Masala Bonds

Masala Bonds, a flavorful blend of finance and culture, have emerged as an innovative financial instrument in the global marketplace. Introduced in 2014 by the International Finance Corporation (IFC), these rupee-denominated bonds enable Indian entities to raise capital from foreign investors while also exposing them to India's thriving economy. 

In this article, we'll dive into the world of Masala Bonds, exploring their origin, unique characteristics, advantages, limitations, and impact on the Indian financial landscape. By understanding how these bonds function and their significance to both investors and borrowers, we'll uncover the reasons behind their growing popularity and potential implications for the future of international finance.
 

What is Masala Bond?

Masala Bonds represent rupee-denominated bonds that Indian entities issue outside of India. An example of Masala bonds is when the Indian Railway Finance Corporation (IRFC) issued rupee-denominated bonds in the international market, raising funds for rail infrastructure development. Masala bonds are a financial instrument that allows Indian companies or organisations to raise capital from foreign investors in Indian currency (INR) rather than the local currency of the investor. 

Introduced in 2014 by the International Finance Corporation (IFC), the primary objectives of Masala Bonds are to fund infrastructure projects, promote internal growth through borrowings, and internationalise the Indian rupee. Understanding the masala bonds meaning involves recognizing them as rupee-denominated bonds that allow Indian companies to secure funds in foreign currencies, thereby minimising currency risk for both issuers and investors on a global scale.

Since Masala Bonds are issued in Indian currency, the currency risk lies with the investor and not the borrower. This means if the Indian rupee depreciates, the foreign investor bears the loss. Masala Bonds are an attractive option for foreign investors looking to invest in Indian assets and for Indian entities seeking to diversify their funding sources and tap into the global capital market.
 

Characteristics Of Masala Bonds

The main characteristics of Masala Bonds include:

●    Investors: Masala Bonds can be issued to residents of countries that are members of the Financial Action Task Force (FATF) and whose securities market regulators are members of the International Organisation of Securities Commissions. Additionally, regional and multilateral financial institutions, where India is a member country, can subscribe to these bonds.
●    Issuers: Both Indian government entities and private corporations can issue Masala Bonds to raise funds from foreign investors.
●    Currency: Masala Bonds are issued in Indian currency (INR) rather than the local currency of the investor, which means the currency risk is borne by the investor and not the issuer.
●    Maturity Period: For bonds amounting up to 50 million USD equivalent in INR per financial year, the minimum original maturity period is 3 years. In contrast, for bonds exceeding 50 million USD equivalent in INR per financial year, the minimum original maturity period extends to 5 years.
●    Eligibility: Foreign investors keen on investing in Indian assets can subscribe to Masala Bonds. Indian entities such as HDFC, NTPC, and Indiabulls Housing Finance have successfully raised funds through Masala Bonds.
●    Usage Restrictions: Proceeds raised from Masala Bonds can be used for specific purposes, such as refinancing rupee loans, investing in non-convertible debentures, and funding integrated townships and affordable housing projects. However, the funds cannot be used in real estate activities (excluding approved projects), activities prohibited by Foreign Direct Investment guidelines, investing in domestic capital markets, purchasing land, or on-lending to other entities for restricted purposes.
 

Where Can The Proceeds From These Bonds Be Used

The proceeds raised from Masala Bonds can be used for the following purposes:
●     Refinancing of rupee loans and non-convertible debentures. 
●     Development of integrated townships and affordable housing projects. 
●    Working capital for corporations.

However, the Reserve Bank of India (RBI) has placed restrictions on the usage of proceeds from Masala Bonds. The funds cannot be used for real estate activities (excluding approved projects), activities prohibited by Foreign Direct Investment guidelines, investing in domestic capital markets, purchasing land, or on-lending to other entities for restricted purposes.
 

Benefits Of Masala Bonds

For Investors:

●    Higher Interest Rates: Masala Bonds generally offer higher interest rates compared to other investment options, making them attractive to foreign investors.
●    Confidence in the Indian Economy: Investing in Masala Bonds helps build foreign investors' confidence in the Indian economy and supports the internationalisation of the Indian Rupee.
●    Strengthening Foreign Investments: Masala Bonds facilitate foreign investors' confidence in Indian currency, encouraging more investments in the country.

For Borrowers:

●    No Currency Risk: Masala Bonds are issued in Indian currency, protecting the borrower from currency fluctuations, as the currency risk is borne by the investor.
●    Mobilizing Funds: Borrowers can mobilise a large number of funds through Masala Bonds, which can be used for various purposes such as infrastructure projects, refinancing loans, or providing working capital.
●    Portfolio Diversification: Issuing Masala Bonds helps Indian entities diversify their debt portfolio and reduce their reliance on domestic funding sources.
 

Masala Bonds vs Dim Sum Bonds vs Samurai Bonds

Masala Bonds, Dim Sum Bonds, and Samurai Bonds are all examples of foreign-currency-denominated bonds issued by entities from one country to raise funds in the currency of another country.

●    Masala Bonds: Masala bonds Issued by Indian entities in Indian Rupees (INR) to raise funds from foreign investors. These bonds expose investors to currency risk but shield borrowers from currency fluctuations.
●    Dim Sum Bonds: Issued by Chinese entities in Chinese Renminbi (RMB) to raise funds from foreign investors. Like Masala Bonds, investors bear the currency risk, and borrowers are protected from currency fluctuations.
●    Samurai Bonds: Issued by non-Japanese entities in Japanese Yen (JPY) to raise funds in Japan. In this case, borrowers assume the currency risk, and investors are protected from currency fluctuations.