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No More Spice Left In Indian Masala Bonds

These bonds help the corporates to diversify their bond portfolio as the issue is in off-shore market

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Masala bonds are rupee denominated bonds issued by Indian companies in the overseas market. These bonds primarily help Indian companies to hedge the risk of currency fluctuation as these bonds are issued in Indian rupees.

These bonds also help the corporates to diversify their bond portfolio as the issue is in off-shore market. It also helps in borrowing at cheap credit, as the interest rates in developed markets are much lower compared to India.

The issuance of masala bonds in the overseas market was well accepted by the investors globally as the investors could earn better returns through masala bonds compared to the investment returns from their home country, they could benefit from these bonds if the rupee appreciates at the time of maturity and capital gains from appreciation of rupee are also exempted from tax.

Issuance under masala bonds for Q4FY17 increased to Rs 19,120 crore against Rs 5,570 crore for the previous quarter Q3FY17 and stood at an aggregate Rs 30,620 crore for entire FY17.

According to ICRA “Given the attractiveness of RDBs, the growth in such issuances is expected to dampen issuances of foreign-currency-denominated external commercial borrowings (ECBs).”

During 2007, Indian companies that had raised money abroad by issuing Foreign Currency Convertible Bonds found themselves in a soup when the rupee depreciated sharply following the global financial crisis.

However, the recent move by Reserve Bank of India (RBI) in June 2017 has taken off all the spice from these masala bonds.

RBI has recently introduced new guidelines for the issue of masala bonds:

1. Any issuance of Masala bond would now be examined by Foreign Exchange Department of RBI

2. Masala bonds must have a minimum maturity of three years for issuances of up to $50 million. Sales above that amount would need to have maturities of five years or above.

3. The all-in-cost ceiling for such bonds would be 300 basis points over the prevailing yield of the Government of India securities of corresponding maturity.

4. Entities permitted as investors under the regulatory provisions for these should not be related party within the meaning as given in Ind-AS.

RBI said it was changing the rules for masala bonds "with a view to harmonize" the present regulations on external commercial borrowings.

However, these changes haven't gone down well with India Inc. Many experts feel that the new guidelines would most likely impact lower-rated issuers, as they will now have less flexibility while issuing masala bonds.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Siddhartha Gupta

The author has been working in the financial industry for more than 4 years. He is currently working as an Investment Consultant. His educational background in finance and marketing has given him a broad base to approach topics in his field.

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