Masala bonds are 10 year Indian rupee bonds issued in the offshore capital market by International finance corporation (IFC), a member of the World bank group. To make it clear these bonds are issued abroad to attract foreign investments in India. These will be offered and settled in US dollars to raise Indian rupees from international investors for infrastructure development in India. For example a Rs. 1,000-crore bond with yield percent of 6.3% and a benchmark rating of AAA has been issued in London to fund infrastructure projects in India. These bonds will be listed on the London Stock Exchange(LSE). IFC will convert bond proceeds from dollars into rupees and use the rupees to finance private sector investment in India. Hence the currency risk lies with the investor and not the issuer, unlike external commercial borrowings (ECBs), where Indian companies raise money in foreign currency loans. While ECBs help companies take advantage of the lower interest rates in international markets, the cost of hedging the currency risk can be significant. If unhedged, adverse exchange rate movements can come back to bite the borrower.
These type of bonds are being used on a regular basis in countries like China and Japan.
How to buy Money bonds?
Corporates can issue bonds through the Foreign portfolio investment route (FPI). Money raised through masala bonds overseas will be counted in the overall investment limit for FPIs in corporate bonds, which now stands at Rs.2.44 trillion. FPI investment limit in corporate bonds will be expressed in rupees instead of dollars, bringing it on a par with limits in government bonds. The maximum amount a single issuer can raise through masala bonds is Rs.5,000 crore and the maturity period is 3 years.
How is it different from other bonds?
Bonds are fixed income securities that are exchanged over the counter by a company when it requires money to fund for their new projects. Most of times these kind of transactions happen locally within the country. There are a lot of positives in Masala bonds. It focuses on visibility of Indian rupee in the global market and can provide a benchmark for future issuances. A vibrant bond market can help regulate the prices and strengthen the value of rupee. They can help to shield corporate balance sheets from exchange rate risks. They can play an important role in the Indian economy. The cost of borrowing will be much lower. It can increase the demand for these kind of products thus providing the confidence for foreign investors to invest in India. On the flip side, with these benefits come the risks associated with financial openness and sudden shifts in capital flows, and the risk that offshore markets may draw liquidity away from the domestic market.
To avoid these circumstances of extreme cash crunch RBI brought in a set of regulations in September 2016 to monitor these issuances of corporates. According to the guidelines the issuance of Rupee denominated bonds overseas should be within the aggregate limit of foreign investment permitted in corporate debt as notified from time to time and is subjected to change depending on the economic conditions. Only time will tell whether it is really beneficial or not.
