All about Masala Bonds
A Rupee Denominated Bond issued overseas by an Indian Entity
Masala Bonds are Rupee-denominated bonds issued by Indian entities in the overseas markets.
The key objective of the Masala Bonds is to enable the Indian entities to diversify their funding sources, tap global liquidity, bring foreign funds at cheaper rates without taking any currency risk to mainly fund Infrastructure and affordable housing projects in India
Since the Bonds are denominated in Indian Rupees, the overseas investors take their currency fluctuation risk. If the INR depreciates after issuance of the Masala bond but before redemption, the currency losses needs to be borne by the foreign investor and not by the Indian entity.
Masala Bonds are different from the External Commercial Borrowings (ECB) in which funds are raised and repaid in foreign currency.
These bonds are listed and traded on the overseas stock exchanges (generally on London Stock Exchange and Singapore Stock Exchange) and not on the Indian stock exchanges.
The Reserve Bank of India (“RBI”) in September 2015 issued guidelines for issuance of Indian Rupee denominated bonds overseas. The Summary of the guidelines is as follows:
Who Can Issue?
Any company registered under the Companies Act 1956/2013, a Body corporate (entity specially created out of a specific act of the Parliament), Indian Banks, Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs).
Who Can Subscribe?
Any investor from a Financial Task Force (FATF) compliant jurisdiction whose securities market regulator is a signatory to the International Organization of Securities Commission’s (IOSCO’s) or has an MOU signed with SEBI.
What can the role of Indian banks in the issuance of Masala Bonds?
Indian banks, subject to applicable prudential norms, can act as an arranger, underwriter, market makers and traders. If Indian banks are underwriting an issue then their holding should not be more than 5% of the issue size after 6 months of the issuance.
What is the minimum tenor of Masala Bonds?
Bonds with issue size below USD 50 million equivalent in INR needs to have a minimum average tenor of 3 years and for other cases, the minimum average tenor is 5 years.
Whether issuer has the option to prepay to the investors?
No, the issue does not have the option to prepay to the investors.
What is the maximum cap on the all-in-cost of such bonds?
Prevailing Yield of the G-SEC Yield of corresponding maturity + 4.5% p.a.
What is the End-Use of Proceeds from Masala Bonds?
The proceeds can be used for any purposes except for Real estate activities (other than for the development of integrated township / affordable housing projects), investment in the capital markets, activities prohibited as per the Foreign Direct Investment (FDI) guidelines, and purchase of land.
Whether sale or transfer or pledge of bonds permitted?
Yes, it is permitted provided conditions related to whom it can be issued are satisfied.
What will be the forex conversion rate?
The investors bring foreign currency into India but the investment is denominated in INR. The conversion will be at the market rate prevailing on the date of settlement of transactions undertaken for issue and servicing of the interest and redemption of bonds.
Whether the investors can hedge their exposure in Masala Bonds?
The currency fluctuation risks are borne by the investors. RBI allows them to hedge their exposure in through permitted derivative products with the following banks
- AD Category – I banks in India or
- Through branches/subsidiaries of Indian banks abroad or
- Branches of foreign banks with Indian presence abroad
After Issuance, whether the Indian entities convert their repayment liabilities into foreign currency?
Not Permitted. The Indian entity issuing Masala Bonds overseas is not permitted to convert their INR liability of the bonds into a foreign currency liability in any manner and are not allowed to assume foreign currency risk in any manner.