Context

• Kerala became the first state to tap into masala bond market by listing the Kerala Infrastructure Investment Fund Board (KIIFB)’s masala bond worth Rs 2,150 crore in London Stock Exchange (LSE)’s International Securities Market (ISM).
• It has a fixed interest rate of 9.72% per annum. Through this government focuses to get multinational corporations to invest in the state.

About

What are masala bonds?

• Masala bonds are those bonds issued outside India but denominated in Indian Rupees, rather than dollar or the local currency.
• They are used by the companies to raise funds. Till now Indian companies have been raising debt from overseas markets for decades through bond offerings, which have been denominated in dollar or other currencies.
• Any corporate, body corporate and Indian bank is eligible to issue Rupee denominated bonds overseas.
• The objective of these bonds is to fund infrastructure projects in India, fuel internal growth via borrowings and internationalise the Indian currency.
• RBI mandates that the money raised through such bonds cannot be used for real estate activities other than for development of integrated township or affordable housing projects.
• It also can’t be used for investing in capital markets, purchase of land and on-lending to other entities for such activities.

How Masala Bonds help in supporting the rupee?

• The bonds are directly pegged to the Indian currency. So, investors will directly take the currency risk or exchange rate risks. If the value of Indian currency falls, the foreign investor will have to bear the losses, not the issuer which is an Indian entity or a corporate.
• If foreign investors eagerly invest in Masala Bonds or bring money into India, this would help in supporting the rupee.
• The issuer of these bonds is shielded against the risk of currency fluctuation, typically associated with borrowing in foreign currency. Besides helping in diversifying funding sources, the costs of borrowing via masala bonds could also turn out to be lower than domestic markets.

Where can these bonds be issued and who can subscribe?

• The Rupee denominated bonds can only be issued in a country and subscribed by a resident of such country that is a member of financial action task force and whose securities market regulator is a member of 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.

What is the minimum maturity period of such bonds?

• According to RBI, the minimum maturity period for Masala Bonds raised up to Rupee equivalent of USD 50 million in a financial year should be 3 years and for bonds raised above USD 50 million equivalent in INR per financial year should be 5 years.
• The conversion for such bonds will happen at the market rate on the date of settlement of transactions undertaken for issue and servicing of the bonds, including its redemption.

Why Kerala government issued masala bonds?

• The fund will provide investment for critical and large infrastructure projects in Kerala.
• The money raised through these bonds will help in rebuilding the state infrastructure -the state was devastated by catastrophic floods in 2018 and it required funds for reconstruction.
• The bond will help to attract investor to invest in Kerala previously it was lacking due to delay in clearance, strikes etc.
  
  

  Kerala Infrastructure Investment Fund Board It is a government owned financial institution in Kerala to mobilize funds for infrastructure development from outside the state revenue.  It is a statutory body constituted under a state Act.