What is Masala Bond in India?

Narendra Kumar

13 Sep, 2019

Masala Bond the word first put its foot on London Stock Exchange where it got its name “The Masala Bond”. When PM’s visit in 2016 to the UK to grow funds and a favored destination to attract investors, these bonds primarily registered on the London Stock Exchange^[1] and got their name ‘The Masala Bond”.

There are other similar Foreign Currency Denomination Bonds like Dim Sim in China and the Samurai Bond in Japan.

What are Masala Bonds?

Masala Bonds are bonds that issued outside India to raise money from the overseas market in rupees and not in other foreign currency. The Masala bond has eased down the situation where Indian Companies had to earlier depend only on the External Commercial Borrowing that was raised and repaid in Dollars only. Masala Bonds quickly become a game-changer for Corporate Debt, market due to high benefits offered to both issuer and investors.

Some Success Scope of Masala Bond

There are many stories that running sharply towards this direction and more than 4 times oversubscribed by the people soon after its listing in the UK. The Indian Railways Finance Corporation has successfully filled the bucket with around 1 billion followed by the NTPC. Furthermore, HDFC bank also has become the First Indian Company to raise Rs 3000 Crores from Masala Bonds.

How does the Masala Bond Work?

The transaction of the Rupee- denominated bonds like buying of bonds, payments of interest, and repayment of all are expressed in Rupees. Looking at the traditional method of Foreign Currency bond that is issued by the Indian entity where the risk only lies in the hand of the investors and did not bear by the Indian Issuer Company.

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What are the Eligibility Criteria under Masala Bond?

• They can be subscribed by a resident of a country that is a member of a Financial Task Force or a Similar Regional Body
• The bonds can be easily sold, transferred or offered as a security overseas subject to IOSCO requirements
• The Securities Market Regulator signed by the International Organization of Securities Commission’s or has an MOU signed with SEBI
• The maximum borrowing will be up to INR 50 billion per financial year beyond that prior approval of RBI^[1] is to be taken

Prohibited Use of Masala Bond

• Real estate activities other than the development of affordable housing projects
• Investing in the capital market
• Activities that are prohibited as per the Foreign Direct Investment Guidelines
• On- lending to other entities for the above purposes
• Purchase of land

Benefits under Masala Bond

Benefits to Economy

• Masala Bonds helps to internationalize the Indian Rupee and give value to the Indian Financial system and economy
• Companies are protected against the risk of the currency fluctuation
• The flow in the Foreign Investment in rupee-denominated debt shows an increasing international interest in the instruments nowadays and which is a welcome development of India.
• Liquid rupee-denominated debt markets stimulate financial stability.
• The market has opened up new avenues for Bond investments by retail savers by increasing their rupee structure.

Benefits to the Investors

• It has low- credit Risk and high rupee- linked yield for Investors
• The finance Ministry favored the scheme by cutting the “TDS” on residents outside the country on the interest income from such bonds to 5% from 20% making it an attractive investment option. Into the bargain, the capital gain from rupee appreciation is fully exempted from taxation.
• India serves a unique combination of opportunity by being on a high growth trajectory with a very higher rate of Interest.

Benefits to the Issuer

• This is a good opportunity to access cheaper funding sources like the domestic market
• In the near future, Masala Bond will lower the cost of Capital which is quite high in Asia.
• This especially comes to the rescue of Indian Companies when banks back home are reluctant to lend the money at the time of need.

Conclusion

Masala Bond can be very helpful in growing funds and give impetus to the economy through the diplomatic exchange. Since the economic growth and Currency have been completely depending on the external factors, invest need to put issuers through a lot of scrutinies and have to keep an eye on their creditability.