Masala Bonds are debt instruments that help to raise money in local currency from foreign investors. Both the government and private entities can issue these bonds. They work just like any other normal bond, but can only be issued outside India. The issue of these bonds is in Indian currency rather than the local currency of the country where it is issued. The IFC issued the first masala bonds in India to fund infrastructure projects in 2014.
Foreign investors have named Indian Rupee Denominated Bonds as “ MASALA BONDS”, since they think that Indians are fond of spices( Masala). They have also named bonds and instruments of other countries based on popular dishes or popular customers. The bonds issued by the Japanese are called “ SAMURAI BONDS” and the bonds issued by the Chinese are called “ DIM-SUM” Bonds.
Any resident of that country can subscribe to these bonds which are members of the Financial Action Task Force and the capital regulator of the subscriber is a member of the International Organisation of Securities Commission. Multilateral and Regional Financial Institutions which India is a member country can also subscribe to these bonds. The Indian Railway Finance Corporation, NTPC, HDFC Bank, and Yes Bank are some of the organisations that issued Masala Bonds to raise capital through the international market. The conversion of these bonds happens at the market rate on the date of settlement of transactions undertaken for the issue and servicing of interest of the bonds.
RBI vide its Circular No. 05 (circular No.2017-18/64/A.P. (DIR Series) dated 22.09.2017, advised that with effect from October 3, 2017, Masala bonds (Rupee denominated bonds overseas) will no longer form a part of the limit for FPI investments in corporate bonds. These bonds will form a part of the ECBs and will be accordingly monitored. The Masala Bonds are presently reckoned both under Combined Corporate Debt Limit (CCDL) for FPI (Foreign Portfolio Investors) and External Commercial Borrowings (ECBs). After a review by the central bank has decided that these bonds will form a part of the ECBs and will be accordingly monitored. Hereafter, the eligible Indian entities proposing to issue Masala Bonds are required to approach the Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai as specified in terms of A. P. (DIR Series) Circular No.47 dated June 7, 2017.
Now onward, an amount of ₹ 9,500 crore in each quarter will be available only for investment in the infrastructure sector by long-term FPIs (i.e., Sovereign Wealth Funds, Multilateral Agencies, Endowment Funds, Insurance Funds, Pension Funds, and Foreign Central Banks). The definition of ‘Infrastructure’ shall be the same as defined under the Master Direction on ECB issued by the Reserve Bank of India. Long-term FPIs will continue to be eligible to invest in sectors other than infrastructure as usual. As per the above notification, all other existing conditions for investment by FPIs in the debt market remain unchanged.
Risk factors:
Masala bonds are issued in rupee terms and at the maturity time they will be paid in dollar terms leaving the risk of currency to the investors.
Disclaimer: This blog has been written exclusively for educational purposes. The author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
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