The Curious Case of Masala bonds!

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masala-bonds

India’s food pallet is unparalleled. 

 

The dishes, the fragrance, the spices. Oh! the spices. The mindblowing aroma of tadka, the colourful masalas blending in your kadai, the splattering of oil!

 

And, if you weren’t aware, India’s flavorful masalas are not just found in the grocery store. Our investment space is quite colourful itself. 

 

Let us introduce to you – Masala Bonds!

 

Masala Bonds – The Spicier Alternative?

 

Masala bonds are basically rupee denominate bonds which are issued by Indian entities, but outside India. They work just like any other normal bond, but, these bonds are only issued outside India. 

 

What’s the unique part?

 

The money raised is in Indian currency.  The first masala bond was issued in 2014 by the International Finance Corporation to fund an infrastructure project in India. 

 

So, how do these bonds work?

 

Let’s say there’s a company called Pizza Ltd India. which wants to raise an amount of Rs. 4000 crores. Now Pizza Ltd India. says they have already raised a significant amount of money from Indian investors, so they want to issue these bonds overseas. 

 

And hence, they list their bonds on the London Stock Exchange. 

 

Now, these bonds are rupee-denominated bonds, which means that the debt will be raised in Indian currency. 

 

Therefore, if Pizza Ltd India. wants to issue Rs. 4000 crores, it will raise a sum which is equal to Rs. 4000 crores in Indian currency, but, from foreign investors. 

 

Now, you must be asking how they can repay their investors if the currency is different?

 

Simple, suppose after a few years they need to repay Rs. 4,200 crores to their investors. At that point of time, they will repay an amount that is equivalent to Rs. 4,200 crores, but in pounds (because it is listed on London Stock Exchange). 

 

Benefits of Masala Bonds

 

masala-bonds-alternatives

But why will a company issue masala bonds and why will foreign investors invest in them? What’s in it for the lenders and borrowers?

 

Let’s find out.

 

For Investors:

 

1. Economic boost

Masala bonds take the Indian debt market which is definitely a boost for the economy and is a platform that can even generate more foreign direct investments in India. Plus, they sound so cool!

 

2. Tax Exemptions

Yeah, you heard it right! Capital gains earned through rupee denominations are exempted from tax. That sounds like a pretty good reason to me already.
 

3. If the  Rupee Appreciates!

If the value of rupee appreciates by the end of the tenure, then it’s a natural win-win situation for the investor.

 

Who Can Invest in Masala Bonds?

 

We know you want to know who exactly can invest in these bond, 

 

For Borrowers

 Here’s how borrowers can invest in them.

 

1. More Funds 


By issuing masala bonds, a huge amount of money can be raised, which can be channelled to grow the company’s scale and operations

 

2. The Reach

Let’s take an example of an MNC. If an MNC is present in 2 countries V/s if it is present in 200 countries. Which company will have a larger presence?


You guessed it right. The company that is present in 200 countries.

By listing their funds in foreign countries, the reach increases significantly. 

 

3. No Currency Fluctuations

The borrowers do not need to worry about local currency fluctuations, since the bonds are listed in another country’s exchange, which is a good thing because presently, India’s currency is volatile.

 

 

Are There any Limitations?

 

The following can be considered limitations of masala bonds

 

1. The Money Can’t be Used for Everything


RBI regulates bonds and RBI restricts the money raised through these funds to be used only in certain fields, like housing projects and for the development of townships. 

 

2. Relatively Riskier


Financing through masala bonds, is ofcourse riskier, because you are raising money from a foreign market, which can include currency fluctuations, emergency financial crisis etc.

For example, suppose a company invests in an emerging market. Usually, emerging markets are more volatile and they are prone to political fluctuations as well. Which may not be an ideal situation, would it?

 

3. Restrictions by RBI

 

Every sector has a boss and the boss of the Indian financial sector is RBI, the central bank of India!

 

RBI restricts the usage of masala bonds in certain sectors, like real estate activities that do not include the development of a township, buying land or use the proceeds to invest in the equity market. 

 

And no prizes for guessing, If companies do not adhere to these laws, they will be sued. 

 

Significant Masala Bond Issuances Over the years

 

Company  Amount  Year
The International Finance Corporation 1000 crores 2014
Indian Renewable Energy Development Agency (IREDA 1950 2017
Kerala Infrastructure Investment Fund Board (KIIFB) 2500 crores 2019
HDFC  1000 crores 2019

 

Whether it be in the kitchen or the market, masala bonds add a unique flavour. These bonds are open to residents who are part of the Financial Action Task Force and they can be issued by government and private entities. 

 

How this investment class will pan out in the future?

 

We’ll have to wait and watch.

 

Till then,

 

Happy Winting!

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