Explore Masala Bonds: Meaning, Features, Benefits, and Impact on Indian Economy and Investors

Nowadays, new and innovative financial investment instruments are always being developed, providing various options for businesses and investors of all sizes. One such option that has attracted a lot of attention is Masala Bonds. This unique financial tool offers great potential for Indian companies looking to access international markets.

In 2014, the International Finance Corporation (IFC) was the first to issue Masala bonds. These bonds are sold by Indian companies outside of India and are denominated in Indian rupees rather than the local currency of the country where they are issued. Indian companies use Masala bonds to raise funds from international investors. In this blog, we will explore the meaning of Masala Bonds, their key features, benefits, and the transformative impact they can have on Indian businesses.

What are Masala Bonds?

Masala Bonds derive their name from the rich and diverse Indian culture, reflecting their distinctive role in the global financial arena. They are rupee-denominated bonds issued by Indian entities outside of India, enabling these companies to secure funding in international markets without exposure to foreign exchange risks commonly associated with borrowing in foreign currencies.

How does Masala Bonds work?

Let’s understand the working mechanism of Masala Bonds with an Example.

Let’s consider a company named Spice Ltd. in India. They aim to raise Rs. 3000 crores for expanding their business. Spice Ltd. has already secured substantial funds from local investors, so they decided to issue these bonds overseas.

Consequently, they list their bonds on the New York Stock Exchange. These bonds are denominated in Indian rupees, meaning the debt will be in Indian currency. Therefore, if Spice Ltd. issues Rs. 3000 crores, they will receive that exact amount in Indian rupees from foreign investors.

Now, you might wonder how they will repay these investors if the currency is different. It’s simple: let’s say in a few years, Spice Ltd. needs to repay Rs. 3200 crores to their investors. At that time, they will repay an equivalent amount in US dollars (since it’s listed on the New York Stock Exchange), ensuring the investors get their due amount adjusted for currency exchange rates.

Eligibility

• Can be subscribed by a resident of a country that is a member of a Financial Task Force FATF or a similar regional body.
• Masal bonds can be sold, transferred, or used as collateral abroad, provided they meet IOSCO and FATF regulations.
• Whose securities market regulator is a signatory to the International Organization of Securities Commission (IOSCO) or has an MOU signed with SEBI.
• The maximum borrowing limit is INR 50 billion per financial year, and any amount beyond this requires prior approval from the RBI.

Features of Masala Bonds

1. Rupee-Denominated – Masala Bonds are issued in Indian rupees (INR), rather than the currency of the country where they are issued.
2. Issuance in International Markets – Masala Bonds issued by Indian entities on international platforms, allowing them to raise capital from global investors. These bonds are often listed on major international stock exchanges such as the London Stock Exchange or the New York Stock Exchange.
3. Currency Risk – Investors in Masala Bonds take on the currency risk since these bonds are denominated in Indian Rupees. If the value of the rupee declines against the investor’s home currency, they will experience a loss when converting returns back to their own currency.
4. Objective – Masala Bonds are utilized to secure funding for various objectives such as infrastructure development, business expansion, or refinancing existing debt. By tapping into international capital markets, Indian entities can access the necessary funds to support large-scale projects.
5. Interest Rates – The interest rates offered on Masala Bonds could be higher compared to domestic bonds, primarily due to the currency risk associated with them.
6. Maturity Period – Masala Bonds typically span a maturity period ranging from three to five years. This timeframe represents the duration for which investors commit their funds to the issuer, during which interest payments are made periodically, and the principal amount is repaid at the end of the maturity period.

List of Masala Bonds to Invest in 2024

Name of the Company	Issue Size	Annual return	Period	Year of Issue	Listed in	Snippets
International Finance Corporation (IFC)	INR 2 Billion	7.10%	15 years	Mar 2014	London Stock Exchange	Longest-dated offshore rupee bond to be issued
HDFC	Rs 3,000 Crore	8.33%	3 years	July 2016	London Stock Exchange	Got oversubscribed by 4.3 times
Yes Bank	Rs 3.15 Billion	6.45%	5-year	Aug 2015	London Stock Exchange	Green Masala bond to be invested in clean energy
NTPC	Rs. 2000 Crores	7.25%	5-year	Apr 2017	Singapore Stock Exchange	lowest yield for any Masala bond by an Indian issuer to date and has been priced within AAA Corporate Bonds
Indian Railway Finance Corp. (IRFC)	$500 million	3.83%	10-year	Dec 7, 2017	London Stock Exchange	Green bond under Climate Bonds Initiative to finance infrastructure for dedicated freight corridors and passenger transport in India. The debut green bond was oversubscribed 3 times.

Benefits of Masala Bonds

1. Diversification of Funding Source – By tapping into international markets, Indian companies can diversify their funding sources, thereby decreasing their dependence on domestic banks and financial institutions. This strategic move allows them to secure financing from a broader range of global investors, potentially offering more favorable terms and enhancing their financial resilience against fluctuations in the domestic financial landscape.

2. Reducing Currency Risk – Masala Bonds, being denominated in Indian Rupees, transfer the currency risk to investors rather than the issuing company. This arrangement shields the issuer from the impact of exchange rate fluctuations, ensuring greater stability in their financial planning and operations.

3. Access to International Investors – Issuing Masala Bonds enables Indian companies to reach a diverse global investor audience, which can result in more favorable financing conditions and heightened market presence. This global exposure broadens the scope for securing funding and enhances visibility in international financial markets.

4. Financial Stability – Raising capital via Masala Bonds can bolster the financial resilience of Indian companies by offering them access to long-term funding alternatives. This approach helps strengthen their financial stability, ensuring they have sustainable resources to support their growth and operational needs over time.

How Masala Bonds can be a game-changer for Indian Companies, Investors, and the Economy?

Masala Bonds have emerged as a potential game-changer for Indian companies, investors, and the economy. The term “Masala Bond” gained prominence during Prime Minister Modi’s 2016 visit to the UK, where efforts were made to position the UK as a favored investment partner for India, particularly through the London Stock Exchange listings of these bonds.

The response was overwhelming, with Masala Bonds being oversubscribed more than four times shortly after their debut, signaling their acceptance in the global market. Indian entities quickly capitalized on this momentum:

• Indian Railway Finance Corporation raised $1 billion, and NTPC issued India’s first corporate green Masala Bonds worth Rs. 2,000 crore.
• HDFC Bank followed suit by raising Rs. 3,000 crore, setting new benchmarks for the use of Masala Bonds in raising substantial funds internationally.

Investors benefit from Masala Bonds’ lower credit risk and higher yields linked to the rupee, offering attractive returns compared to bonds in developed markets where interest rates are low. For instance, while yields in US bonds average around 2%, Masala Bonds typically offer yields ranging from 5.00% to 7.00%. Moreover, Masala Bonds mitigate the risks associated with currency speculation that plagued Indian companies in the past, ensuring a more balanced risk distribution. The Finance Ministry’s recent tax reforms, reducing tax deducted at source on interest income from Masala Bonds to 5% from 20%, further enhance their appeal.

As India moves towards potentially fully convertible rupee markets with a market-determined exchange rate, Masala Bonds are pivotal in facilitating the rupee’s global integration. They represent not just a financial instrument, but a strategic tool in India’s quest for global financial prominence amidst a dynamic global economic landscape.

Final Thoughts

In conclusion, Masala Bonds is not just a financial innovation but a strategic tool that can propel India towards greater economic integration and stability in the global financial landscape. They present a compelling opportunity for both Indian companies and international investors, marking a significant step in India’s journey toward financial empowerment and global economic prominence.

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