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Masala Bonds
P R E S E N T E D BY S H A R L I N P U P PA L ENROLMENT NUMBER : 2023 MBA 01 2 N D Y E A R M B A , M N LU M U M B A I Introduction Masala bonds have made a significant impact on the Indian economy. They have helped Indian entities secure foreign investments without requiring them to deal with volatility associated with foreign currencies. Plus, masala bonds are often cheaper than traditional funding sources. What are Masala Bonds ? Masala bonds are bonds issued outside of India but denominated in Indian rupees. ‘Masala’ is a Hindi word that translates to ‘spices.’ The term was initially coined by the International Finance Corporation (IFC) to evoke the cultural and culinary essence of India. They are issued by Indian entities in overseas markets : allowing them to raise funds outside India. Let us have a look at some of their key features: These are debt instrument issued in foreign markets but denominated in Indian rupees. They give Indian issuers the option to raise funds abroad. It also allows investors outside India to invest in Indian assets without taking on the currency risk associated with the Indian rupee. What are maturity period of masala bonds? The minimum maturity period for bonds raised up to 50 million USD equivalent in INR per financial year should be three years. The minimum original maturity period for bonds raised above 50 million USD equivalent in INR per financial year should be five years. Key characteristics 1. Denomination in Indian Rupees (INR) : Masala bonds are issued in Indian rupees. They are different from traditional bonds, which are typically denominated in the currency of the issuing country. This feature shields investors from currency exchange rate fluctuations. 2. Issued by Indian entities : Masala bonds are issued by Indian entities, such as: Corporations Financial institutions, or Government-backed entities Key characteristics 3. Listed on Foreign Exchange : These bonds are listed on foreign exchanges, usually in financial centres like London and Singapore For example : The first masala bond issued in November 2014 was issued by IFC was listed in London stock exchange. The listing allows international investors to access Indian markets indirectly. 4. Regulated by Indian authorities: Despite being issued abroad, masala bonds are subject to regulations by Indian authorities They are regulated by RBI and SEBI. Benefits of Masala Bonds Beneficial to Investor Beneficial to Borrower (Indian Entities) 1. Higher returns 1. Zero Currency Risk 2. Boast Confidence 2. Large Fund Mobilisation 3. Tax advantage 3. Portfolio Diversification 4. Currency Fluctuation 4. Potentially lower costs Protection Example Example Limitation of Masala Bonds
Reduced Investor Appeal
Restricted Use of Funds Emerging Market Risk The proceeds raised from these bonds can be used: In refinancing of rupee loan and non-convertible debentures. For the development of integrated townships and affordable housing projects. Working capital to corporate.
RBI mandates the proceeds raised from these bonds cannot be used: In real estate activities, not including the development of integrated townships and affordable housing projects. Activities prohibited according to Foreign Direct Investment guidelines. Investing in capital markets and usage of the proceeds for equity investment domestically. Purchase of land. On-lending to other entities for any of the above purposes.
