Concept of Rupee Dominated Bonds or Masala Bonds

Concept of Rupee Dominated Bonds or Masala Bonds

The International Finance Corporation (IFC) issued Masala Bonds in India in 2014. (IFC). The IFC was the first in India to issue masala bonds to support infrastructure projects. To raise funds, Indian corporations or enterprises issue masala bonds outside of India. These bonds are issued in Indian rupees rather than local currency. As a result, if the rupee rate declines, the investor would lose money.

What are the Features of Masala Bonds?

Masala Bonds are majorly the rupee-denominated bonds which is basically issued by Indian firms outside of India for attracting international investors. They can be termed as the debt products which will provide an aid in the raising of funds in local currency from investors who are foreign or are international. These bonds can be issued by both the private entities or business and also the government-based entities.
These bonds are available to investors who are foreign investors or are from outside India who want to invest in Indian assets. These bonds, which are members of the Financial Action Task Force, are available to any resident of that nation. The securities market regulator of the investors who subscribe should be a member of the International Organization of Securities Commissions. These bonds can also be purchased by Multilateral and Regional Financial Institutions, of which India is a member.
The bonds raised to the rupee equivalent of $50 million in a financial year have a three-year maturity period, according to the RBI. Bonds raised above the rupee equivalent of $50 million in a financial year have a five-year maturity period. These bonds are converted at market rate on the day of settlement of transactions for the issuing and service of the bonds’ interest.

Where all can I Use my Proceeds from this Bonds?

The revenues from these bonds can be utilized for a variety of purposes, including:

• In rupee loan refinancing and non-convertible debentures.
• Integrated townships and affordable housing developments are being developed.
• Corporate working capital.

The revenues from these bonds are not allowed to be utilized for the following purposes, according to the RBI:

• Not considering the building of integrated townships and affordable housing developments, in real estate activity.
• Foreign Direct Investment guidelines ban certain activities.
• Investing in capital markets and using the proceeds to make domestic stock investments.
• Land acquisition.
• On-lending to other companies for any of aforementioned reasons.

What are the Advantages of the Masala Bonds?

Masala bonds provide a number of advantages. Subscribing to and issuing these bonds helps both investors and debtors. The following are the advantages which are held by the investors in the masala bonds:

• It has higher interest rates, which is advantageous to the investor.
• It contributes to the trust of foreign investors in the Indian economy.
• It contributes to the country’s foreign investment strength by increasing foreign investors’ confidence in Indian currency.
• Capital profits derived from the rupee denomination are tax-free.
• The investor profits if the rupee appreciates at the time of maturity.

The following are the advantages for the borrowers:

• The borrower gains since there is no currency risk. The borrower is protected against currency swings.
• Borrowers will not be affected by rupee depreciation because these bonds are issued in Indian currency rather than foreign money.
• The borrower has the here can get the chance or the advantage to raise a huge sum of money, which is a resource for the business.
• It aids the Indian organisation that issues these bonds in diversifying its portfolio.
• It helps borrowers save money because it is issued outside of India at a rate of less than 7%.
• Because these bonds are issued in the offshore market, borrowers can access a larger pool of investors.

What are the Disadvantages of Masala Bonds?

There are certain disadvantages which are held by the Masala Bonds or the rupee-denominated bonds and this includes the following majorly:

• Masala Bonds have been subjected to periodic rate cuts by the RBI, making them less appealing to investors, who invests in bonds.
• The funds obtained through these bonds cannot be used in all circumstances, again causing a major disadvantage to the investor.
• There are specific areas in which money can be invested.
• According to Moody’s, the long-term viability of Masala Bond financing is an issue since investors are anticipated to be wary of taking on currency risks in emerging nations.

FAQs or Frequently Asked Questions

1. What is the minimum maturity period for the Masala Bonds?

Three years shall be the minimum maturity length for bonds raised up to 50 million USD equivalent in INR every financial year. Bonds raised in excess of 50 million USD equivalent in INR every financial year shall have a minimum initial maturity length of five years.

2. Why is this particular bond referred to as Masala Bonds?

Masala bonds are issued outside of India; however, they are denominated in Indian Rupees instead of the local currency. Masala is a term from India that means “spices.” The name ‘Masala’ was coined by the IFC to describe Indian food and culture. Unlike dollar bonds, where the borrower bears the currency risk, masala bonds place the risk on the investors.

3. Which entity in India made Masala Bonds?

On the London Stock Exchange, the state-owned Kerala Infrastructure Investment Fund Board or the KIIFB debuted its INR 2,150 Crore ‘masala bond’ offering. It is India’s first sub-sovereign entity to access the foreign bond market in the rupee.

4. What is the main objective of the Rupee Dominated Bonds or the Masala Bonds?

Masala bonds were created with the primary goals of funding infrastructure projects, internationalising the Indian rupee, and igniting internal growth through borrowing.

5. When did India issue its first Masala Bond?

Masala bonds are bonds that are denominated in rupees. In November 2014, the World Bank-backed IFC issued the first Masala bond in India, raising Rs.1,000 crore to support infrastructure projects in the country. In August 2015, the IFC issued green masala bonds, raising Rs.3.15 billion for private sector projects in India that address climate change.

6. Does Masala Bonds have any cons or disadvantages?

Masala bonds have been subject to repeated rate decreases by the RBI, making them less tempting to investors. The funds earned through these bonds will not be able to be utilised in all fields. There are specific areas in which money can be invested. According to Moody’s, funding sustainability through Masala bonds is difficult since investors are likely to be wary of taking on currency risks in emerging nations.

7. Which are the areas where one can use the proceeds of the Masala Bonds?

Following are the two ways in which the proceeds from Masala Bonds can be used:

• As working capital in case of the corporates
• And also, for the re-financing of non-convertible debentures and rupee loans.