Masala Bonds - Features, Benefits, RBI, Importance

By Ritesh|Updated : February 8th, 2023

Masala Bonds are rupee-dominated bonds issued in India by a corporate and Indian entity, i.e. these are the funds raised in Indian currency from the overseas market. Masala Bonds are issued by private and government businesses as well. International Finance Corporation (IFC) issued the first Masala bond to build infrastructure in India in 2014, therefore also known as IFC Masala Bonds.

Masala bond has an important topic in the Indian economy. A lot of questions have been asked from Masala Bonds in the IAS Exam. This article will teach you everything about the Masala Bond, its characteristics, benefits, and issues. Along with this, you will learn about the RBI's mandate regarding using Masala Bonds and their importance in India.

Table of Content

Masala Bonds - Latest News

Kerala Infrastructure Investment Fund Board (KIIF) is a Financial Institution. The Government of Kerala owns KIIFB. In 2019, KIIFB listed a Masala Bonds in the London Stock Exchange’s International Security Market of ₹ 2,150 crores. It is a 5-year tenure with a secured fixed-rate bond with a coupon of 9.723 per cent.

Since the state witnessed repeated floods in 2018 and 2019, Kerala requires funds to rebuild the devastated infrastructure. The fund will be used to achieve the aim of rebuilding the state infrastructure.

Along with this, a 10-year Masala Bond was listed by Asian Development Bank for Rs 850 crore on India INX. India INX is a global debt listing platform. These proceeds are subjected to be used in investment in India.

Masala Bonds UPSC Notes

Key Features of Masala Bonds

The key features of the Masala Bonds are-

  • If the fund raised is in foreign currency, the borrowers must pay a significant amount of servicing debt at the time of depreciating the domestic currency.
  • The issuers don’t have to deal with the transfer risk because of the fluctuations in the currency.
  • Maturity period: If Masala Bonds is raised to USD 50 million eq in Rs, the financial year should be 3 years, and the minimum maturity period should be 5 years.
  • Recognised Investors: For a country to issue the Masala Band, it has to fulfil the following Condition-
    • It has to be a member of FATF ( Financial Action Task Force)
    • The country's securities market regulator must be a signatory to IOSCO’s Multilateral Memorandum of Understanding.
  • End-use Prescriptions: The funds raised should not be used for purchasing land and real estate activities.

Masala Bonds - RBI Mandate

According to the Reserve Bank of India, the Masala Bonds can never be used for the following-

  • For Real Estate: The money raised from the Masala Bonds can not be exploited for real estate activities like housing projects or the development of integrated townships.
  • Along with the real estate activities, these funds are restricted from being used for purchasing land.
  • The money cannot be used directly for actions prohibited by the Foreign Direct Investment guidelines.
  • One cannot invest money in capital market projects. It is also restricted to use for domestic equity investment proceeds.

Benefits of Masala Bonds

Masala Bonds have proven to be beneficial for Investors as well as for Borrowers. The benefits are explained as follows-

Benefits for investors

The investors get the following benefits from the Masala Bonds-

  • Masala Bonds requires less need of documentation. Because of less documentation, the investors are not required to register as the FPI (Foreign Portfolio Investment) in India.
  • Since there is a gain in Capital from the rupee appreciation, the investors are excused from taxes.
  • It provides an assortment from the proportionately shallow domestic bond market.
  • Through FPI / FII route, most investors do not have access to the domestic market. Because of the Masala Bonds, an investment route for global investors is opened.
  • International custodians can be used to set the bond in a foreign country.
  • An interest rate can be up to 5% or above the SBI’s base rate.

Benefits for Borrowers

The borrowers enjoy the following benefits-

  • There is no risk of currency fluctuations.
  • The Masala Bonds offer an interest rate of less than 7%, and they enjoy a cheaper cost of funds.
  • There is no risk of borrowing and paying by the Indian companies as all the transactions happen in Indian rupees after RBI allowed companies to raise rupee resources overseas.
  • The proceeds of the Masala Bonds can be utilised for affordable housing projects, developing integrated townships, refinancing NCDs and rupee loans.

Issues with Masala Bonds

Though Masala Bonds offers plenty of benefits to investors and borrowers, certain issues are associated with it. These are-

  • With the higher tax possibility, there is a weakening of instrument utilities.
  • Since RBI has cut the periodical rates, Masala Bonds have less appeal among investors.
  • Financial sustainability because of Masala Bonds is a challenge for investors.
  • There is a constant fare that the Indian rupee might face depreciation pressure.

Masala Bonds in India

Masala Bonds are a prime part of the Indian economy. India has gained the following benefits with the introduction of the Masala Bonds-

  • Since the interest rate for foreign currencies is low, Indian companies are gaining a lot of benefits by raising funds through the Masala Bonds.
  • Indian Rupee is familiar with international investors, which will ultimately result in the Indian economy's growth.
  • When the Masala Bonds gain popularity, there will be a fall in the foreign currency-denominated ECB.
  • It will help India create a new opportunity for retail investors.

Masala Bonds UPSC

Masala Bonds UPSC is one of the crucial topics that come under the Indian Economy section of the IAS Exam. Sometimes questions are asked about the Masala Bonds topic in the UPSC Prelims and UPSC Mains exams. You can check the Economics Book for UPSC and NCERT Books for UPSC for a detailed understanding of similar topics. You can also download the UPSC Study Material and check your preparations by solving the UPSC Previous Year Question Paper.

Masala Bonds UPSC Questions

Following are the questions that have been asked in the UPSC Prelims and Mains exam-

Question - Concerning IFC Masala Bonds, consider the following statements: (2016)

  1. The International Financial Corporation that offers these bonds is an arm of the world bank
  2. They are rupee-denominated bonds and a source of debt financing for public and private sectors

Choose the correct option:

  1. 1 only
  2. 2 only
  3. Both 1 and 2
  4. Neither 1 and 2

Answer- C

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FAQs for Masala Bonds UPSC Notes

  • Masala Bonds are rupee-denominated bonds that are termed debt instruments. It is used to raise money in the local currency rather than dollars from foreign investors.

  • The Masala Bonds for the Private Lender’s additional Tier 1 have been listed on the debt securities market platform.

  • The states have equal rights for issuing the Masala Bond. In 2019, KIIFB (Kerala Infrastructure Investment Fund Board), which the Government of Kerala owns, raised a Masala Bond of ₹ 2,150 crores on the London Stock Exchange.

  • The Masala Bonds can be raised to raise money in Indian currency rather than local or dollar-denominated currency. 

  • The First Masala Bond was issued in August 2015, when IFC issued a green Masala Bond for 5 years on London Stock Exchange. This bond raised 3.15 Billion Rupees for investing in the private sector, which addresses the Indian Climate Change.

  • Both private and government entities can issue the bonds, and investors outside India who want to invest in assets can also subscribe to Masala Bonds.

  • The Masala Bond got its name 'Masala' because in India Masala means spices. This word describes the cuisine and culture of India, so the International Finance Corporation(IFC) decided to use the word, Masala Bond.

  • The International Finance Corporation launched Masala Binds in 2014. Rs. 1000 crore was raised by the corporation for funding infrastructure projects in India.

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