MASALA BONDS

Subject: Economy

Context: Overseas borrowing through rupee-denominated bonds (masala bonds), which has been declining over the last few years, witnessed a sudden surge in interest from domestic borrowers.

Concept:

Masala bond – a form of external commercial borrowing (ECB) – was launched by the government and International Finance Corporation (IFC) in 2014-15 to contain the account deficit, reducing rupee volatility, attracting long-term funds for infrastructure projects and internationalising the rupee. The term ‘masala’ was ascribed to these bonds to give an Indian flavour, similar to ‘Dim Sum Bonds’ of China or Turkey’s ‘Baklava Bonds’

Masala Bonds

They are rupee-denominated bonds i.e. the funds would be raised from overseas market in Indian rupees.

According to RBI, any corporate, body corporate and Indian bank is eligible to issue Rupee denominated bonds overseas.

While companies can raise funds through these bonds, there are limitations for the use of such proceeds.

RBI mandates that the money raised through such bonds cannot be used for real estate activities other than for development of integrated township or affordable housing projects.

It also can’t be used for investing in capital markets, purchase of land and on-lending to other entities for such activities as stated above.

Minimum maturity of masala bonds

According to RBI, the minimum maturity period for Masala Bonds raised up to Rupee equivalent of USD 50 million in a financial year should be 3 years.

And for bonds raised above USD 50 million equivalents in INR per financial year should be 5 years.

The conversion for such bonds will happen at the market rate on the date of settlement of transactions undertaken for issue and servicing of the bonds, including its redemption.

Where can these bonds be issued and who can subscribe?

The bonds can only be issued in a country and subscribed by a resident of such country that is a member of FATF and whose securities market regulator is a member of International Organisation of Securities Commission.

While residents of such countries can subscribe to the bonds, it can also be subscribed by multilateral and regional financial institutions where India is a member country.