond."

During Prime Minister Modi's visit to the UK in 2016, the bonds gained prominence as a means to attract investors and grow funds. The Masala Bond eased the situation where Indian companies previously had to rely solely on External Commercial Borrowing, which was raised and repaid in dollars. Masala Bonds quickly became a game-changer for corporate debt markets, offering significant benefits to both issuers and investors.

Success and Scope of Masala Bonds

Masala Bonds have seen significant success, often being oversubscribed by more than four times soon after their listing in the UK. HDFC Bank became the first Indian company to raise ?3,000 crores through Masala Bonds, followed by the Indian Railways Finance Corporation, which raised around $1 billion, and NTPC.

How Masala Bonds Work

Transactions involving Rupee-denominated bonds, such as buying, interest payments, and repayments, are conducted in Rupees. Unlike traditional foreign currency bonds issued by Indian entities, where the currency risk lies with investors, Masala Bonds shift this risk to the investors.

Eligibility Criteria for Masala Bonds

• Can be subscribed by residents of countries that are members of a Financial Action Task Force or a similar regional body.
• The bonds can be sold, transferred, or offered as security overseas, subject to IOSCO requirements.
• The securities market regulator must be signed by the International Organization of Securities Commissions or have an MOU signed with SEBI.
• The maximum borrowing limit is up to INR 50 billion per financial year; beyond this, prior approval from RBI is required.

Prohibited Uses of Masala Bonds

• Real estate activities other than the development of affordable housing projects.
• Investing in the capital market.
• Activities prohibited by Foreign Direct Investment guidelines.
• On-lending to other entities for the above purposes.
• Purchase of land.

Benefits of Masala Bonds

Benefits to the Economy

• Helps internationalize the Indian Rupee and adds value to the Indian financial system and economy.
• Companies are protected against currency fluctuation risks.
• Increased foreign investment in Rupee-denominated debt reflects growing international interest in Indian instruments.
• Liquid Rupee-denominated debt markets contribute to financial stability.
• Opens new avenues for bond investments for retail savers, enhancing their Rupee structure.

Benefits to Investors

• Low credit risk and high Rupee-linked yield.
• Finance Ministry has reduced TDS on interest income from such bonds for residents outside India from 20% to 5%, making it an attractive investment option. Capital gains from Rupee appreciation are fully exempt from taxation.
• India offers a unique combination of high growth and high interest rates.

Benefits to Issuers

• Provides access to cheaper funding sources compared to the domestic market.
• Expected to lower the cost of capital, which is relatively high in Asia.
• Helps Indian companies when domestic banks are reluctant to lend during critical times.

CA. Harsh Patel

Disclaimer: This publication has been prepared for general guidance on matters of interest only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice.