Attractive Funding scheme for bigger projects 5/5 (1)

Masala bond is an informal name used for Rupee denominated bond that Indian corporate borrowers can sell to investors in international markets (typically in the major financial centres like London, Singapore, New York etc).The term was used by the International Finance Corporation (IFC) to evoke the culture and cuisine of India

The interest rate faced by companies in India is often higher than the rate outside India. So some Indian companies would like to borrow abroad. Until now they had been able to borrow only in the major currencies (Dollar, Euro etc). This is called External Commercial Borrowing – ECB for short.

ECBs have few disadvantages from the perspective of the borrowing company and Reserve Bank of India(RBI).

  • The debt is in a foreign currency. Interest and principal payments have to be made in the foreign currency. However, most of the company earnings will usually be in Indian Rupee. So in the face of a falling Rupee the company faces a currency risk. This can be solved by hedging but it increases the cost of borrowing.
  • Large amount of foreign currency debt raised this way can influence the Rupee rate itself which is partly managed by RBI. This is because the companies have to sell the foreign currency and buy Rupee to use the funds in India – causing the Rupee to appreciate.
  • If large amount of debt in important domestic companies are raised this way, it can expose the economy to currency risk -reducing RBI’s ability to play the role of lender of last resort.The above three can mostly be solved if Indian corporations can borrow in Rupee itself. In that case the borrower will need to pay interest in Rupee. Then the currency risk (Rupee falling against Dollar) will be shifted to the lender (who would typically hedge their exposure by buying some currency derivative). This is what the Masala bonds do. They are RBI’s attempt to internationalize the Rupee.The Reserve Bank of India (RBI) allowed issuance of these bonds by Indian corporates as part of its fourth bi-monthly policy statement for the year 2015-16 on September 29, 2015.Masala bonds should have a minimum maturity of five years, and there is a $750 million per year limit for borrowers which can be exceeded with the RBI approval.

    Why Masala Bond is game changer of Indian Companies

    • Before the evaluation of masala bonds , the bonds are issued in rupee terms and the interest and repayments happen in dollars
    • The issuer does not bear the currency risk, and this was the biggest issue with Indian Corporates with dollar denominated bonds, For example, In 2013 the Inr crashed sharply versus the US dollars, during that time the depression of Inr to the dollar pushed many companies to bankruptcy.
    • The demand for Masala bonds has been on higher demand , there is a higher advantage of strong rupee to the investor.
    • For Indian Issuers this could save blushes of Currency risk.
    • By the Victory of Bjp in Up polls, Indian Companies are lining up Masala bonds worth $1 Billion in the next few months.
    • This may just be the beginning of emergence and acceptance of Masala bonds
    • The proceeds from the issue can’t be used for real estate activities or capital market investment. However, the proceeds from these bonds can be utilised for development of integrated township/affordable housing project or any other infrastructural development project.
    • Currently, these bonds are listed on the London Stock Exchange

    How to raise Masala bonds

      • According to RBI, any corporate, body corporate and Indian bank is eligible to issue Rupee denominated bonds overseas.
      • The Rupee denominated bonds can only be issued in a country and subscribed by a resident of such a country that is a member of the financial action task force and whose securities market regulator is a member of the 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.
      • Masala bond is issued and listed in overseas markets such as the London Stock Exchange, New York Stock Exchange
      • This bond is issued via IFC (International Finance Corporation) investment arm of World Bank.
      • In Category Fixed income markets, Masala Bonds are raised in London stock Exchange
      • London Stock Exchange has a strong track record of supporting Masala bond issuance by supranational, municipal and private company institutions on its markets
      • We can clearly say company issuing Masala Bonds will be the right candidate for making an investment. You should purchase shares of such companies.
      • Can be subscribed by a resident of a country that is a member of a Financial Task Force FATF or a similar regional body
      • Can be subscribed by a resident of a country that is a member of a Financial Task Force FATF or a similar regional body
      • Whose securities market regulator is a signatory to the International Organization of Securities Commission’s (IOSCO) or has an MOU signed with SEBI
      • Maximum borrowing will be up to INR 50 billion per financial year beyond that prior approval of RBI is to be taken

    Prohibited Use of Masala Bonds

      • Real estate activities other than development of affordable housing projects / integrated township
      • Investing in capital market
      • Activities prohibited as per the foreign direct investment guidelines
      • On-lending to other entities for above purposes
      • Purchase of Land
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  • : Narayanan Swaminathan

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