Spicing up your company investment through Masala bonds.

Masala bonds are how Indian companies spice up their investments through participation from foreign entities. Masala bonds took major headlines when the Kerala government issued bonds to raise Rs. 2100 crore for various development initiatives through the Kerala Infrastructure Investment Fund Board (KIIFB). Whether that was the best move or not, the silver lining was that more people who associated masala with dosa became excited to know more about these bonds. Let's see what this masala bond is in more detail.

What is Masala bond?

Masala bonds were first introduced in 2014 by the International Finance Corporation (IFC) enabling Indian entities to raise funds through foreign investors through Indian rupee-denominated bonds. These debt instruments benefit the borrowers by protecting them from currency fluctuations, and investors take the risk. If the rupee depreciates in the future it hurts the investor and the entity will have to bear the losses. \

Masala bonds can be issued by any financial corporation and Indian government entities to countries that are part of the Financial Action Task Force (FATF). Also, the regulators of these investors’ securities should be part of the International Organisation of Securities Commissions.

Why Masala bonds?

The most peculiar thing about the bonds is that these are denominated in INR rather than the local currency of the foreign countries. This protects the borrower from fluctuations in the Indian rupee, and the borrower can enjoy its full benefit. The fluctuation’s repercussions are borne by the investor from the foreign market. 

The maturity period for masala bonds is less than that of conventional bonds. For a raised amount of up to the rupee equivalent of 50 million USD, the maturity period is 3 years. Conventional bonds typically have a 5-year maturity period. For investments greater than the rupee equivalent of greater than 50 million USD, the maturity period is 5 years. Conversion of these bonds is not at any pre-determined rate but at the market rate on the settlement day. The same applies for the interest paid.

The catch of Masala bonds is that the funds raised cannot be used for all activities the borrower wishes to use. These can only be used for limited activities such as 

• Developing townships and affordable housing projects
• Refinancing rupee loans
• Investing in non-convertible debentures (debentures that cannot be converted to equity or stocks)

These raised funds cannot be used in:

Real estate investments other than developing townships and affordable housing projects

• Activities prohibited by Foreign Direct Investment
• Domestic capital market investments
• Lending to other entities for restricted purposes.

These restrictions have been imposed by the Reserve Bank of India, and non-compliance with these rules can invite severe action from the RBI.

What are the benefits?

As discussed previously, if investors bear the risk, why should they invest in these bonds? What are their benefits?

In 2017, it was decided to lower the TDS to 5% from 20% on the interest earned from such bonds which encouraged investors.As rupee depreciation is beneficial to the borrower, appreciation of rupee is beneficial to the investor.

Masala bonds improve the confidence of the investors in the Indian Rupee. This helps internationalize the Indian currency around the world.. This further allows companies to explore investment options in India and make India more investment-friendly.

Borrowers have an advantage as they are protected against currency fluctuations. Since the settlement is in INR, the borrower has no reason to worry about the exchange rates. The borrower also reduces their risk by diversifying their portfolio across various instruments. Masala bonds also allow borrowers to mobilize larger funds for the permitted activities explained prior.

The interest rate for these bonds is less than those inside India and helps to cut the cost of funds.

When was masala bonds used?

Masala Bonds came into the picture in November 2014, issued by the World Bank backed by IFC, and raised Rs. 1000 crores. The aim was to utilise the raised amount to fund the infrastructure projects in India. 

Since then there have been instances where Indian corporations and states have issued Masala bonds for raising funds.

HDFC:

On 30 September 2021, HDFC listed masala bonds worth Rs. 739 crores on the India International Exchange (IFSC) Limited (INX) and NSE IFSC. The masala bonds were issued at a coupon rate of 7.55%. The proceeds from the bonds were used for the banking activities. The perpetual bonds released carried no maturity date and could be treated as equity.

NTPC:

State-owned National Thermal Power Corporation (NTPC) issued green masala bonds at a yield of 7.48% for Rs. 2000 crore, with a 5-year maturity in 2016. Major buyers of the securities were Blackrock, the Government of Singapore, and Bluebay. They further raised Rs. 2000 crores through masala bonds in 2017. In 2020, NTPC offered to buy back Rs. 4000 worth of masala bonds from the holders and lenders.

KIIFB:

The Kerala Infrastructure Investment Fund Board (KIIFB) issued the most recent masala bond issuance for Rs. 2150 crores on the London Stock Exchange in March 2019. This made Kerala the first state to issue masala bonds. The secured bond was offered a coupon rate of 9.7% with 5 years of maturity. The issuance was to rebuild the infrastructure destroyed by the 2018 floods in Kerala and improve the state’s investor-friendly image. KIIFB planned to repay the amount to the investors on schedule, as per the report on March 2024.

Currently, the London Stock Exchange alone has 48 masala bonds listed, and money worth 7.16 billion USD(Rs. 443 billion) has been raised, with 13 issuers.

Does only India have bonds in their currency?

No, China and Japan have their instruments similar to Masala bonds.

Dim Sum bonds:

These are Chinese renminbi-denominated bond issues in Hong Kong. This has been instrumental in bringing investments from foreign companies, avoiding the People’s Republic of China’s strict laws and regulations regarding domestic debt.

Samurai bonds:

These are yen-denominated bond issues in Tokyo. These are issued by non-Japanese companies to raise funds in Japan and are subjected to Japanese laws. Here, the borrowers are more exposed to risk than investors because of the currency's depreciation.

In a gist, masala bonds are becoming a more exciting and attractive option for Indian companies (public and private) to raise funds because of the low cost of capital and risk. It also provides more future benefits for the economy as well. As the funds raised through these bonds have restrictions, adhering to the rules is vital to avoid consequences. Let masala bonds spice up your portfolio without being too overpowering. 

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Author - Abhishek Sonawane

Abhishek Sonawane, an MBA graduate from the prestigious Indian Institute of Management Visakhapatnam(IIMV), brings over ten years of experience in the finance domain. His extensive background includes various roles in financial management and strategy, providing him with a comprehensive understanding of the financial landscape. Abhishek’s expertise and dedication to financial education make him an authoritative voice in personal finance, helping readers make informed financial decisions.