Masala Bonds – BondEvalue

Masala Bonds are bonds denominated in Indian Rupees (INR) which are issued outside of India and settled in USD. These bonds come under the External Commercial Borrowings (ECB) route as categorized by the Reserve Bank of India (RBI). Any corporate or Indian bank is eligible to issue masala bonds.

Why are they better than the previous form of ECBs? If an Indian corporate that majorly earns its revenues and profits in INR has to raise money in foreign currency, the interest and principal have to be paid in foreign currency which can be an issue. The corporate therefore has to resort to different types of hedging techniques or risk getting hurt by market fluctuations (INR depreciating in particular). Masala Bonds on the other hand, gives an opportunity to that Indian corporate to borrow from international markets without requiring to hedge exchange rate risk – because they are denominated in INR. This is therefore an issuer friendly issuance.

The RBI’s circular on the issuance of rupee denominated bonds overseas revised its provisions as follows:

  • Maturity period: Minimum original maturity period for Masala Bonds raised up to $50mn equivalent in INR per financial year should be 3 years. Minimum original maturity period for bonds raised above $50mn equivalent in INR per financial year should be 5 years.
  • All-in-cost ceiling: The all-in-cost ceiling for such bonds will be 300bp over the prevalent Government of India bond yield of the equivalent maturity. All-in cost is the maximum cost that the borrower is allowed to incur on the ECB – it includes the rate of interest, guarantee fees etc. but does not include commitment fee, pre-payment charges and withholding tax payable in INR.
  • Recognised investors: Entities permitted as investors under the provisions of paragraph “3.3.3 of the Master Direction” but should not be related party within the denotation given under Ind-AS 24.

The maximum amount that a single company can borrow via Masala Bonds (under the ECB overall) is $750mn equivalent in INR. Any size above that requires the RBI’s approval.

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