Five Things To Know Before You Taste The Masala Bond
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Amidst the boom in bitcoin and other virtual currency, rupee-denominated debt securities sold abroad, better known as ‘Masala Bonds’, have picked up significantly with estimates suggesting, Indian companies having raised about $3 bn in these bonds from the overseas market. Masala Bonds have become an attractive investment as they are issued to foreign investors and settled in USD, thereby shifting the currency risk from the issuer to the investor.
Discussing the increasing popularity of Masala Bonds among Indian corporate, Prasanth Prabhakaran. Senior President & CEO of Yes Securities Ltd said,"Today, debt is difficult to raise for most of the promoters the PSU banks have almost stopped lending while the private sector banks have become cautious. Hence, Masala Bonds is an innovative way raising funds from the international market."
To know more before you invest in these bonds, read the five essentials things about masala bonds.
Who Issues These Bonds
Any corporate or body corporate, Indian banks, Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are eligible to issue these denominated bonds overseas. Resident entities like Limited Liability Partnerships and Partnership firms are, however, not eligible to issue these bonds.
Who Can Invest
Masala Bonds can be issued only in countries that have an arrangement for Financial Action Task Force (FATF) or are a member of a FATF-Style Regional body along with securities market regulator is a signatory to the International Organization of Securities Commission's (IOSCO’s) or a signatory to bilateral MoU with the SEBI for information sharing arrangements.
These bonds can either be placed privately or listed on exchanges as per host country regulations.
The minimum maturity period for Masala Bonds raised up to $50 million equivalents in INR per financial year should be 3 years and for bonds raised above $50 million equivalent in INR per financial year should be 5 years.
Internationalization of Rupee
Since the bonds are issued in INR, the forex related risk is on the investor and not the company. The benefit of the rupee-denominated bonds is that it will encourage foreign buyers to deal more in rupees, hence, internationalization of rupee can be promoted by rupee denominated bonds.
These bonds also aid India’s geo-economic goals, unstated or understated as off-late, interest rates in hard currencies, such as the US dollar, pound sterling, the euro, and the yen, are still at very low levels.
The subscriber of these bonds have greater flexibility to transfer / sell the Rupee Bonds to a third party (domestic or offshore) but the issuer cannot use the proceeds from the issue for real estate activities or capital market investment. However, it can be utilized for development of integrated township / affordable housing project or any other infrastructural developmen project.