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Rupee denominated bonds (masala bonds)

Rupee denominated bonds (masala bonds)
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This article gives an overview about masala bonds as how it can be issued, its uniqueness, merits, demerits and its future.

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Rupee denominated bonds (masala bonds)

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Nội dung Text: Rupee denominated bonds (masala bonds)

  1. International Journal of Management (IJM)
    Volume 7, Issue 7, November–December 2016, pp.382–386, Article ID: IJM_07_07_042
    Available online at
    Journal Impact Factor (2016): 8.1920 (Calculated by GISI) www.jifactor.com
    ISSN Print: 0976-6502 and ISSN Online: 0976-6510
    © IAEME Publication

    Syamala Devi Challa
    Research Scholar, Department of Commerce & Business Administration,
    Acharya Nagarjuna University, Andhra Pradesh, India

    Dr. A. Kanakadurga
    Assistant Professor, Department of Commerce & Business Administration,
    Acharya Nagarjuna University, Andhra Pradesh, India

    Rupee denominated bonds (RDBs) or Masala bonds are becoming more enticing for both
    investors and issuers, and with these bonds, India also stands at a profitable position. Normally
    Indian corporate issues debt instruments to raise money from the Indian investors. Unlike debt
    instruments, masala bonds are innovative type of bonds, which are linked to rupee but issued to
    overseas investors. Masala bond is an effort to protect issuers from currency risk and instead
    transfer the risk of currency to investors buying these bonds. The Reserve Bank of India (RBI)
    issued a circular authorizing the issuance of masala bonds overseas on September 29, 2015.
    International Finance Corporation (IFC), a private sector investment arm of the world bank
    named, issued and listed masala bonds, on London Stock Exchange (LSE) in need of infrastructure
    projects in India. Mortgage lender Housing Development Finance Corporation (HDFC) was the
    first Indian company who raised Rs 5000 crore by issuing masala bonds. This article gives an
    overview about masala bonds as how it can be issued, its uniqueness, merits, demerits and its
    Key words: Rupee denominated bond, External Commercial Borrowing, Overseas investment
    Cite this Article: Syamala Devi Challa and Dr. A. Kanakadurga, Rupee Denominated Bonds
    (Masala Bonds). International Journal of Management, 7(7), 2016, pp. 382–386.

    Masala bonds are creating hype in Indian as well as foreign markets. The recent success of HDFC has
    geared so many organizations such as YES bank and the Railways, had also announced their entry into the
    overseas market. Before these rupee denominated bonds, the main source for the corporate to raise money
    from the foreign market was external commercial borrowings or ECBs. External commercial borrowings
    (ECBs) are commercial loans in the form of buyers’ credit, suppliers’ credit, bank loans and securitized
    instruments like fixed rate bonds, floating rate notes and preference shares which are non-convertible,
    optionally convertible or partially convertible, issued to the non-resident lenders with a minimum average
    maturity of 3 years. ECBs can be accessed under automatic and approval routes. Automatic route covers
    the borrowings for industrial sector, real estate, infrastructure and some special service sectors. Approval

    http://www.iaeme.com/IJM/index.asp 382 editor@iaeme.com

  2. Rupee Denominated Bonds (Masala Bonds)

    route covers borrowings for the financial sector. ECBs are dollar denominated bonds which are issued and
    repaid in US Dollars. The main threat allied with ECBs is currency risk – if the domestic currency
    depreciates, the liability can significantly increase. In ECBs the majority of the risk has borne by the
    issuers. While in a rupee denominated bond, an Indian entity issues a bond in foreign markets and the
    principal reimbursement and interest payments are articulated in rupees. Masala bonds are issued in rupee
    terms and at the maturity time it will be paid in dollar terms leaving the risk of currency to the investors.
    In November 2014 International Finance Corporation (IFC) issued the first masala bond in London in
    order to increase the foreign investment in India. IFC is the largest global development institution,
    established in 1956, owned by 184 member countries. It is mainly focused on financial companies and
    private sector companies in developing countries. IFC raised 10 billion Indian rupee bonds ($163 million)
    with 10 years of maturity (Nov 2014) to sustain infrastructure developments in India. Masala bonds were
    the first rupee denominated bonds listed on the London Stock Exchange (LSE). IFC named masala bonds
    as ‘Masala’ to reflect the spiciness and culture of India. The idea was similar to Chinese Dim-Sum Bonds,
    which are Yaun-denominated bonds and named after a popular dish in Hong Kong. Another one is
    Japanese Samurai bond, which is Yen-denominated bond and named after its country’s warrior. Like any
    other off-shore bonds, masala bonds are meant for those overseas investors who want to take experience to
    the Indian assets from their locations. But they have been attached to the currency risk or exchange rate
    risks since the settlement will be in US dollars. This is because of the limited convertibility of rupee than
    the US dollars.

    According to the guidelines issued by Reserve Bank of India (RBI) in September 2015 and modified policy
    in August 2016, the money borrowed under masala bonds can only be used for infrastructure funding
    purposes. In order to achieve the capital needs and to accumulate fund for the infrastructure projects, RBI
    allowed banks to issue masala bonds or RDBs in August 2016. The overall guidelines underlying for rupee
    denominated bonds will be similar to that for External Commercial Borrowings (ECBs) 1.

    2.1. Issuers of RDBs
    Any corporate body or corporate (an entity registered under Companies Act as a company) formed with a
    specific Parliament Act is eligible to issue Masala bonds overseas. According to the September 2015
    regulation Infrastructure Investment Trusts (InvITs), Real Estate Investment Trusts (REITs) coming under
    SEBIs jurisdiction are also eligible. From the recent August 2016 regulation, banks are also permitted to
    borrow such bonds in order to finance their tier 1, tier 2 and infrastructure funding.

    2.2. Corporate Issuers and Maturity Period
    Indian corporate who is entitled to raise External Commercial Borrowings (ECBs) is also allowed to issue
    off-shore Rupee denominated bonds. The RDBs borrowing procedure pursues the same guidelines as the
    corporate follows to issue ECBs. The corporate need RBI permission to avail masala bonds if they issue
    ECBs under approval route, whereas under automatic route of ECBs issue, RBI approval is not needed.
    The payments of coupon and redemptions are settled in foreign currency. The amount to be issued, the
    average maturity period (minimum of 3 years) and end use protection (the reason for which these masala
    bonds are issued) also consider as per the guidelines under External Commercial Borrowings (ECB) 1.

    2.3. Interest Payments and Maximum Amount
    The payments of interest (coupon payment) should not be more than 500 basis points that means under
    consequent maturity it shouldn’t be above the superior yield of the Indian Government’s security. For
    instance, if the interest rate of a G Sec five-year bond is 6%, then the rate of interest for rupee denominated
    bond should not be above 11%. For the conversion of USD-INR, the reference rate of the Reserve Bank on
    that date of issue will be pertinent. An eligible issuer can raise a maximum of INR 50 billion or its

    http://www.iaeme.com/IJM/index.asp 383 editor@iaeme.com

  3. Syamala Devi Challa and Dr. A. Kanakadurga

    equivalent through RDBs under automatic route during a financial year. This limit may be more than the
    permitted amount under automatic route of ECB. The fund collected from rupee denominated bonds must
    not be used for some restricted areas of FDI and for real estate activities (except for the development of
    housing projects and townships).

    Table 1 Recent Masala Bond issuers in London Stock Exchange (As on October 2016)

    Issuers of Rupee denominated bond in Transaction Details Issuer
    London Stock Exchange (LSE) profile
    Issue Date Issue Size Coupo3 Maturity Rating
    International Finance Corporation (IFC) 21 Mar 2016 INR 2bn 7.1% 15 year AAA/Aaa
    10 Aug 2015 INR 3.15bn 6.45% 5 year
    18 Nov 2014 INR 10bn 6.3% 10 year
    National Thermal Power Corporation 10 Aug 2016 INR 20 bn 7.375% 5 year BBB-
    (NTPC) (emr)*

    Housing Development Finance Corporation 12 Oct 2016 INR 20 bn 7.25% 40 months AAA/
    (HDFC) 21 July 2016 INR 30 bn 7.875% 37 months A1+**
    British Columbia 09 Sep 2016 INR 5bn 6.6% 40 months AAA/Aaa
    European Bank for Reconstruction and 4 Mar 2016 INR 5 bn 6.4% 3 year AAA/Aaa
    Development (EBRD)

    Source: London Stock Exchange

    3.1. International Finance Corporation (IFC)
    • IFC is one of the world’s prime investors for developing countries, mainly investing about $11 billion over
    the last decade in long-term financing for climate-smart projects like energy efficiency, green buildings,
    sustainable agriculture, private sector adaptation to climate change and renewable power.
    • IFC issued INR 2bn in 15 year masala bond in March, 2016 marking as a historic longest-dated overseas
    • The proceeds of the bonds will be used to progress private sector development in India.

    3.2. National Thermal Power Corporation (NTPC)
    • NTPC is India’s biggest power utility company and its head quarters are located in New Delhi. NTPC was
    established by Government of India in 1975 and it was awarded Maharatna status in May 2010.
    • The company’s core business entails producing and selling electricity to State Electricity Boards and state-
    owned power distribution companies in India.
    • NTPC initiated a green bond2 structure which has been certified by Climate Bonds, an associate of London
    Stock Exchange independently.
    • The proceeds of the bond will be invested to support solar and wind projects supplementing Indian
    Government goal to produce 175 GW of renewable energy by 2022.

    3.3. Housing Development Finance Corporation (HDFC)
    • HDFC founded in 1977, is a foremost provider of Housing Finance and it is established as the first
    specialized Mortgage Company in India.

    http://www.iaeme.com/IJM/index.asp 384 editor@iaeme.com

  4. Rupee Denominated Bonds (Masala Bonds)

    • HDFC stand for the world’s first Indian corporate issued Masala bond.
    • The corporation has raised a total amount of Rs 5,000 crore through the issue of Rupee denominated bonds
    (as on October 14, 2016).

    3.4. British Columbia
    • British Columbia, a Canadian Province was the first foreign government unit to issue a rupee denominated
    • The income from the bond will be utilized by HDFC (one of India’s leading financial services and banking
    companies) in India’s housing industry.

    3.5. European Bank for Reconstruction and Development (EBRD)
    • EBRD was founded in 1991, is a multilateral international financial institution which uses investments as a
    device to build market economies. It is owned by two governmental institutions (EU and EIB) and 65
    • The European Bank for Reconstruction and Development has been an important issuer of Indian Masala
    bonds in London.

    4.1. To Corporate
    • It helps the Indian corporate to diversify their bond portfolio. While the bond issue is in off-shore market, it
    facilitates Indian companies to valve a large number of investor base.
    • As interest rates in developed countries are much lower compared to India, Corporate can borrow from
    overseas market at low interest rates.
    • Being an issuer, Indian entity do not have to bear the risk of currency. That means there is any fluctuation in
    the currencies, the risk is totally lies with the off-shore investor.

    4.2. To Investors
    • An investor in overseas can earn better returns through masala bonds compared to the investment returns
    from his home country (In US the bond yield3 is only just 3% whereas in masala bond it ranges from 5% to
    • An investor benefits from the masala bond if the rupee appreciates at the time of maturity.
    • Rupee denominated bonds are building interest in the investors who are even unwilling to invest in the off-
    shore market.
    • In order to attract and benefit more foreign investors, the Ministry of Finance has cut the withholding tax (a
    deducted tax at source on populace outside the country) on interest proceeds of bonds from 20% to 5%. And
    capital gains from appreciation of rupee are also exempted from tax.

    4.3. To India
    • As India has ambitious with few many goals like digital India, developing smart cities, Make in India etc, it
    will need around INR 26 lakh crore in next five years. Rupee denominated masala bond is an efficient way
    to tap foreign capital.
    • Masala bonds help in rising up the off-shore investor’s confidence and knowledge about Indian economy.
    • In India many long term projects like infrastructure and power are hindered due to shortage of capital. Long-
    term Rupee denominated bond is the best solution for road, power and infrastructure companies.

    http://www.iaeme.com/IJM/index.asp 385 editor@iaeme.com

  5. Syamala Devi Challa and Dr. A. Kanakadurga

    Along with the benefits of the masala bonds there are some risks involved with rapid shifts in capital
    flows, financial candidness, and the risk that overseas market may portray liquidity away from the
    domestic market.

    The issuance of masala bonds by the RBI could be the major advancement for the Indian economy. The
    recent opportunity for Indian banks to raise foreign currency through RDBs is also an enlightening step
    towards the growth. Depending on the masala bonds for getting foreign investment is good for some extent
    but too much dependence will lead to a negative exposure and ultimately it affect the investments to India.

    [1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10153&Mode=0
    [2] Dr. Sonali N. Parchure, Influence of the Financial Literacy on the Investor Profile of the Individual
    Investors. International Journal of Management (IJM), 7(5), 2016, pp. 141–153.
    [3] http://www.investopedia.com/terms/g/green-bond.asp
    [4] http://www.investopedia.com/ask/answers/020215/what-difference-between-yield-maturity-and-coupon-
    [5] http://www.londonstockexchange.com/specialist-issuers/debts-bonds/masala/masala-presentation.pdf
    [6] Prof. Suresh Kumar S, Dr. Joseph James V and Dr. Shehnaz S R, The Single Index Model – An Exoteric
    Choice of Investors In Imbroglio – An Empirical Study of Banking Sector in India. International
    Journal of Management (IJM), 7(5), 2016, pp. 210–222.
    [7] https://www.rbi.org.in/Scripts/FAQView.aspx?Id=113

    http://www.iaeme.com/IJM/index.asp 386 editor@iaeme.com

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