What is a Masala Bonds and what are the benefits to the Indian economy?

 

The masala bonds were issued on November 10, 2014, by the International Finance Corporation (IFC), a member of the World Bank Group in the international capital market to develop infrastructure in India. Masala bonds are also listed on the London Stock Exchange. Masala bonds started issuing in India from 2015. IFC also spelt the word, Masala Bond.

 

What are Masala Bonds?

 

Indian companies (both private and government) have been allowed by the Government of India and the Reserve Bank of India several types of instruments to raise capital from abroad, one of them is the Masala Bonds. Companies raise the capital they need by selling masala bonds abroad. That is, bonds issued in Indian rupees for investment in foreign capital markets are called masala bonds. It is a corporate bond that is issued in the international market. Masala Bonds are called masala bonds after the name of Indian spices. Their minimum maturity period is 3 years, till April 2016 this period was 5 years. It cannot be redeemed before 3 years.

 

Before the issuance of Masala Bonds, Indian companies used to issue bonds in dollars for foreign investment, if the price fluctuated, Indian companies would have to bear the loss, but this is not the case with Masala Bonds. Foreign investors buy these bonds so as to earn more interest on bonds issued in rupees. This interest is not available on bonds that are issued in dollars.

 

Companies can raise an equivalent amount of US $ 50 billion per year (US $ 750 million as of April 2016) through Masala Bonds by automatic route (ie, without prior approval). If they want to raise more money than this limit, then they have to take permission of the Reserve Bank. The money borrowed through masala bonds cannot be used to purchase capital markets, real estate and land.

 

Who can issue Masala Bonds?

 

The International Finance Corporation (IFC) first issued 1000 crore masala bonds in November 2014 for the development of India's infrastructure. Both private and public companies in India can issue this bond. Masala bonds are issued by companies in India who need to raise funds from foreign sources without any risk. Indiabulls Housing has raised $ 180 million through masala bonds. Indian Railway Finance Corporation has been approved to raise $ 1 billion through masala bonds. Apart from these, HDFC Bank, National Highway Authority and NTPC have also borrowed through masala bonds.

 

The current foreign portfolio investment (FPI) limit for corporate bonds (including 'masala bonds') is Rs 2,44,323 crore comprising only Rs 44,001 crore of masala bonds. The RBI has made a rule from October 3, 2017, that masala bonds will no longer be part of foreign portfolio investors (FPIs) and will now be considered as part of external commercial borrowings. Now if a corporate house wants to sell spice bonds abroad, then it only has to take permission from the Reserve Bank.

 

Why are masala bonds beneficial for India?

 

Masala bonds are issued in Indian rupees and upon completion of their maturity period, payments are made not in dollars but in Indian rupees, which saves a large amount of foreign exchange. The second biggest advantage of a masala bond is that the losses due to fluctuations in the exchange rate between the dollar and the rupee have no effect on the Indian company, ie the issuer of the masala bonds, but the taker. Before the introduction of masala bonds, corporate houses in India used to borrow in the form of external commercial borrowings which had to be paid in foreign currency. At the same time, losses from exchange rate fluctuations also had to be dealt with. The Indian rupee is recognized globally by masala bonds and there will come a time when Indian rupee will be accepted by every country like the US dollar.