‘Masala Bonds’ are Indian rupee denominated bonds issued in offshore capital markets which issued to offshore investors settled in dollars and, therefore, the currency risk resides with investors. It is used to refer to rupee-denominated borrowings by Indian entities in overseas markets.
The International Finance Corporation (IFC) the investment branch of the World Bank issued a 10-year, 10 billion Indian rupee bonds in November 2014 to increase foreign investment in India and mobilize international capital markets to support infrastructure development in the country.
Masala bond was the first Indian bond to get listed in London Stock Exchange. IFC named it Masala bonds to give a local flavour by calling to mind Indian culture and cuisine. Moreover, there are popular bonds name are there in the list Dim-Sum Bond of China and Samurai Bonds of Japan, Yankee of USA and the bulldog of UK.
What are the benefits of issuing of the Masala Bonds?
• It assists the Indian companies to diversify their bond portfolio. Now Indian companies can issue Masala Bonds in addition to the corporate bonds. It helps the Indian companies to cut down cost. If the company issues any bond in India, it carries an interest rate of 7.5%-9.00% whereas; Masala Bonds outside India is issued below 7.00% interest rate.
• It will helps in building up foreign investors confidence in Indian economy and currency which will strengthen the foreign investment in the country. It helps companies to tap a large number of investors as these bonds are issued in the offshore market.
• Offshore investor earns better returns by investing in Masala Bonds rather than by investing in his home country. An investor will benefit from his investment in Masala Bond if the rupee appreciates at the time of maturity.
• The Finance Ministry has cut the withholding tax (a tax deducted at source on residents outside the country) on interest income of such bonds to 5% from 20%, making it attractive for investors. Also, capital gains from rupee appreciation are exempted from tax.
• India is that rare fast-growing large economy, and ‘Masala Bonds’ are one way for investors to take advantage of this.
• These measures are intended to further deepen market development, enhance participation, facilitate greater market liquidity and improve communication. It results to widen the investor pool and ultimately deepen the market for additional Tier 1 and Tier 2 bond issuance amounts to ease a key constraint for banks in accessing new AT 1 and T 2 capital, given the limited size of the domestic investor pool relative to the scale of the capital need.
• It allows Indian companies, banks, non-banking finance companies (HDFC, India Bulls Housing Finance are examples of such companies) and infrastructure investment trusts and real investment trusts (investment vehicles that pool money from various investors and invest in infrastructure and real estate sectors) to issue rupee-denominated bond overseas.