Friday, October 19, 2018

The “Masala” bonds in Rupee Denominated

The “Masala” having Rupee Denominated Bonds

Rupee Denominated Bonds [RDBs] commonly known as “Masala Bonds”, are debt securities denominated to Indian rupees issued by Indian entities to overseas investors but deal in foreign currency. At the end of the day, they are rupee named bonds issued to a remote financial specialist. In spite of the fact that these bonds are issued to speculators in seaward purviews, still, they are designated in Indian cash. Subsequently, the expression "Masala" has been attributed to these bonds to give an Indian flavor to the equivalent. China also issues bonds name called as “Dim Sum Bonds” and similarly the Japanese bonds named called as “Samurai Bonds”.These bonds are attracting to foreign investors as they will provide a higher interest rate compared to the standard interest rate conquer in the market. Moreover, it encourages the Indian Rupee at globalization for foreign buyers will deal more in rupees while buying these bonds. Interestingly, currency risk is assumed by the investor and, hence, during the repayment of bond coupon and maturity amount, if rupee decry, the Reserve Bank of India [RBI] will realize marginal saving.

Let’s go we understand the working of RDBs as follows. Assume that an Indian company issues the rupee-denominated bond worth ₹ 2000 in US, the buyer can purchase the bond paying the equivalent amount in dollars. Assuming that the exchange rate is equivalent to ₹72 compare to $1, the bond purchaser will have to pay $27 to buy the rupee-denominated bond. Assume the rates of interest applicable on these bonds are 10%, the Indian company has to pay ₹200 annually and this is paid by the issuer means Indian company. at the prevailing exchange rate at the time of payment. However, if the exchange rate decry to 1$= ₹80, the buyer’s interest revenue of Rs 200 amounts to approximately $1.25 and it incurs losses in terms of dollars. The same buyer could have got $2.7 had the decry of exchange rate not occurred.

The International Finance Corporation the World Bank and a related global financial organization that encourages the private sector to develop in underdeveloped countries, has witnessed it's rupee-designated acquiring in global markets amid year financial 2015. From that point, it thought of two bond issues: "Maharaja Bonds" which were issued to Indian speculators and "Masala Bonds" that were issued to abroad financial specialists. Further, on July 14, 2016, HDFC was the primary Indian organization to issue masala bonds and, on August 4, 2016, NTPC issued green masala bonds to fund inexhaustible power ventures. Besides, HDFC was the first to list its masala bond on the London Stock Exchange in 2016.

The Masala Bond market confers major advantages for issuers:-

  1. With most countries facing relatively low-interest rate regimes at present, they can moderate their cost of borrowing vis-à-vis domestic bond borrowing as India’s interest rate levels are still very high as compared to western countries. 
  2.  The bonds are denominated in the rupee, so there is no exchange rate risk. 
  3.  Issuing Masala Bonds helps to Indian corporates to diversify their bond portfolio. While the bond issue is in the offshore market, it facilitates Indian companies in catching a large number of the investor base.
  4. Even for investors, these bonds serve a remunerative purpose as an investment overseas can earn good returns through Masala Bonds compared to the investment returns from its residency country. 
  5. These bonds are also exempted from tax.

Legal Framework:-

Masala Bonds having debt securities under Section 2(30) of the Companies Act, 2013. Therefore,
provisions also apply to the issuance of debt securities shall apply to Masala Bonds as well. the Ministry of Corporate Affairs [MCA] General Circular No: 09/2016 dated August 3, 2016, has issued a clarification regarding the applicability of provisions of the Act with respect to the issuance of Rupee denominated bonds to foreign investors by an Indian company. Accordingly, Indian companies issuing Rupee denominated bonds overseas [Masala Bonds] under RBI’S policy and External Commercial Borrowing (ECB) Guidelines will not be required to comply with provisions of the Act and the issue of secured debentures under Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014. In addition, listed entities in India shall also comply with the provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 with respect to the issuance of debt securities.

According to the guidelines issued by Reserve Bank of India in modified policy in August 2016, the money borrowed under Masala Bonds only be used for infrastructure funding purposes. the capital needs and to accumulate funds for the infrastructure projects, the RBI allowed banks to issue Masala Bonds or RDBs in August 2016. The overall guidelines underlying for rupee-denominated bonds will be similar to that for ECBs.

Considering the fact that Masala Bonds are governed by the RBI and in order to further streamline the regime, the Securities and Exchange Board of India (SEBI) through its circular dated August 4, 2016, has clarified that foreign investment in Masala Bonds will not be treated as investment by Foreign Portfolio Investors (FPIs), and will not be covered under the purview of the amended SEBI (Foreign Portfolio Investors) Regulations, 2014.

Moral of the story:-

In spite of the fact that the advantages of RDBs are combined with a few dangers required with fast moves in capital streams and that the broad market may depict liquidity far from the local market, the issuance of Masala Bonds could be a noteworthy progression for the Indian economy. The ongoing open door for Indian banks to raise outside money through RDBs is likewise an edifying advance towards the development. Contingent upon the Masala Bonds for acquiring remote venture is helpful to some degree, however, an excessive amount of reliance will prompt a negative presentation and at last influence the speculations into India.

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