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Masala Bonds

Masala bonds

Introduction

International Finance Corporation (IFC) issued and listed new debt instruments by the name of Masala Bonds on London Stock Exchange (LSE) to gather funds from foreign investors to invest in India. This can help foreign investors diversify their exposure to Indian assets. Through this issue IFC wanted to raise Rs. 1000 crore for infrastructure project in India. Although the bonds are rupee denominated but they will be settled in US dollar. IFC in their first tranche issued bonds worth $2 billion.JP Morgan was the sole runner of the issue. Most of the investors were European insurance companies.

Idea behind Masala Bonds

IFC issued the AAA rated,“masala bonds” yielding 6.3% annually,maturing in 10 years. The proceeds from this issue will be used to fund issues like Long term infrastructure bonds by Axis bank who plan to raise Rs. 6000 crore through their issue. Such exotic issues are also good for emerging economies like India as they get an infusion from global investors which strengthen the currency and create demand for further issues.

Although the bonds are issued and payable in INR, redemption and repayment will be done in USD/INR due to restricted convertibility of rupee. This does involve significant currency risk on the part of investors. Separately RBI has laid down guidelines to allow Indian companies to raise money overseas through bonds. The issue limit has been set to $750 million, this will help escalate the status of Indian rupee in international market. IFC in another issue raised 3.15 billion rupees through first of its kind 5 year Green Masala bond on LSE. Through this issue IFC plan to invest in clean tech technology. IFC plans to use the money raised through its green masala bond to invest in Yes Bank’s issue of bonds.

Benefits of Masala Bonds

Through the issue of “Masala Bonds”corporates will be able to borrow more from international markets at cheaper rates. This will increase investors’ confidence. Corporates will not be subjected to currency risk unlike External Commercial Borrowings (ECB) where the risk was borne by Indian corporates which led to huge losses due to decrease in value of INR. On the other hand with masala bonds offshore investors can diversify and increase their returns.

Masala bonds have relatively much higher interest rate. Investors can benefit when rupee appreciates against the bond’s redeemable/repayable currency. Many infra projects did not see the light of the day due to capital constraints and no new inflow of capital. Money raised from masala bonds will help boost the growth of stalled projects. The Finance Ministry is also providing an impetus to investors by decreasing tax on interest income from 20 percent to 5 per. Furthermore capital gains from appreciation of rupee is eligible for tax exemption. The global macro condition has not improved with the increased liquidity due to lower interest rates in develop economies.

However, India has shown great prospects of fast-growth and through the help on masala bonds investors will be able to enjoy greater returns. This can also help INR appreciate due to increased demand. Masala bonds can help make INR internationally recognised and highly liquid.

Conclusion

The issuance of exotic bonds like “Masala Bond” has opened doors for foreign investors. Government sector companies like Indian Railway Finance Corporation via masala bond plan to raise up to $1 billion. The Indian corporate borrowing is at$171 billion and currency devaluation has huge impact on the amount, with the issue of “Masala Bonds” the currency risk will be mitigated. Standard &Poor expect similar issues to grow and touch $5 billion annually over a period of 2-3 years this will improve the domestic market and reduce the dependence of corporates on local investors.

About Prateek Agarwal

I am Chartered Accountant by profession, practicing in Jaipur. I have interest in accounting and taxation field.

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