Masala Bonds: Definition, Features and Benefits

Masala bonds India

Masala bonds hit the news in 2014 when it was first introduced by International Finance Corporation (IFC).  IFC raised Rs.1,000 crore bond to fund infrastructure projects in India. Later in 2015, IFC issued green masala bonds and raised Rs.3.15 billion to be used for private sector investments that addressed climate changes in India. Since then, it has become a popular product in the last few years. HDFC, Yes Bank, NTPC and IRFC are among the Indian companies that have raised money through the Masala Bonds route. In this article, we will understand what exactly are masala bonds and what are the key features and benefits of masala bonds that are important for UPSC GS paper 3.

What are masala bonds?

• Masala bonds meaning: Simply put, masala bonds are rupee-denominated bonds.
• These are debt instruments through which Indian entities can raise money from overseas markets in the rupee, not foreign currency.
• A Masala bond is a Rupee bond but is repaid in dollar terms based on the extant conversion rate.
• Here, the objective is to shield issuers from currency risk and instead transfer the risk to investors buying these bonds.

Why it is called masala bonds?

• IFC used the term ‘Masala’ to evoke the cuisine and culture of India.
• Masala bonds make the investors bear the risk, unlike dollar bonds where the borrower takes the currency risks.

What is a Maharaja bond?

• In 204, International Finance Corporation, an arm of the World Bank, issued rupee-denominated borrowing in international markets.
• It came up with two bond issues:
  • Maharaja Bonds which were issued to Indian investors; and the other one was
  • Masala Bonds that were issued to overseas investors.
• These Bonds were issued with the specific approval of RBI.

Key features of masala bonds

• Eligibility: Both the government and private entities can issue masala bonds.
  • Any offshore resident can subscribe to these bonds which are members of the Financial Action Task Force.
  • Multilateral and Regional Financial Institutions of which India is a member country can also subscribe to these bonds.
• Objective: To fund infrastructure projects, internationalise the Indian rupee and ignite internal growth through borrowings.
• Minimum maturity: The minimum maturity period for such bonds will be 3 years.
• Amount: The maximum amount that any eligible borrower can raise through issuance of these bonds under automatic route is INR 50 billion or its equivalent during a financial year.

Benefits of masala bonds

Benefits for the investors

• These bonds offer higher interest rates and thus benefiting the investor.
• It also helps in building up foreign investors’ confidence in the Indian economy.
• It strengthens the foreign investments in the country as it facilitates foreign investors’ confidence in Indian currency.
• The capital gains arising from the rupee denomination are exempted from tax.
• Moreover, if the rupee appreciates at the time of maturity, it benefits the investor.

Benefits for the borrowers

• Masala bonds benefits the borrower as there is no currency risk. It saves the borrower from currency fluctuations.
• Borrowers need not worry about rupee depreciation as the issuance of these bonds is in Indian currency rather than foreign currency.
• It helps the Indian entity issuing these bonds to diversify their portfolio.
• It aids borrowers to cut down their cost as they are issued outside India below 7% interest rate.
• Since these bonds issuing are in the offshore market, it helps borrowers to tap a large number of investors

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