The International Finance Corporation (IFC) issued Masala Bonds in India in 2014. (IFC). The IFC was the first in India to issue masala bonds to support infrastructure projects. To raise funds, Indian corporations or enterprises issue masala bonds outside of India. These bonds are issued in Indian rupees rather than local currency. As a result, if the rupee rate declines, the investor would lose money.
What are the Features of Masala Bonds?
Masala Bonds are mostly rupee-denominated bonds issued by Indian firms outside of India to attract international investors. They can be termed debt products that will help raise funds in local currency from foreign or global investors. Both private entities and businesses and government-based entities can issue these bonds.
These bonds are available to foreign investors or those from outside India who want to invest in Indian assets. They are members of the Financial Action Task Force and are available to any resident of that nation. The securities market regulator of the investors who subscribe should be a member of the International Organization of Securities Commissions. These bonds can also be purchased by Multilateral and Regional Financial Institutions, of which India is a member.
According to the RBI, bonds raised to the rupee equivalent of $50 million in a financial year have a three-year maturity period. Bonds raised above this amount have a five-year maturity period. These bonds are converted at the market rate on the day of settlement of transactions for the issuing and servicing of the bonds’ interest.
Where do I use the proceeds from the sends?
The revenues from these bonds can be utilized for a variety of purposes, including:
- In rupee loan refinancing and non-convertible debentures.
- Integrated townships and affordable housing developments are being developed.
- Corporate working capital refinancing from these bonds is not allowed to be utilized for the following purposes, according to the RBI:
- The building of integrated townships and affordable housing developments should not be considered in real estate activity.
- Foreign Direct Investment guidelines ban certain activities.
- Investing in capital markets and using the proceeds to make domestic stock investments.
- Land acquisition.
- On-lending to other companies for any of the reasons above.
What are the Advantages of the Masala Bonds?
Masala bonds provide a number of advantages. Subscribing to and issuing these bonds helps both investors and debtors. The following are the advantages that are held by the investors in the masala bonds:
- It has higher interest rates, which are advantageous to the investor.
- It contributes to the trust of foreign investors in the Indian economy.
- It contributes to the country’s foreign investment strength by increasing foreign investors’ confidence in the Indian currency.
- Capital profits derived from the rupee denomination are tax-free.
- The investor profits if the rupee appreciates at the time of maturity.
The following are the advantages for the borrowers:
- The borrower gains since there is no currency risk. The borrower is protected against currency swings.
- Borrowers will not be affected by rupee depreciation because these bonds are issued in Indian currency rather than foreign currency.
- The borrower has the chance or advantage of raising a huge sum of money, which is a resource for the business.
- It aids the Indian organisation that issues these bonds in diversifying its portfolio.
- It helps borrowers save money because it is issued outside of India at a rate of less than 7%.
- Because these bonds are issued in the offshore market, borrowers can access a larger pool of investors.
What are the Disadvantages of Masala Bonds?
Certain disadvantages are associated with Masala Bonds or rupee-denominated bonds, including the following: The RBI has periodically cut the rates on Masala Bonds, making them less appealing to bond investors.
- The funds obtained through these bonds cannot be used in all circumstances, again causing a significant disadvantage to the investor.
- There are specific areas in which money can be invested.
- According to Moody’s, the long-term viability of Masala Bond financing is an issue since investors are anticipated to be wary of taking on currency risks in emerging nations.
FAQs or Frequently Asked Questions
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What is the minimum maturity period for the Masala Bonds?
Three years shall be the minimum maturity length for bonds raised to 50 million USD equivalent in INR every financial year. Bonds raised in excess of 50 million USD equivalent in INR every financial year shall have a minimum initial maturity length of five years.
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Why is this particular bond referred to as Masala Bonds?
Masala bonds are issued outside of India; however, they are denominated in Indian Rupees instead of the local currency. Masala is a term from India that means “spices.” The nIFC coined the term ‘Masala’ to describe Indian food and culture. Unlike dollar bonds, where the borrower bears the currency risk, masala bonds place the risk on the investors.
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Which entity in India made Masala Bonds?
On the London Stock Exchange, the state-owned Kerala Infrastructure Investment Fund Board (IIFB )debuted its INR 2,150 Crore ‘masala bond’ offering. It is India’s first sub-sovereign entity to access the foreign bond market in the rupee.
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What is the main objective of the Rupee Dominated Bonds or the Masala Bonds?
Masala bonds were created to fund infrastructure projects, internationalize the Indian rupee, and ignite internal growth through borrowing.
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When did India issue its first Masala Bond?
Masala bonds are denominated in rupees. In November 2014, the World Bank-backed IFC issued the first Masala bond in India, raising Rs.1,000 crore to support infrastructure projects in the country. In August 2015, the IFC issued green masala bonds, raising Rs.3.15 billion for private sector projects in India that address climate change.
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Do Masala Bonds have any cons or disadvantages?
Masala bonds have been subject to repeated rate decreases by the RBI, making them less tempting to investors. The funds earned through these bonds cannot be utilised in all fields. There are specific areas in which money can be invested. According to Moody’s, funding sustainability through Masala bonds is difficult since investors are likely to be wary of taking on currency risks in emerging nations.
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Which are the areas where one can use the proceeds of the Masala Bonds?
The following are the two ways in which the proceeds from Masala Bonds can be used:
- As working capital in the case of corporations
- And refinancing convertible debentures and rupee loans.
