Masala Bonds

Introduction:

Bond is basically a debt instrument used for financing. There is a need for significant volume
of funds for infrastructural development in India. Every option is being explored whether
domestic or international. Masala bonds is one such means to bring foreign funds to India.

Masala Bonds:

Masala Bonds are bonds which are denominated in rupee and are issued to offshore (Foreign)
investors. They can be used by Indian Corporates for raising funds from abroad but in INR
(Indian rupee). Thus masala bonds are one of the many ways in which corporates can raise
money from abroad. Other avenues include ECB i.e. External Commercial Borrowings and
Foreign Currency bonds etc. The term Masala Bond was used by IFC to evoke the culture and
cuisine of India. Masala is an Indian word and it means spices. Masala Bonds are basically the
flavour of the season considering the needs of funds in India primarily for infrastructural
development. Unlike dollar bonds, where the borrower takes the currency risk, masala bond
makes the investors bear the risk.

Why Masala Bonds?

Raising debt in domestic currency is the usual way companies opt to raise money, but some
companies, banks, governments, and other sovereign entities may decide to issue bonds in
foreign currencies as it may appear to be more stable and predictable than their domestic
currency. Issuing bonds denominated in foreign currencies also gives issuers the ability to
access investment capital available in foreign markets. The proceeds from the issuance of these
bonds can be used by companies to break into foreign markets, or can be converted into the
issuing company's local currency to be used on existing operations. Foreign issuer bonds can
also be used to hedge foreign exchange rate risk. These can be issued by foreign issuers looking
to diversify their investor base away from domestic markets.

Instances of Masala Bond Issuance:

The first Masala bond was issued by the World Bank backed International Finance Corporation
in November 2014 when it raised 1,000 crore bond to fund infrastructure projects in India.
Later in August 2015 International Financial Corporation for the first time issued green masala
bonds and raised Rupees 3.15 Billion to be used for private sector investments that address
climate change in India.

HDFC became the first corporate issuer of Rupee Denominated Bonds (or Masala bonds)
overseas in July 2016, selling Rs30bn ($447m) of three-year rupee bonds in London at an
annualised yield of 8.33 per cent.

Fullerton India Credit Company, an NBFC, in October 2017 issued Masala Bonds worth Rs
500 crore to investors abroad at a yearly interest rate of 8.125% and a tenure of three years and
one month.
In September 2016, Indiabulls Housing Finance raised more than Rs 1,300 crore through
masala bonds. The issuance, which was subscribed over two times, saw strong interest from
some 20 leading global funds, including Aberdeen, Alliance Bernstein, BFAM Partners,
Blackrock, Bluebay, Jupiter and Tosca.

In November 2016, IL&FS Financial Services became the first Indian company to raise money
through overseas investors, by securing the equivalent of $50 million from Export
Development Canada (EDC).

In May 2017, Union minister Nitin Gadkari rang the opening bell at the LSE while flagging
off NHAI rupee-denominated offshore bond offer targeted at raising capital for Indias
infrastructure projects.

Data from depositories show that from July 2016 to January 2017, masala bonds aggregating
16,500 crore were raised. Majority of issues were by NBFCs having a maturity of three to
five years.

Merits of Masala Bond

For Corporates:

It helps the Indian corporates to diversify their bond portfolio.

As interest rates in developed countries are much lower compared to India, corporates
can borrow from overseas market at low interest rates.
Being an issuer, Indian entity do not have to bear the risk of currency.

For Investors :

An investor in overseas can earn better returns through masala bonds compared to the
investment returns from his home country
An investor benefits from the masala bond if the rupee appreciates at the time of
maturity.

For India:

To facilitate Indias ambitious goals like digital India, developing smart cities, Make in
India, etc, rupee denominated masala bond is an efficient way to tap foreign capital.
Long-term Rupee denominated bond is the best solution for financing long term
projects of road, power and infrastructure companies.

Demerits of Masala Bond:

Masala bonds are a good idea to shield corporate balance sheets from exchange rate risks but
they are best used in moderation. The after-effects of too much masala are not pleasant.

Along with the benefits of the masala bonds there are some risks involved with rapid shifts in
capital flows, financial candidness, and the risk that the overseas market may portray liquidity
away from the domestic market.
Way Forward for Rupee Denominated Bonds:

The issuance of masala bonds by the RBI could be a major advancement for the Indian
economy. The recent opportunity for Indian banks to raise foreign currency through RDBs is
also an enlightening step towards the growth.

As of July 2017, masala bonds accounted for Rs 402bn of Rs 2.3tn in corporate bonds held by
foreign investors - up from zero and Rs 1.6tn, respectively, a year before. Despite these inflows,
Indias corporate bond market remains far smaller, relative to its economy, than those of China
and other major emerging markets, with companies still relying heavily on bank funding.

Depending on the masala bonds for getting foreign investment is good to some extent but too
much dependence will lead to a negative exposure and ultimately affect the investments to
India.

Conclusion:

Allowing Indian firms to raise rupee-denominated loan from overseas market is a step towards
full convertibility of Indian currency and the Indian central bank is supportive of this
experiment. Masala bonds can help the rupee go global. British government is wooing masala
bond issuers and would like to position London as the global hub for offshore rupee financing.
The success of masala bonds would demonstrate overseas investors confidence on Indian
currency. In other words, successful issue of these bonds by Indian corporate would imply faith
on countrys macroeconomic fundamentals and the central banks role in currency
management.

Indian curry is quite a hit in the West. So can global investors be tempted to try out Masala
bonds?