Masala Bonds

Masala Bond

What are bonds?

Let us first look at what bonds mean to know what masala bonds are. Bonds are a type of investment or loan that is given to a borrower. The investor/ lender gets a fixed amount of interest on the bonds in return. The value of the bonds may change over time in the marketplace. A bond is a debt security instrument. There are many different types of bonds like municipal bonds, corporate bonds, high yield bonds etc.

What are masala bonds?

Back to masala bonds, they are bonds that Indian issuers make with foreign investors in the Indian Rupee instead of the local currency of the foreign investors country. Having these bonds in Indian rupees maximises the profit of the Indian issuers. The rate of the rupee falling or exchange rate risks would not affect them but the investor of the bonds. So if the value of the rupee falls the risk is borne by the investor. Simply, these are rupee-denominated bonds issued in foreign countries. Indian corporates can borrow money from the offshore market at low-interest rates. They can be issued for the maturity of 3 years, 5 years or 7 years.

Some Facts

The International Finance Corporation, which is a sister organization of the World Bank, plays the role of an agent in issuing masala bonds. Overseas markets listed to issue these bonds are the London stock market and the New York stock exchange. The first-ever Masala Bond was issued on the 10th of November 2014. It was for 2 billion under IFC’s offshore rupee program.  A maximum of 50 billion INR can be issued in 1-year loans. Any amount over this has to seek prior permission from the Reserve Bank of India. Their interest rates are usually less than 6 per cent. Also, masala bonds have to be plain vanilla bonds that are the most basic type of bonds. They also help to increase the development of the domestic bonds market due to competition with foreign markets.

Investors from outside India who are interested in investing in Indian assets can put money into these masala bonds. Indian companies like HDFC and India bulls have elevated their funds by using these bonds. Cooperates, partly-sovereign entities like the National Highways Authority of India and state institutions like Kerala Infrastructure Investment Fund Board have enjoyed the benefits of these bonds. HDFC was the first to issue masala bonds; they raised 3,000 Crore rupees. Since 2014, these debt instruments have been a vital part of the Indian economy. They help the Indian companies to diversify their funding’s. Until 2020, masala bonds worth 5.5 billion dollars have been issued.

Where the name comes from:

The International Finance corporation in 2014 first formally used the term, Masala Bonds. Undoubtedly, we Indians have a special space for spices and masala in our hearts. So the name suits these bonds well. To fan out Indian culture and cuisine all around the world these bonds were named so. Similarly, there is a Chinese variant bond under the name dim-sum.

External commercial borrowing

Another borrowing contract concept that is similar to Masala Bonds is External commercial borrowing or ECB. There is a fine line of difference between the two. ECB is a borrowing contract from overseas. The local currency is the denomination of these and not Indian rupee. In ECB the currency risk lies with the borrower and not the investor. This may lead to a loss to the borrower in case there is a downfall in the currency. They are solely for commercial uses only.

Some disadvantages of masala bonds

There is a likelihood for higher taxes. There are also periodical rate cuts by the Reserve Bank of India. Not every activity can be done using the money gained from these bonds. It can’t be used for activities like the capital market. Buying of land is also prohibited. Giving this money to other entities is restricted as well. Much of the real estate activities cannot be done using these bonds. Other than the RBI mandates for affordable housing projects or integrated townships.

Masala bonds have been a good means to engage with foreign capital. It will definitely help India move closer to economic growth. These bonds will also give us exposure in the finance world.

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