28 April, 2016

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Masala Bonds - Are they really Crispy


Masala Bonds - Are they really Crispy

Masala bonds is just another spicy item in the market , which is fresh but oh.. not edible. Masala bonds is just a term coined for a specific type of bonds.In this article , we will learn about Masala bonds , their advantages and disadvantages and will also try to analyze whether investors should think of them as an option.


What are Masala bonds

Masala bonds are rupee denominated borrowings issued by the Indian organization in the foreign or international market.These are debt instrument , which are generally issued by the corporate to overseas buyers for raising  the funds. Even though the Masala bonds are issued in Indian currency, they are settled in foreign currency because of limited coverage of Indian currency in the overseas markets.

These bonds are listed on stock exchanges or placed privately.The term masala bonds was coined so as to give an essence of India to them.These are offshore bonds which are issued for 10 years in general with AAA rating.

This naming as Masala bonds is not uncommon , where a peculiar bonds issued by Chinese markets were referred to as Dim-sum bonds.

Masala bonds as compared to other funding like ECB

ECB refer to External Commercial Borrowings , which are linked to foreign currency and issued and settled in foreign currency only.Masala bonds are issued and redeemed in Indian currency i.e.Rupees however they are settled in foreign currency like dollars , pounds etc.

The companies raise foreign currency loans in case of ECB, where the issuer can exploit lower interest rates in overseas markets.However, there lies immense risk of foreign currency rates , which if not hedged can cost a big chunk of gains if any.
With respect to Masala Bonds , the companies i.e. issuers are at little risk of foreign currency exposure , because the settlement is done in foreign currency.Also these bonds carry lower cost of borrowing.

How these bonds came into picture  
When the International  Financial Institutions rupee denominated instruments in the international markets , there was seen akin interest for investing n the same.One such scenario can be reminded of IFC (International Finance Corporation), which works as part and parcel of World Bank.IFC issued Rupee denominated bonds of Rs 1000 crore for 10 years , which was listed in London stock Exchange.

Proceeds from this bond issue were proposed to be invested in Axis bank issue of infrastructure bonds.

Regulations
RBI (reserve Bank of India) has come out with regulatory framework which allows Indian companies , NBFC (Non Banking Finance Company), Infrastructure Investment trusts and Real Investment Trusts to issue rupee linked bonds in international markets .There are two routes – one is automatic where no prior approval is needed for issuing and another is approval route where the organization issuing the Masala Bonds require approval from RBI.
Call and put option i.e. right to buy and sell can be excercied at any time prior to completion of average maturity period.
With respect to coupon rates , RBI has regulated that it should not be more than 500 basis points as compared to yield by government securities in India.

Foreign currency conversion would be done at the rate as prescribed as RBI reference rate.However the amount of maturity and average maturity period as well as end use restrictions (i.e. how to use the proceeds) shall be as per existing ECB restrictions.

Investors can hedge currency risk and credit risk via permitted derivative products.they can access domestic markets , however banks incorporated in India cant access Masala Bonds.
The RBI has restricted the amount to be raised through Masala Bonds to $ 750 millions.RBI is said to be lineant with respect to issue of Masala bonds is to appreciate Rupee in international markets , which will lead to whole currency convertibility.


Advantages of Masala Bonds

With amendment in TDS rates from 20% to 5% on interest income to residents outside country has been a major step towards attracting overseas buyers.Noteable point to be noted would be rupee appreciation , capital gain on which is exempted under Indian income Tax.

Issuers can take advantage of the lower interest rates in international markets, without being hampered by foreign currency risks.

Investors will be relieved form insecurity hovering around credit rating as these funds are issued by accredited financial institution recognized n foreign markets.

Masala Bonds have been a major boost to the Indian Economy by attracting major foreign investment.With Indian Government’s ambitious plans to carry India on its way to success by initiating make in India, digital India etc , we need almost around $400 billion to afford infrastructure and other facilities.Masala Bonds can easily make this possible by easing out on funding basis.

CONCLUSION
Masala Bonds will not only add the regional flavor to the international markets but it is also expected to bring up the rupee value in international markets. This will benefit Indian Government which has undertaken Vision 2020 as its mission and it will be successful , provided Msala Bonds gain more popularity.

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