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What are Masala Bonds?
The minimum maturity period for these rupee-denominated bonds has been reduced to three years from five years \"in order to align with the maturity prescription regarding foreign investment in corporate bonds through the foreign portfolio investment (FPI) route,” said RBI recently.
The minimum maturity period for these rupee-denominated bonds has been reduced to three years from five years "in order to align with the maturity prescription regarding foreign investment in corporate bonds through the foreign portfolio investment (FPI) route,” said RBI recently. The maximum amount a single issuer can raise through masala bonds is Rs 5,000 crore.
Among those considering options to raise funds through "masala bonds" are the road transport and highways ministry and its road building arm, NHAI. New Development Bank promoted by the BRICS is also keen on promoting masala bonds and is likely to come out with a maiden issue by December this year.
Masala bonds are rupee-denominated bonds issued by Indian corporates to overseas buyers. However, the settlement of the interest and principal would be in US dollars. This relieves the issuer of forex exchange volatility risk which is transferred to the investors. Indian companies, non-banking finance companies, infrastructure investment trusts and real investment trusts are allowed to issue masala bonds.
Masala bonds are thought of by the Indian government in view of abundant scope to raise funds in the overseas markets to fuel India's growth. Interest rates are low, but have overseas bonds have greater liquidity compared to Indian market and there is plenty of idle capital waiting to be invested. India's status as the fastest growing economy and large market is also helping the matters.
Along with exemption of capital gains tax, the withholding tax on interest income of such bonds at 5 per cent also makes it attractive for investors. Now, there is a demand to let domestic investors also put money in such bonds. International Finance Corporation (IFC) issued a 5-year green Masala bond on the London Stock Exchange, the first green bond issued in the offshore rupee markets in August 2015.
The bond raised 3.15 billion rupees for private sector investments that address climate change in India. IFC will invest the proceeds of the bond in a green bond issued by Yes Bank, one of India’s largest commercial banks. Yes Bank will invest the proceeds of its bond in renewable energy and energy efficiency projects, mainly in the solar and wind sectors. There are currently 12 “masala bonds” listed on London Stock Exchange’s markets with a combined outstanding value of Rs 65.6 billion.
