MASALA

BONDS

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MASALA
BONDS
TAZEENTAJ MAHAT
Agenda
01 ECONOMIC SCENIARIO IN INDIA.

02 MASALA BONDS

03 GLOBAL SCENARIO

04 INTERNATIONAL BOND MARKET

05 CONCLUSION
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What Is a Current Account
Deficit?

The current account deficit is a measurement of a country’s

trade where the value of the goods and services it imports
exceeds the value of the products it exports.

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The government Friday announced an
array of steps, including removal of
withholding tax on Masala bonds,
relaxation for Five
Arun Jaitley Outlines FPIs,
Steps to Stem Rupee Fall After
and curbs on non-essential imports,
PM Modi Reviews Health of Economy

to contain the widening current

account deficit and check the rupee
fall

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WHAT ARE MASALA
BONDS?

Masala bonds are bonds issued outside India

but denominated in Indian Rupees, rather than
the local currency
IFC issued a 10-year, 10 billion Indian rupee
bond in November 2014
Masala bond was the first Indian bond to get
listed in London Stock Exchange.
 Eligibility Maturity Issuance limit Withholding Tax Capital gains
(Individual and
total )
RBI guidelines Corporate or body Minimum USD 750 million Ambiguous
for Masala corporate, Real Estate maturity per annum per
Bonds, Sep 29, Investment Trusts period of 5 issuer
2015 (REITs) years
andInfrastructure
Investment Trusts
(InvITs)
Central Board Yes. 5 per cent Capital gains
of Direct Taxes withholding tax on arising in case
clarification, interest income from of appreciation
Oct 29, 2015 Masala bond exempted from
taxation
RBI circular, Tenor reduced Rs. 50 billion annually,
Apr13, 2016 to 3 years per issuer

SEBI Clarified that Masala Clubbed Masala bond

circular, Aug bond investment shall investment limit with
04, 2016 not be treated as FPI Corporate debt limit
investments of INR 244,323
crore
RBI press Banks allowed issuing
release, Aug 25, Masala bond for their
2016 capital requirements
and for financing
infrastructure
and affordable housing.
SEBI Clarified that Masala Clubbed the Masala
circular, Aug bond investment shall bond investment limit
04, 2016 not be treated as FPI with the
investments Corporate debt limit
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GLOBAL ECONOMIC
SCENARIO
▰ After the 2008 financial crisis
weakened the advanced economies;
▰ emerging market economies (EMEs)
improved
▰ Offshore, local-currency bonds of
EMEs became popular
▰ India also launched its rupee-
denominated bond (Masala bond)
abroad in 2013,
▰ Masala bonds were used for
domestic infrastructure financing,
while mitigating currency risks.
 Investment
opportunities shrank
GLOBAL for Private investors
ECONOMIC Emerging market
SCENARIO economies (EMEs)
Policies and a
commitment to
structural reforms.
Macroeconomic
stability.
GLOBAL ECONOMIC
SCENARIO
Yet global investors faced issues that
undermine their overall attractiveness of EME.
• like the limited capacity of local bond
markets,
• cumbersome registration processes,
foreign exchange administrative
procedures,
• and capital controls.
Offshore local currency bonds developed as an
alternative .

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 • Local currency debt
offers an additional
avenue for channeling
foreign resources into
local long-term
infrastructure projects
• Countries like China ,
Brazil, Chile, Colombia,
Egypt, Peru,
Philippines, Russia and
Uruguay have
systematically built a
local currency bond
market abroad to
promote financial
liberalization and
internationalize usage
Local Currency Bonds of its currency (Fung
and Yau 2012; 2014).
Local Currency Bonds
▰ India has been a latecomer to the scene.
▰ The first steps to issue rupee-
denominated bonds in overseas markets
were taken in September 2015
▰ The country has a large, unmet
infrastructure gap.
▰ Budgetary constraints limit public funding
of infrastructure investments
▰ Banks cannot finance large-scale
infrastructure projects that typically have
long gestation periods.
▰ Overburdened public sector banks have
little appetite for fresh infrastructure
financing.
▰ Basel III capital regulations were
released by the Basel Committee
on Banking Supervision (BCBS) in
December 2010.
▰ The Basel III regulations ask for
higher capital adequacy, higher
quality capital.
▰ The regulations aims at resilient
banking system, especially in times
of stress.

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▰ Basel III capital regulations have
been implemented in India since
April 01, 2013 and would be fully
implemented by March 31, 2019.
▰ While the Basel III regulations by
BCBS requires a minimum
▰ Common Equity Tier 1 (CET1)
ratio of 4.5% to be maintained by
banks,

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▰ The Indian Private Sector Banks
(PvtSBs) operate at a higher level
of capital adequacy,
▰ the capital position of Indian Public
Sector Banks (PSBs) has been
low.
▰ The asset quality position of PSBs
has deteriorated since 2011, and
as a result of higher provisions, the
profit levels have declined,
subsequently affecting the internal
generation of capital and capital 24
▰ Before masala bonds, corporates raised finance from
international market through external commercial
borrowings or ECBs
▰ ECBs are denominated in foreign currency, the same
attracts risk of forex fluctuation.
▰ currencies fluctuate sharply.
▰ the risk is high to an issuer of ECB
▰ largely rupee earnings, where issue and repayment are
years apart.
▰ Thus masala bond is better since as the risk of currency
lies with the investor and not the issuer.
▰ The need for a healthy corporate debt
market in India has been emphasized
repeatedly.
▰ A well-developed corporate debt
market will not only support the
banking system in meeting the long
term funding requirements of the
corporate but will also be a reliable
source of finance in situations when
the equity market is unstable.
▰
• IFC has named these ‘Masala’ bonds as ‘masala’
is a globally recognized term that evokes the culture
and cuisine of India.

• This is not the first time that a bond has been

named after the food or culture of a country.

• Chinese bonds, for example, are called Dim sum

bonds, and

• Japanese ones as Samurai bonds.

The first Masala bond
• was issued by the World Bank backed
International Finance Corporation in November
2014 when it raised 1,000 crore bond to fund
infrastructure projects in India.
• In August 2015 International Financial
Corporation for the first time issued green Masala
bonds and raised Rupees 3.15 Billion to be used
for private sector investments that address
climate change in India.
• In July 2016 HDFC raised 3,000 crore rupees
from Masala bonds and thereby became the first
Indian company to issue Masala bonds.
• In the month of August 2016 public sector unit
NTPC issued first corporate green masala bonds
worth 2,000 crore rupees.
 Masala Masala Domestic
Entity bond
bond bond
Issuance Yield Yield
HDFC (July 2016)
Rs.3,000 crore 8.33 8.38

Adani Transmission Limited

(August 2016) Rs. 500 Crore 9.1 9.85

NTPC (August 2016) Rs. 2000 Crore 7.48 7.58

HDFC (September 2016)

Rs 500 crore 7.64 7.80-8

HDFC (September 2016)

Rs. 1,000 crore 7.50

Indiabulls Housing Finance Ltd. Higher than

(IBHFL) September 2016) Rs 1,330 Crore 8.57 domestic
borrowing costs
but almost
at par
COMPANIES WHO ISSUED AND PLANNING
TO
ISSUE MASALA BONDS
• International finance corp. 1370
Core INR
• HDFC $ 750 million*
• Yes Bank $ 500 million
• NTPC $ 500-750 million*
• Power finance Corp. $ 500-750
million*
• IRFC $ 300-500 million
 COMPANY OVERSUBSCRIPTIO
N PROPORTION
Axis Bank 2.2
EXIM Bank 3
REC 3.9
NTPC 1.45
YES Bank 2
Greenko Group 1.5
IREDA (2016) 5.1
IREDA (2017) 1.74
AZURE POWER 2
IRFC 3
BENEFITS OF MASALA
BONDS
• diversify their bond portfolio.
• cut down cost.
• In India any bond carries interest
rate of 7.5% to 9%
• below 7% interest rate.
• to tap a large number of investors
as this bond are issued in the
offshore market.
• No impact of rupee depreciation.
MASALA BOND RULES

• As per RBI guidelines not only

corporates but also real estate
investments trusts and infrastructure
investment trust are eligible to issue
these bonds.
• These bonds can be privately placed
or listed on exchanges as per host
country regulations. These bonds
will be issued for a minimum maturity
period of five years.
• The proceeds from these bonds can
be used for all purpose expect real
estate activities.
Investors point of view
• An investor will benefit from his
investment in masala bonds if the rupee
appreciates at the time of maturity.
• If the rupee weakens by the time the
bonds come up for redemption, the
borrower (company) will need to shell out
more rupees to repay the dollars.
• Interest rate in most countries abroad are
low and masala bonds can therefore
provide better alternative for them to earn
high interest.
• Risk will be borne by the foreign
investor, whereas the Indian issuer does
not face currency risk
ISSUE OF MASALA
BONDS
• The rupee bond guidelines allows in
addition to companies any
• corporate body,
• NBFC,
• real estate investment trust,
infrastructure investment trust which
is subject to the regulatory oversight
of the SEBI is also eligible to issue
Masala Bonds.
• An issuer can issue masala bonds
worth a maximum $750 million a year.
Did you know of Green
Bonds

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• Mr. Patnaik feels the amendments provided by
RBI will make masala bonds less accessible to
many issuers and investors especially in the
high yield masala bonds market since the
market-linked pricing was a major factor for
numerous issuances.
• Bhakta Patnaik, Partner and Head – Capital
Markets at law firm, Trilegal to discuss how the
new rules affect the overseas rupee markets.

• The long run, bonds—and by extension other

fixed-income investments— are actually riskier
than stocks.

Warren Buffet 39
Structure of
Bond Market

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International Bond
Market
▰ A eurobond is ▰ Foreign ▰ Global
denominated in bonds are bonds are
a currency issued in a bonds that are
other than that domestic issued and
of its country of
issue. Bonds in market by a traded in two
this market are foreign entity, or more
categorized in the domestic markets and
according to market’s denominated in
the currency in currency. The one market’s
which they are samurai bond, currency.
denominated. for example, is
A eurobond a popular yen-
issued in the
U.S. and denominated
denominated in bond issued in
Japanese yen, Japan by an
for example, American
would be company.
classified as a
euroyen bond.
 FCCB
 Foreign Currency convertible bond issued by a country
in a currency different than the its own currency
 Powerful instrument by which the country raises the
money in the form of a foreign currency
 Bond acts like both a debt and equity instrument

 Bondholder the option to convert the bond into a

company’s equity share
 Retain all features of a convertible bond
ECB Policy- An Overview

External Commercial Borrowings – Commercial Loans, buyer / suppliers credit, securitized instruments
(Bonds, Preference shares etc.) with a minimum average maturity of 3 years.

External Commercial Borrowing (ECB)

Automatic Route Approval Route

U$ 750 M-Maximum
Approval route applicable -
U$ 200 M- Hotel, Hospital, S/W
when not covered in Automatic
and Miscellaneous Service;
route
U$ 10 M- NGO in MF –MFI;
Specified NBFC and SIDBI as
per conditions

Minimum average maturity

3 or 5 years depending on the
quantum of ECB

Short term debt not encouraged

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ADR and GDR

• A depositary receipt (DR) is a

negotiable financial instrument
issued by a bank to represent a
foreign company's publicly
traded securities.
• The depositary receipt trades on
a local stock exchange.
 American Depository
Receipts (ADRs)

Depository Receipts
Global Depository
Receipts
(GDRs)

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Conclusion
• As of December 2014, corporate
overseas borrowings stood at $171
billion. The recent turmoil in the rupee
is already prompting caution on
existing foreign loan exposure.
• Some reports estimate that Indian
corporates, are likely to issue about
$6 billion worth of Masala bonds this
fiscal. With our economy still on shaky
ground, too much reliance on external
debt (even in rupees) can weigh
heavily on our rating by global
agencies.
• The long run, bonds—and by
extension other fixed-income
investments— are actually riskier
than stocks.

Warren Buffet

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