Masala Bonds: Meaning, RBI Guidelines & Key Features

What Are Masala Bonds?

In recent years, Indian companies have been exploring innovative ways to raise funds from international markets. One such financial instrument that gained global attention is the Masala Bond. Introduced with the support of the Reserve Bank of India (RBI), these bonds allow Indian entities to access overseas capital markets without taking on foreign exchange risks directly.

This article explores the concept, purpose, benefits, and regulatory framework of Masala Bonds, as well as how they contribute to India’s financial ecosystem.

Masala Bonds are rupee-denominated bonds issued by Indian entities in the international market. Essentially, these bonds are issued outside India but are denominated in Indian Rupees (INR) rather than foreign currency.

This means that when foreign investors buy these bonds, they invest in Indian currency, and any gain or loss due to currency fluctuation is borne by them — not by the Indian issuer.

Masala Bonds enable Indian companies to raise capital abroad while protecting themselves from foreign exchange volatility.

Origin and Background

The concept of Masala Bonds was inspired by other international instruments like Dim Sum Bonds (Chinese yuan-denominated bonds) and Samurai Bonds (yen-denominated bonds).

The first Masala Bond was issued by the International Finance Corporation (IFC), a World Bank Group institution, in 2014 to fund infrastructure projects in India. The name “Masala” was chosen to give the bond an Indian cultural identity and reflect the country’s economic flavor.

RBI Guidelines for Masala Bonds

The Reserve Bank of India (RBI) plays a crucial role in regulating Masala Bonds. Here are the key RBI guidelines governing their issuance:

1. Eligible Issuers:

• Indian companies, including corporates and banks, are allowed to issue Masala Bonds.

• Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are also eligible.

2. Eligible Investors:

• Non-Resident Indians (NRIs), foreign investors, and international institutions can invest in these bonds.

3. Maturity Period:

• Minimum maturity of 3 years for bonds up to USD 50 million equivalent per financial year.

• Minimum 5 years for issues above USD 50 million equivalent.

4. End-Use Restrictions:

• Proceeds cannot be used for real estate activities (other than affordable housing), capital market investments, or on-lending for similar purposes.

• Permitted uses include infrastructure financing, renewable energy projects, and working capital needs.

5. RBI Approval:

• Issuance is subject to RBI’s External Commercial Borrowing (ECB) framework and compliance with KYC and reporting norms.

6. Listing:

• Masala Bonds can be listed on international exchanges such as the London Stock Exchange (LSE), Singapore Stock Exchange (SGX), or others.

Purpose of Masala Bonds

The main purpose of introducing Masala Bonds is to enable Indian companies to:

• Diversify their investor base by accessing global capital markets.

• Reduce dependence on domestic debt markets.

• Mitigate currency risk, as the repayment is made in INR, not USD or any foreign currency.

• Promote the Indian Rupee as an international currency by increasing its global circulation.

By issuing these bonds, Indian corporates can attract foreign investors looking to participate in India’s growth story.

Benefits of Masala Bonds

1. Currency Risk Protection:

Since the bonds are rupee-denominated, Indian issuers are not exposed to foreign exchange fluctuations.

2. Access to Global Capital:

Indian companies can tap into international investors, enhancing funding sources.

3. Promotion of Rupee Internationalization:

Encourages the use of INR in global transactions and financial instruments.

4. Diversified Funding:

Reduces reliance on domestic lenders and opens avenues for foreign institutional investments.

5. Reputation and Visibility:

Listing on global exchanges improves issuer visibility and investor confidence.

Risks Associated with Masala Bonds

While Masala Bonds offer several advantages, investors and issuers must understand the associated risks:

• Currency Fluctuation Risk (for investors):

As the bond is rupee-denominated, foreign investors bear the exchange rate risk.

• Liquidity Risk:

Secondary market liquidity can be limited, affecting ease of trading.

• Regulatory and Compliance Risk:

Issuers must adhere to RBI, SEBI, and international listing regulations.

• Market Risk:

Global interest rate movements and credit rating changes can impact pricing.

Examples of Masala Bond Issuances

Several major Indian entities have issued Masala Bonds to raise funds internationally:

• HDFC Ltd: Raised funds in 2016 to support affordable housing projects.

• NTPC Ltd: Issued bonds to finance renewable energy initiatives.

• IRFC (Indian Railway Finance Corporation): Used proceeds for railway infrastructure development.

• Adani Transmission and Indiabulls Housing Finance: Also tapped into the Masala Bond market.

These examples highlight how Masala Bonds have become a strategic tool for funding large-scale infrastructure and social projects in India.

Impact on India’s Financial Ecosystem

Masala Bonds have contributed significantly to:

• Expanding India’s foreign investment inflows.

• Strengthening the bond market infrastructure.

• Enhancing financial inclusion through global participation.

• Promoting sustainable finance by channeling funds into renewable and green projects.

The RBI’s regulatory framework ensures transparency and stability, making Masala Bonds an important component of India’s external debt strategy.

Frequently Asked Questions (FAQs)

1. What are Masala Bonds in simple terms?

Masala Bonds are rupee-denominated bonds issued outside India by Indian entities to raise funds from global investors.

2. Why are they called Masala Bonds?

The term “Masala” gives the bond an Indian identity, representing the flavor of Indian culture and economy in global markets.

3. Who regulates Masala Bonds in India?

The Reserve Bank of India (RBI) regulates Masala Bonds under its External Commercial Borrowing (ECB) framework.

4. Who can invest in Masala Bonds?

Foreign investors, NRIs, and international institutions can invest in Masala Bonds listed on overseas exchanges.

5. What is the minimum maturity period for Masala Bonds?

The minimum maturity is 3 years for issues up to USD 50 million and 5 years for larger issuances.

6. Do Masala Bonds offer any tax benefits?

Interest earned by foreign investors may be subject to withholding tax as per Indian regulations, but there are no direct tax exemptions for issuers or domestic investors.

Conclusion

Masala Bonds have emerged as a powerful financing tool that bridges the gap between India’s capital requirements and global investor appetite. By allowing Indian entities to borrow in rupees internationally, they support infrastructure growth, promote the Indian currency, and provide an alternative to traditional foreign borrowing.

However, like all financial instruments, they come with associated market and currency risks. Both issuers and investors should carefully assess the terms, regulatory guidelines, and objectives before participating in such instruments.

Disclaimer

This blog is intended solely for educational and informational purposes. The bonds and securities mentioned herein are illustrative examples and should not be construed as investment advice or personal recommendations. BondScanner, as a SEBI-registered Online Bond Platform Provider (OBPP), does not provide personalized investment advice through this content.

Readers are advised to independently evaluate investment options and seek professional guidance before making financial decisions. Investments in bonds and other securities are subject to market risks, including the possible loss of principal. Please read all offer documents and risk disclosures carefully before investing.