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Masala Bonds were introduced in India in 2014 by International Finance Corporation (IFC). The IFC issued the first masala bonds in India to fund infrastructure projects. Indian entities or companies issue masala bonds outside India to raise money. The issue of these bonds is in Indian currency rather than local currency. Thus, if the rupee rate falls, the investor will bear the loss.
Masala Bonds are rupee-denominated bonds issued outside India by Indian entities. They are debt instruments which help to raise money in local currency from foreign investors. Both the government and private entities can issue these bonds. Investors outside India who would like to invest in assets in India can subscribe to these bonds. Any resident of that country can subscribe to these bonds which are members of the Financial Action Task Force. The investors who subscribe should be whose securities market regulator is a member of the International Organisation of Securities Commission. Multilateral and Regional Financial Institutions which India is a member country can also subscribe to these bonds.
According to RBI, the maturity period is three years for the bonds raised to the rupee equivalent of 50 million dollars in a financial year. The maturity period is five years for the bonds raised above the rupee equivalent of 50 million dollars in a financial year. The conversion of these bonds happens at market rate on the date of settlement of transactions undertaken for issue and servicing of interest of the bonds.
The proceeds raised from these bonds can be used:
RBI mandates the proceeds raised from these bonds cannot be used:
Masala bonds have various benefits. Both the investors and borrowers get benefits from subscribing and issuing of these bonds. The benefits for the investors are:
The benefits for the borrowers are:
Masala bonds are rupee-denominated bonds. In India, the first Masala bond was issued by the World Bank-backed IFC in November 2014, and it raised Rs.1,000 crore bond to fund infrastructure projects in India. Later in August 2015, IFC issued green masala bonds and raised Rs.3.15 billion to be used for private sector investments that addressed climate changes in India.
Masala bonds are issued outside India but denominated in Indian Rupees rather than the local currency. Masala is an Indian word that means spices. The IFC used the term ‘Masala’ to evoke the cuisine and culture of India. Masala bonds make the investors bear the risk, unlike dollar bonds where the borrower takes the currency risks.
The primary objectives of Masala bonds are to fund infrastructure projects, internationalise the Indian rupee and ignite internal growth through borrowings.
The minimum maturity period for bonds raised up to 50 million USD equivalent in INR per financial year should be three years. The minimum original maturity period for bonds raised above 50 million USD equivalent in INR per financial year should be five years.
RBI has been making periodical rate cuts in Masala bonds, making it a bit less appealing to the investors. The money raised through these bonds cannot be used in every field. There are fixed fields where the money can be invested. As per Moody’s, financing sustainability via Masala bonds is a challenge as the investors are expected to be cautious in taking on currency risks from emerging markets.
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