What Are Masala Bonds?

Referred to as rupee-denominated bonds, the Masala bonds are named to represent Indian culture. The term ‘masala’ comes from Indian spices, and these bonds are issued abroad, i.e. outside India. The Masala bonds were first issued by the International Finance Corporation (IFC) in 2014 and play a significant role in funding infrastructure projects and enhancing domestic growth. Know its influence on the financial scenario of our country and associated details here. 

Understanding Masala Bonds 

The Masala bonds are only issued outside India but in Indian currency. These are open to be taken by the countries that are part of the Financial Action Task Force and Multilateral and Regional Financial Institutions. Further, the investors’ securities market regulator must be a member of the International Organization of Securities Commission. These bonds serve the purpose of raising funds, encouraging domestic growth and internationalisation of the Indian rupee. The Masala bonds ensure no loss to the borrower but to the investor if the value of the rupee falls. 

According to the RBI, the minimum maturity of the bonds is three years if they intend to raise the rupee to $50 million in the fiscal year. However, for the higher values, the maturity is a minimum of 5 years. The bond conversion depends on the market rate set at the date of transaction settlement. The Masala bonds are regulated by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). Masala bonds are similar to Dim Sum bonds from China and Samurai bonds from Japan. 

Regulations Regarding Masala Bonds 

The RBI has set up the following regulations concerning these bonds. They are: 

• The money generated through Masala bonds is not eligible for capital market and real estate investment.
• The exception to the first regulation lies with permission for investment in affordable housing projects and the development of integrated townships.
• The Masala bonds can be issued by any of the Indian and corporate banks. 

So, where can the generated income be used? Here is what you can do with them: 

• Incorporate working capital into corporate
• To refinance the non-convertible debentures and rupee loan 
• A specific part of real estate, only limited to as stated in the above points 

Pros of Masala Bonds 

There are multiple benefits to owning and lending Masala bonds. A general benefit is the involvement of less paperwork. Further, the benefits specific to investors and borrowers are enlisted as follows: 

For Investors 

• It is a good source of income owing to the higher interest rates associated with these bonds. 
• Enhances foreigners’ trust in the Indian economy.
• They get tax exemption on the capital raised from these bonds.
• The market volatility leading to a rise in the value of the rupee offers profit.

For Borrowers

• Regardless of the change in currency value, the borrowers remain shielded from the associated risks 
• Paves pathway for capital mobilisation 
• Saves the expenditure due to interest rate being below 7%
• Aids in portfolio diversification

Cons of Masala Bonds

Some of the limitations associated with Masala bonds are: 

• The risk of downfall due to currency deters foreign investors from taking risks 
• Periodic reduction in interest rates has lowered foreigner’s interest in investment in these bonds 
• Limitations in earned capital usage deter borrowers

Wrapping Up!

Bonds are debt instruments aimed at generating funds from investors. The Masala bonds are rupee-denominated bonds issued by Indian corporations, financial institutions or government entities. Offering protection to borrowers at the cost of investors’ profit, these bonds help in capital mobilisation, allowing the country’s infrastructure growth and much more. However, there are certain limitations associated with these bonds, such as restricted allowed usage of the gained capital. 

It is recommended that the decision to go ahead must be made after clearly knowing all the facts. Connect with GoldenPi for advice. 

FAQs About What Are Masala Bonds?

1. How is India eligible for Masala bonds?

India is a member of the multilateral and regional financial institutions, which makes it eligible for Masala bonds. 

2. State the financial institutions that have already raised funds through Masala bonds. 

Institutes like Indiabulls Housing Finance, HDFC, NTPC and others are prominent examples of the case. 

3. State the specifications of the first Masala bond. 

The Asian Development Bank enlisted the first Masala bond of INR 850 crore for ten years in February 2020.