Masala Bonds

Main Features of Masala Bond:

• The bonds can be placed either privately or registered on a stock exchange
• Can be repaid on market prevailing rates as on the settlement date
• Issuer can issue masala bonds worth a maximum $750 million
• Minimum maturity period for bonds up to USD 50 million should be 3 years
• And for others – 5 year
• Its settlement happens in dollars

  Eligibility:

• Can be subscribed by a resident of a country that is a member o a Financial Task Force FATF or a similar regional body
• The bonds can be sold, transferred or offered as security overseas subject to IOSCO/FATF requirements
• Whose securities market regulator is a signatory to the International Organization of Securities Commission’s (IOSCO’s) or has a MOU signed with SEBI
• Maximum borrowing will be up to INR 50 billion per financial year beyond that prior approval of RBI is to be taken

Prohibited use:

• Real estate activities other than development of affordable housing projects / integrated township
• Investing in capital market
• Activities prohibited as per the foreign direct investment guidelines
• On-lending to other entities for above purposes
• Purchase of Land

  List of Top Masala Bonds:  

  Benefits to Economy:

• Masala Bonds are an attempt to internationalize the Indian rupee and give strength to Indian financial system and economy
• The government has relaxed the norms as well. Although the foreign portfolio investors can only invest in
• India through rupee-denominated debt instruments subjected to a cap limit of US$51 billion, however, Masala
• Bonds no longer forms the part of this limit as per the recent RBI notification
• Companies are shielded against the risk of currency fluctuations
• The surging foreign investment in rupee-denominated debt reflects an increasing international interest in the instrument. This was a welcome development for India.
• Recent data suggest not only that rupee-denominated debt issuance is increasing, but corresponding foreign currency debt has substantially declined.
• A Liquid rupee-denominated debt markets stimulate financial stability
• A vibrant bond market can open up new avenues for bond investments by retail savers thereby propping up the rupee structure. A very promising example is the Dim Sum bond that promoted the use of Yuan in global trade and investment.
• With talks back home here about full convertibility of rupees into other international currency through a unified market-determined exchange rate, Masala bonds can help the rupee go global.

  Benefits to Investors:

• It has low-credit risk and high rupee-linked yield for investors
• The Finance Ministry has cut the ‘tax deducted at source’ on residents outside the country on interest income from such bonds to 5% from 20% making it an attractive investment option. Also, capital gain from rupee appreciation is fully exempted from taxation.
• On an average, the rupee-denominated bonds have an interest rate of 2 to 3 % higher compared to the standard LIBOR (London Interbank Offer Rate)
• And in the real scenario for example bond offered in investor’s home country in the US, the yield is hardly 2% whereas in rupee denominated Masala Bonds the yield ranges from 5.00% to 7.00%. Globally, there is ample liquidity but interest rates in developed markets are low coupled with a fragile economy. India serves a rare combination of opportunity by being on a high growth trajectory with higher rates of interest.
• During 2007-08, Indian Companies tended to issue bonds in USD under ECB and repaid them whenever the exchange rate was lower. The Masala Bond framework ensures that the Indian Companies do not take advantage of such speculations by evenly distributing the risks.