A STUDY ON THE CONCERNS ARISED FROM THE ISSUE OF MASALA BONDS BY KERALA

INFRASTRUCTURE INVESTMENT FUND BOARD ( KIIFB)

*Athira J R and Reni Susan Philip*

2nd Year M.Com. Students, Department of Commerce, University of Kerala, Kariyavattom.

Email. athiraammujr28@gmail.com

Phn. 8592014842

Abstract

Kerala Infrastructure Development Fund Board popularly known as KIIFB is a Government owned
financial institution in Kerala formed for raising funds from outside the state revenue for large
infrastructure development projects in the state of Kerala. It is a statutory body constituted by the Kerala
Infrastructure Development Fund Act 1999. KIIFB has issued masala bonds in the London Stock Exchange
on on 17th may 2019 to raise 2150 crore Indian rupee for infrastructure development. The bond has a
tenure of 5 years and a coupon rate of 9.723 percentage. Kerala is the first Indian state to go abroad to
raise funds by the issue of masala bonds. But allegations has been raised by the opposition party on the
issue of bonds. One is based on the high interest rate of the bond and on the total amount to be repaid
which adds up to 3200 crore Indian rupees. Another allegation was about the lender, a Canadian
Government owned company CDPQ's association with SNC Lavlin which was involved in a scandal
related to hydroelectric infrastructure project in Kerala back in 1995. This paper deals with the study on
the concerns araised from the issue masala bond by KIIFB and the actual facts behind the allegations and
to examine whether these allegations can cause problems to the economy of the state as mentioned by
the opposition.

Keywords: KIIFB, Infrastructure, Masala Bonds, CDPQ, SNC Lavlin

INTRODUCTION

Government borrowings is the borrowings by any Government from within the country or outside the
country. These funds are mobilized to maintain balance between revenue and expenditure, to meet
unexpected expenses, to finance public welfare program, to curb inflation, to finance economic
development and to finance public sectors. Internal borrowings means borrowing funds from within the
country and the sources include Central banks, Commercial banks, non-banking financial institutions and
individuals. External borrowings means borrowing funds from outside the country. It includes Foreign
Government and International Financial Institutions. The Indian State of Kerala has set up a financial
institution, Kerala Infrastructure Investment Fund Board (KIIFB), owned by it to raise funds from outside
the state revenue to finance infrastructure development. The project under KIIFB covers all the
important sectors of the economy like health, education, transport ( roads, bridges, waterways and light
metro rail), electricity, water supply etc. KIIFB on 25th March 2019 became the first sub-sovereign entity
in India to approach international bond market by issuing Masala Bonds to raise funds from outside and
later on listed the security on London stock exchange's International Securities Market on 17th May
2019. The bond had a tenor of 5 years with a coupon rate of 9.732 percent. The issue was to raise an
amount of 2150 crore Indian Rupees and the issue was closed on 26th March 2019. But the issue raised
several allegations against the Government by the opposition about the high interest rate and also about
the lender company.

Kerala Infrastructure Investment Fund Board (KIIFB)

Kerala Infrastructure Investment Fund Board (KIIFB) came into existence on 11.11.1999 under the Kerala
Infrastructure Investment Fund Act 1999 (Act 4 of 2000) to manage the Kerala Infrastructure Investment
Fund. The main objective of the Fund was to provide investment for projects in the State of Kerala in the
sectors of Irrigation, Roads, Power, Water Supply, Inland Navigation, Ports, Solid Waste Management and
Drainage. Comprehensive modification of the Act and Scheme has been made through an amendment
Ordinance in August 2016. With new strategy and structure, KIIFB aims to dynamically mobilise funds for
the infrastructure development of Kerala. This also includes major land acquisition needs of the State.
KIIFB have recourse to the advanced financial instruments approved by SEBI and RBI and is expecting an
upspring of sustainable infrastructure development of the State. KIIFB was constituted by Government as
a Body Corporate having perpetual succession consisting of the following members:

 Hon'ble Chief Minister- Chairman

 Hon'ble Minister for Finance - Vice- Chairman
 Chief Secretary to Government- Member
 CEO & Member Secretary
 Vice-chairman State Planning Board - Member
 Secretary (Law)- Member
 Secretary (Finance)- Member
 Secretary (Finance Resources)- Member
 Seven independent members who are experts, who have worked in an institution of national
repute in one or more of the areas of Finance, Banking, Economics.
The Board has previously mobilized funds to the tune of Rs.1023.71 crore through three series of
Redeemable and Non-Convertible Non-Statutory Lending Rate (Non SLR) bonds by private placement
fully backed by State Government Guarantee.

The fund deposited in the Government Treasury in accordance with the KIIF Act & Scheme and has been
utilised by government for funding infrastructure projects through its Plan Schemes.

Government of Kerala is now poised for accelerated investment in Infrastructure for ensuring sustainable
growth in the economy. To finance critical and large infrastructure projects the Government intends to
mobilize funds both in the medium as well as long term. It has approved a plan to issue General
Obligation Bonds against unconditional Government guarantee and Revenue Bonds with structured
payment mechanism for medium term requirement and has initiated steps to raise funds to meet long
term requirements through Alternative Investment Funds (AIF), Infrastructure Investment Trust (InVIT),
Infrastructure Debt Fund (IDF) and build the institutional framework needed for this. In this new scenario
KIIFB has been restructured to act as the key Special Purpose Vehicle (SPV) for mobilising and
channelling the funds to the various infrastructure SPVS. With the restructured and rejuvenated KIIFB
the future looks bright for the development of key infrastructure in Kerala.

MASALA BONDS

Masala bonds are rupee-denominated bonds through which Indian entities can raise money from foreign
markets in rupee and not in foreign currency. Basically, it is debt instruments used by corporates to raise
money from foreign investors in local currency. The issuance of rupee denominated bonds transfers risk
associated with currency fluctuations to investors and not to the issuers. This is especially during
depreciation of domestic currency and when borrowing is in foreign currency as company has to pay
more while repaying its debt, or while servicing interest on such borrowings if the rupee weakened.
From the issuer’s perspective, masala bonds provides cheaper borrowings compared to raising funds in
India besides helps in diversifying its sources of fund-raising. Besides, it also helps in internationalization
of the rupee and in expansion of Indian bond markets. Its issuance in long term can help to check slide of
rupee and also reduce current account deficit over time.

The Kerala Infrastructure Investment Fund Board (KIIFB) has floated masala bonds for ₹2,150 crore,
earning the distinction of becoming the first State government agency to make a debut in the
international debt market. The issue was opened on 25th March 2019 and closed on 26th March 2019
and settlement made on 29th March 2019. The resources mobilised would be channelised for funding
the infrastructure development initiatives cleared by the KIIFB director board. This is the second largest
mobilisation in the masala bond market by any public sector company in the country and in absolute size
the third largest issue done by any Indian entity in the history of the bonds since the instrument was
cleared by the Reserve Bank of India in 2016. The transaction saw strong participation from a wide
spectrum of investors which included asset managers, insurance companies, pension funds, banks as
well as private wealth managers. The masala bond market till date had seen issuance only from large
Indian corporates and public institutions like NHAI and NTPC which are all rated AAA in the domestic
market.
"The successful closing of this deal is significant from this point of view and opens up new avenues for
KIIFB. The deal is also significant for the state as the international investors have shown faith in a credit
backed by a sub-sovereign from the emerging markets for the first time.This issue has also helped to
showcase the unique strengths of Kerala in front of a wider global audience and help garner
international investments to the state," KIIFB CEO K M Abraham said.