Masala bonds are those bonds that are issued outside India but denominated in Indian Rupees. Masala is an Indian word that means spices. The term was used to speak of India’s culture and cuisine by the International Finance Corporation (IFC). In comparison to dollar debt, the creditor faces monetary risk.

  • Masala bond is bearing the risks to creditors. The first Masala Bond was issued to fund infrastructure projects in India by the IFC (International Finance Corporation), backed by the World Bank in November 2014. In August 2015, the IFC issued green mass bonds and raised Rupees for $3.15 billion for private sector investments to address climate change in India.
  • In July 2016, the [HDFC] raised 3,000 Masala bonds crore rupees, making it the first Indian company to issue a Masala bond. The first corporate green masala bonds worth 2 thousand crore rupees were released in August 2016 by national thermal power company limited [NTPC limited].
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The History behind these bonds

  • In November 2014 the International Finance Corporation ( IFC) issued a ten-year Indian Rupee bond to boost foreign investment in India and mobilize international capital markets to support infrastructure development. These are being offered and settled in U.S. dollars to raise Indian rupees from international infrastructure development investors in India. To finance private sector investment in India, IFC will convert bond revenues from dollars into rupees.
  • The first rupee bond in the London Stock Exchange was the “Masala bonds.” IFC calls the “masala” bonds a globally recognized term that evokes India ‘s culture and cuisine. This is not the first time a bond is named for a country’s food or culture. For instance, Dim Sum bonds from China, and the Japanese are labeled as Samurai bonds.
  • In a nutshell, Indian companies, such as LSE and NYSE, are issued masala bonds, via International Financial Corp. (ITFC), World Bank funding arm. They are invested by foreign investors in Offshore markets, amongst others. Such are released and paid in INR, but reimbursement and compensation are correlated with INRvs USD or other exchange rates for foreign currencies. This means that they are exposed to the risk of exchange rates. 

Masala Bonds Benefits to Corporate

1. They can borrow from offshore markets at low-interest rates. In developed countries, interest rates are considerably lower than in India.

2. They are not exposed to FX threats as issuers. Investors entirely fund it. Indian companies suffered considerable losses earlier for the ECB, which have been dominated by USD for two to three decades by the continued structural decline of INR against USD.

3. They can reach a broad base of investors.

4. It will also lead to portfolio diversification.

Companies in India often have higher interest rates than non-Chinese companies. Some Indian companies are also involved in borrowing abroad. Until now, only the main currencies (dollar, euro, etc.) were able to borrow. This is known as “external commercial borrowing”-the ECB in a nutshell.

In the borrowing company’s and Reserve Bank of India ( RBI), the ECBs have no disadvantage.

  • The foreign currency is debt. In the foreign currency interest and principal payments must be made. But most of the company’s income is usually in the Indian Rupee. So the company faces a currency danger in the face of a dropping Rupee. One can overcome this by hedging, but the cost of borrowing rises.
  • The Rupee rate itself can have a substantial foreign currency debt that has been raised, which is partly managed by RBI. It is because businesses need to sell foreign currencies and buy Rupee, which makes Rupee appreciate, to use the funds in India.
  • If this increases large volumes of debt in essential domestic companies, the economy can be exposed to currency risk-reducing RBI’s opportunity to play the role of last resort lenders.

To escape any of those, RBI applied some limits on the capital account for foreign trade borrowing (ECB). They limit how many foreign currencies can be borrowed at what interest rate, time, who can borrow, how much debt could be the ECB, etc.

To represent changing economic conditions, RBI also updates certain limits and restrictions regularly.

The three above can be resolved mainly if Indian companies themselves may lease Rupee. The creditor shall pay interest in Rupee in this situation. The currency risk (dollar rupee) will then be transferred to the lender (using certain currency derivatives to cover their exposure). The Masala bonds are doing this. It is an attempt by RBI to globalize the Rupee.

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Framework of Issuance of Rupee denominated bonds overseas (Masala Bond) by RBI

• Borrowers’ eligibility – Any corporation or company may issue so-called Rupee bonds overseas. The Regulatory Competencies of the Securities and Exchange Board are likewise eligible for Real Estate Investment Trusts ( REITs) and Infrastructure Investment Trusts (Invites).

• Type — Financial Action Task Force (FATF) complying with financial centers issued solely with plain vanilla bonds, either private or listed in exchanges under regulations in the host country.

• Investors recognized – Every investor in meeting jurisdiction with the FATF. Banks incorporated in India will have no access whatsoever to such bonds.

• Maturity – For Masala Bonds up to USD 50 million equivalent in INR in each financial year, the minimum original maturity should be three years. For bonds up above USD 50 million equivalent in INR in each fiscal year, it is expected to be five years.