Asian Development Bank (ADB) has listed 10-year Masala bonds, worth Rs 850 crores, on India INX and Luxembourg exchange. The proceeds from the issued bonds are to be used for supporting local currency lending and investment operations in India. Located at the International Financial Services Centre, GIFT City in Gujarat, India INX is the country’s first international exchange. ADB is the first supranational entity and foreign investor to do a primary listing with India INX.
Masala Bonds, also known as rupee denominated bonds (RDBs), are a debt instrument used by corporate entities to raise money through foreign markets by issuing bonds to overseas investors in Indian rupee denomination. These bonds aim to fund infrastructural development in India, and increase foreign investment in the country. The term ‘Masala’ was used by International Finance Corporation (IFC) while issuing the first RDBs, which were 10-year bonds worth Rs 10 billion, on London Stock exchange (LSE) in November, 2014.
Housing Development Finance Corporation Ltd. (HDFC) is the first Indian corporation to issue Masala Bonds. In July 2016, HDFC listed unsecured RDBs on LSE worth Rs 3,000 crores with a fixed semi-annual coupon of 7.875 per cent per annum and a tenor of 3 years and 1 month. The bonds were oversubscribed by 4.3 times.
Masala bonds transfer the risk from fluctuations in the foreign exchange rates from the issue to the investor. This is important for the issuers especially when domestic currency, i.e. rupee depreciates.
Typically, when a bond (not rupee denominated) is issued in foreign currency, say US dollar, and if the rate of rupee, with respect to dollar falls, the liability of the issuer increases while repaying the amount of the bond or paying the interest on the borrowing. Therefore, the issuer will have to pay more to compensate the fluctuations in exchange rate.
In the case of Masala Bonds, as they are issued in INR, the issuers are protected from the currency fluctuations as the repayment has to be done in INR only. Thus, if the rupee rates fall, investors bear the risk.
Masala bonds are helpful in mobilising foreign capital markets to invite foreign investment to overcome the shortage of capital for undertaking the development of infrastructural projects in the country.