Masala Bonds


In November 2015, IFC, the private investment arm of the World Bank Group, has announced a new issuance of its Rs 1.7 billion masala bond. Masala Bonds are rupee denominated bonds issued in foreign markets. This issue of the masala bond, listed on the London Stock Exchange, has been completely subscribed by KBC Asset Management SA, a leading European asset management company. IFC will use the money to support Indian companies preparing to issue their own masala or rupee bonds. The bonds are issued under IFC’s $3 billion global rupee bond programme. IFC’s rupee bonds are the first of its kind.
Masala bonds widen the range of investment opportunities for money managers. Since these are rupee bonds, they protect the Indian issuer from foreign currency fluctuations. They are also a cheaper source of financing and attract new investors. For the investors, rupee bonds offer a reliable entry into what is perceived as the Indian growth story. They earn higher interest than they would if they invested in the US or Europe.
But, what has been achieved till now is very little, there is still some way to go. India’s bond market is a mere 10 percent of its GDP. Compare this to 18 percent in China and over 90 percent in the US However, for individual companies, raising money from selling offshore bonds is not easy. Foreign investors may hold back from investing in companies they have no knowledge of and which do not have an adequate rating. This is where IFC can play an important role. Its involvement will raise investor confidence and attract more funds.
In all, IFC has issued the equivalent of Rs 107 billion through 14 transactions in masala bonds in the past two years. The success of IFC’s Masala Bond Programme also reflects the confidence that overseas investors have in the Indian growth story.
Boost Infrastructure in India
Masala bonds will give a boost to infrastructure financing in India. These rupee-denominated bonds issued in offshore capital markets will be offered and settled in dollars to raise rupees from global investors. They attract unutilized funds back into circulation.
IFC will convert these bonds from dollars to rupees to finance private investment in India. If these bonds are lapped up by global investors, it would reflect their confidence in the Indian economy and its currency. It will also raise demand for similar products.
The Reserve Bank of India in June 2015  issued a much-awaited framework for Indian companies to sell rupee-linked bonds offshore but failed to cheer the market with restrictive guidelines.

The global rupee bonds, known as Masala bonds, will be subject to restrictions on pricing, volume and end use. Banks incorporated in India will also be barred from issuing such bonds.
The RBI has proposed a cap of 500bps above the sovereign yield of the Indian Government bonds of corresponding maturity for Masala bonds.
The bonds will be subject to the existing external commercial guidelines, or ECB, rules. These prevent most Indian borrowers from raising funds from abroad beyond US$750 million per annum.
In addition, borrowings of three to five years have a price cap of 350bp over six-month Libor and those of more than five years have price caps of 500bp over Libor.

The RBI has also categorically denied access to Masala bonds to banks incorporated in India. Some Indian banks have been lobbying to raise their Additional Tier 1 requirements through this new funding route as the local market is facing investor saturation.
Indian banks need to raise Rs. 40,000 crore (US$6.2 billion) to Rs. 50,000 crore of AT1s in the current financial year ending March 2016, according to rating agency Icra.
Between FY16-19, the requirements of Indian banks for such loss-absorbing Basel III-compliant capital will be Rs. 1.6 lakh crore to Rs. 2 lakh crore, Icra said earlier this week.
In early April, the RBI announced its decision to allow Indian companies to raise funds through the Masala bond market.
The move was seen as a step towards full currency convertibility and potentially even lowering the cost of capital that is among Asia's highest.
So far, only the Asian Development Bank and the International Finance Corp, an arm of the World Bank, have issued Masala debt in 2014, allowing investors to access rupee debt outside India.

Tuesday, 08th Dec 2015, 10:17:56 AM

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