Masala Bonds Offshore Rupee Bonds

Masala Bonds- Offshore Rupee Bonds introduced as a new concept in India.

Q A
Context: Recently RBI has allowed banks to issue Masala Bonds.
What it stands for? ‘Masala Bonds’ are Indian rupee denominated bonds issued in offshore capital markets which issued to offshore investors settled in dollars and, therefore, the currency risk resides with investors.  It is used to refer to rupee-denominated borrowings by Indian entities in overseas markets.
History of Masala Bonds The international Finance Corporation (IFC) the investment branch of the World Bank issued a 10-year, 10 billion Indian rupee bonds in November 2014 to increase foreign investment in India and mobilise international capital markets to support infrastructure development in the country.

Masala bond was the first Indian bond to get listed in London Stock Exchange. IFC named it Masala bonds to give a local flavour by calling to mind Indian culture and cuisine; names like samosa, Ganga and Peacock was there in the race along with Masala for rupee denominations. Moreover, there are popular bonds name are there in the list Dim-Sum Bond of China and Samurai Bonds of Japan, Yankee of USA and the bulldog of UK.
What are the benefits of issuing of the Masala Bonds? 1. It assists the Indian companies to diversify their bond portfolio. Now Indian companies can issue Masala Bonds in addition to the corporate bonds. It helps the Indian companies to cut down cost. If the company issues any bond in India, it carries an interest rate of 7.5%-9.00% whereas; Masala Bonds outside India is issued below 7.00% interest rate.

2. It will helps in building up foreign investors confidence in Indian economy and currency which will strengthen the foreign investment in the country. It helps companies to tap a large number of investors as these bonds are issued in the offshore market.

3. Offshore investor earns better returns by investing in Masala Bonds rather than by investing in his home country. An investor will benefit from his investment in Masala Bond if the rupee appreciates at the time of maturity.

4. The Finance Ministry has cut the withholding tax (a tax deducted at source on residents outside the country) on interest income of such bonds to 5% from 20%, making it attractive for investors. Also, capital gains from rupee appreciation are exempted from tax.

5. India is that rare fast-growing large economy, and ‘Masala Bonds’ are one way for investors to take advantage of this.

6. These measures are intended to further deepen market development, enhance participation, facilitate greater market liquidity and improve communication. It results to widen the investor pool and ultimately deepen the market for additional Tier 1 and Tier 2 bond issuance amounts to ease a key constraint for banks in accessing new AT 1 and T 2 capital, given the limited size of the domestic investor pool relative to the scale of the capital need.

7. It Allows Indian companies, banks, non-banking finance companies (HDFC, India Bulls Housing Finance are examples of such companies) and infrastructure investment trusts and real investment trusts (investment vehicles that pool money from various investors and invest in infrastructure and real estate sectors) to issue rupee-denominated bond overseas.
What are the risk factor associated with it? As it is rupee denominated bond the risk will be borne by the investor. The issuer does not carry any currency risk by issuing this bond in the foreign market. With an aim to reduce risk in banking sector, RBI has proposed to limit exposure of a bank to a business group to up to 25 per cent of its capital, down from the existing 55 per cent, Since exposure of Indian entities to commodity price risks has been accentuated by the growing integration of the Indian economy and increasing volumes of cross border trade.
What are the RBI Guidelines related to it? The RBI proposed to allow banks to raise capital through Masala (rupee) bonds in the overseas market and liberalised the currency market by allowing customers residents and non-residents to maintain big open positions under the Liquidity Adjustment Facility (LAF).

1. Banks incorporated in India will not have access to these bonds in’ any manner whatsoever’; however, investors can hedge their risks by tapping the domestic market.
2. Any investor in these bonds will be eligible to hedge both the foreign currency risk as well as credit risk through permitted derivative products in the domestic market.
3. The investor can also access the domestic market through branches of Indian banks abroad or branches of foreign banks with an Indian presence.
4. Only those Indian companies eligible to raise money through the external commercial borrowing (ECB) channel can issue rupee-linked bonds in the overseas markets.
5. Firms permitted to raise ECB without prior RBI permission can continue to raise money through bonds without informing RBI, while firms that need approval will have to seek permission from the central bank before they issue such bonds.
6. Institutions like the International Finance Corporation (IFC),  in which India is a shareholding member , will not require any permission from RBI if the issue proceeds are entirely invested in India, but it will have to take permission if it is raising money in rupees to fund any member country other than India.
7. The amount and average maturity period of such bonds should be as per the extant ECB guidelines, the call and put option if any, shall not be exercisable prior to completion of applicable minimum average maturity period.

It is a move to permit ‘Masala Bonds’ is an attempt to increase the international status of rupee and is also a step toward full currency convertibility (the freedom to convert Indian currency into other internationally accepted currency without any restrictions). This is intended to improve liquidity and depth in the foreign exchange market and the limit will be revised from time to time.

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