What is Masala Bond?

Masala Bond

A Foreign Currency Convertible Bond (FCCB) is a type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. Masala bonds are issued outside India but denominated in Indian rupees, rather than the local currency. Unlike dollar bonds where the borrower takes the currency risk, masala bond investors will bear the risk. In a way, masala bond is a step to help internationalize the Indian rupee. Investors in these bonds will have a clear understanding and view on the Indian rupee risks. Therefore, a stable Indian currency would be key to the success of these bonds.

It is believed that as the investors in a masala bond will bear the currency risk, they would demand a currency risk premium on the coupon and hence borrowing cost for Indian corporate through this route would be slightly higher. It may still be cheaper if one considers the currency risk. Though raised in Indian currency, these bonds will be considered as part of foreign borrowing by Indian corporate and hence would have to follow the RBI norms in this regard. The first Masala bond was issued by the World Bank backed International Finance Corporation (IFC) in November 2014 when it raised 1,000 crore bond to fund infrastructure projects in India. The major benefit of this bond is that the currency risk is not borne by the issuer. An issuer can issue a maximum of $750 million in a year and the bonds must have a minimum maturity of five years.

Following are the benefits of Masala Bond:

The Finance Ministry has cut the withholding tax (a tax deducted at source on residents outside the country) on interest income of such bonds to 5% from 20%, making it attractive for investors. Also, capital gains from rupee appreciation are exempted from tax.

Globally, there is ample liquidity thanks to lower interest rates in developed markets, but there are very few investment options due to weak economic conditions globally. India is that rare fastgrowing large economy, and masala bonds are one way for investors to take advantage of this. These bonds are bought by retail investors as well as big institutions overseas.

The move to permit masala bonds is an attempt to increase the international status of rupee and is also a step toward full currency convertibility (the freedom to convert Indian currency into other internationally accepted currency without any restrictions).

Who can issue rupee denominated bonds?

Any corporate (entity registered as a company under the Companies Act) or body corporate created out of a specific act of the Parliament is eligible to issue Rupee denominated bonds overseas. Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) coming under the regulatory jurisdiction of the SEBI are also eligible (September 2015 regulation). In the latest regulation, banks are also allowed to issue such bonds to finance their tier 1, tier 2 capital and infrastructure financing (August 2016 regulation).

Regulation for international financial institutions where India is a member

International Financial Institutions where India is a shareholding member need not require the prior permission of the RBI to issue rupee denominated bonds if they allocate the entire proceeds from the bond issuance in India.

In other cases, where an International Financial Institution (of which India is a member) wishes to retain the freedom to deploy the issue proceeds in any member country shall require prior permission from the Reserve Bank / Government of India.