Masala Bonds, to an industry outsider, might sound made up, but it is very much real. The term in fact was initially coined by the International Finance Corporation (IFC), a member of the World Bank Group who first issued Masala Bonds in 2015. 'Masala' is a Hindi word which means 'spice'. The term 'Masala' was used by IFC to evoke the cultural and culinary essence of India. Later, in September 2015, the Reserve Bank of India ("RBI") also allowed Indian entities to issue Masal Bonds overseas.
What are Masala Bonds?
Masala Bond is a sobriquet for a rupee-denominated bond, which is a debt security issued to investors in offshore jurisdictions to raise money in Indian National Rupees ("INR"). In other words, they are rupee-denominated bonds issued to overseas buyers in the overseas market by an Indian entity. The Indian entity could be a public or a private entity.
The bond is released and paid in INR, but reimbursement and compensation are correlated with rates of foreign currencies. This means that their valuation is subject to exchange rates.
Who are the eligible borrowers?
The following are eligible to issue Masala Bonds:
- All entities eligible to receive foreign direct investment ("FDI");
- Port Trusts;
- Units in special economic zones ("SEZ");
- Small Industries Development Bank of India;
- Exim Bank of India;
- Registered entities engaged in micro-finance activities, viz., registered Not-for-profit companies, registered societies/trusts/ cooperatives and Non-Government Organisations.
Who are the eligible lenders?
The lender should be resident of FATF or IOSCO compliant country. However, the following shall also be considered as an eligible lender:
- Multilateral and Regional Financial Institutions where India is a member country will also be considered as recognised lenders;
- Individuals as lenders can only be permitted if they are foreign equity holders or for subscription to bonds/debentures listed abroad; and
- Foreign branches / subsidiaries of Indian banks are permitted as recognised lenders only for FCY ECB (except FCCBs and FCEBs). Foreign branches / subsidiaries of Indian banks, subject to applicable
Benefits to the lenders
Masala bonds generally offer higher interest rates than other investment options, including local currency bonds in the investor's country. This is to compensate for the added currency risk that the lenders face.
The transfer of Masala Bonds, from one non-resident bond holder to another has been exempted from the applicability of capital gains tax in India.
The lenders stand to gain if the INR appreciates at the time of maturity of the bonds.
Benefits to Issuers
Following are the benefits to issuer which make the Masala Bonds attractive:
- Issuers are hedged from risk of fluctuation of INR currency as the Masala Bonds are issued in INR;
- Issuers of Masala Bonds are not required to follow certain compliance rules under the Companies Act, 2013, which would normally apply to Rupee-denominated NCDs. This includes rules like maintaining a debenture redemption reserve and issuing a private placement offer letter. Unlike the External Commercial Borrowing (ECB) regime, there is also no obligation for Masala Bond issuers to maintain a specific liability-to-equity ratio for their borrowings;
- Masala Bonds can help in mobilizing huge funds, i.e. upto USD 750 Million can be raised through automatic route alone.
Applicable Legislation
Presently, 'Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations' dated March 26, 2019 ("ECB Directions") issued by RBI governs the issue of Masala Bonds by an Indian entity.
Conclusion
With benefits for both issuers and lenders, such as higher interest rates and tax exemptions, masala bonds provide a promising avenue for financing, especially in the context of India's growing economy. However, issuers must comply with RBI regulations, making it important for businesses to understand the full scope of the legal and financial implications before venturing into the Masala Bond market.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
