In this article we will discuss in detail about an innovative source of funding which are called as “Masala Bonds” in international financial market. “Masala Bonds” is named after Indian spices to promote Indian culture and heritage throughout the world. Masala Bonds are Indian rupee denominated bonds (RDB) issued by Indian entities in offshore market in INR rather than the local offshore currency.
They are issued in INR and settled in US dollars meaning the Indian rupee will be the base currency for determining present and future value.
What’s the Catch…?
The idea behind introduction of masala bonds by an Indian entity or corporate is to protect them from any kind of exchange rate risks because the exchange risk will be borne by the overseas investors as they are investing in indian rupee denominated bonds.
Well the investors may protect themselves by hedging and that’s a separate thing generally seen in ECB’s but Indian companies atleast can save themselves from the risks arising out of currency fluctuation.
HISTORY OF MASALA BONDS
History of masala bonds can be traced about five years ago from the regime of the UPA government when the Indian government in consultation with International Finance Corporation (IFC) introduced this concept so as to encourage falling Indian rupee at a record level. Thereafter IFC pioneered nearly INR 2 billion the first ever programme in 2013 to support market development and basic infrastructural activities in India.
An important point to note here is that IFC is an international institution that offers advisory, investment to encourage development in developing economies. It is an investment arm of the world bank based in USA. This set up the way for Indian entities and corporate to tap alternate international source of funding.
Later these offshore bonds were named as “Masala Bonds” due to Indian culture.
WHY INDIAN ENTITIES GO FOR MASALA BONDS…? LETS SEE
i) The funds generated are used for promoting infrastructural Projects and fuelling Indian economy.
ii) As mentioned above to save Indian entities from exchange rate fluctuations.
iii) Borrow at comparatively lower prices than the domestic market.
NOW LETS SEE SOME OF THE MASALA BOND ISSUES:
HDFC THE FIRST COMPANY TO GO LONDON VIA MASALA BONDS
HDFC became the first corporate to go London via issue of masala bonds in the year 2016 by raising funds to the tune of INR 30 billion (approx) at fixed coupon rate and maturity. The issue was oversubscribed and finally got listed on London Stock Exchange to facilitate liquidity in secondary market.
ISSUE BY STATE RUN NTPC
NTPC the power giant also raised INR 2000 Cr via issue of these bonds in 2017 for financing its Capital Expenditure requirements. It didn’t stopped here rather it came with a second issue thereafter.
RECENT ISSUE BY KERALA INFRASTRUCTURE INVESTMENT FUND BOARD
KIIFB a state government agency become the first Indian state to successfully issue and list its debute Masala Bonds on LSE this year.
WHY FOREIGN INVESTORS WOULD PREFER MASALA BONDS…?
It is clear that issuing masala bonds offers benefits to Indian borrowers but why a foreign investor will take the exchange risk and invest in RDB(s).
Let us understands
It is obvious that an investor would be ready to take higher risk if he has chances of getting higher return so same is the case here actually Masala bonds appeals more to foreign investors due to comparatively higher rates of interest provided by the Indian issuer than their foreign counterparts.
It has been noticed that on average, Masala bonds have an interest rate higher compared to the standard LIBOR (London Interbank Offer Rate). The interest rate is higher to compensate for the currency risk.
Summarizing, a foreign investor has a upper hand to invest in masala bonds as compared to their domestic returns.
The promoters of any Company under the Companies Act, body Corporate constituted under Special act of Parliament, Indian Banks and certain other forms of business excluding LLP, Partnerships can tap this market.
The Masala Bonds can either be privately placed or listed on exchanges as per the offshore laws of the land. The investors has the option to transfer to another person either domestic or offshore but there are restrictions on the issuer regarding its end use.
In today’s falling Indian Financial Market due to growing NPA(s) along with many other economic factors, PSU banks have almost stopped lending while Private Banks are now more cautious making it difficult for the Indian promoters to raise funds. Therefore Masala Bond is an innovative way of raising funds from the international financial market subject to complying the eligibility criteria.
Also India is a fast growing economy and overseas investors prefers investment destinations like india that has a huge potential to become the global leaders in the years to come.