Masala Bonds

INTERNATIONAL BUSINESS

Group 7 | MFM | 29th October, 2017

Priyanka Singh 109

Sonal Parab 110
Nishmitha Salian 111
Yogesh Shinde 112
Amit Jha 113
Sanjay Lodha 114
Dhaval Darji 115
Prasad More 117
Contents
1. MASALA BONDS/RUPEE DENOMINATED BONDS .................................................. 2
1.1 HISTORY AND EVOLUTION OF MASALA BONDS ................................................. 2
2. RBI’S GUIDELINES ON RDB’S ..................................................................................... 3
2.1 Issuers of RDBs............................................................................................................ 3
2.2 Corporate Issuers and Maturity Period ....................................................................4
2.3 Interest Payments and Maximum Amount ..............................................................4
3. INTERPRETATION .......................................................................................................... 5
3.1 International Finance Corporation (IFC) .................................................................. 5
3.2 National Thermal Power Corporation (NTPC) ......................................................... 5
3.3 Housing Development Finance Corporation (HDFC) ............................................6
3.4 British Columbia...........................................................................................................6
3.5 European Bank for Reconstruction and Development (EBRD)...........................6
4. MERITS OF MASALA BONDS.......................................................................................8
4.1. To Corporate ................................................................................................................8
4.2. To Investors .................................................................................................................8
4.3. To India .........................................................................................................................8
5. DEMERITS OF MASALA BONDS .................................................................................8
6. FUTURE OF RDB ............................................................................................................9
7. CURRENT AFFAIRS .......................................................................................................9
8. REFERENCE ................................................................................................................... 13

PAGE 1
 1. MASALA BONDS/RUPEE DENOMINATED
BONDS
Rupee denominated bonds (RDBs) or Masala bonds are becoming more enticing for both
investors and issuers, and with these bonds, India also stands at a profitable position.
Normally Indian corporate issues debt instruments to raise money from the Indian
investors. Unlike debt instruments, masala bonds are innovative type of bonds, which are
linked to rupee but issued to overseas investors. Masala bond is an effort to protect
issuers from currency risk and instead transfer the risk of currency to investors buying
these bonds. The Reserve Bank of India (RBI) issued a circular authorizing the issuance
of masala bonds overseas on September 29, 2015. International Finance Corporation
(IFC), a private sector investment arm of the world bank named, issued and listed masala
bonds, on London Stock Exchange (LSE) in need of infrastructure projects in India.
Mortgage lender Housing Development Finance Corporation (HDFC) was the first
Indian company who raised Rs 5000 crore by issuing masala bonds.

− Newspaper reports have indicated that Indian companies have raised about ₹.6000
crore through Masala Bonds during the last one year. It may be recalled that the
International Finance Corporation (IFC), the investment arm of the World Bank,
in November 2014, issued a ₹1,000 crore bond to fund infrastructure projects in
India. These bonds were listed on the London Stock Exchange (LSE). IFC then
named them Masala Bonds to give an Indian identity

− During the Prime Minister’s visit to the UK in November 2015, organisations such
as Housing Development Finance Corp., Yes Bank, and the Railways had
announced they were going to raise funds through Masala Bonds from the London
market. Ratings agency S&P expected that the issuance of Masala Bonds would
touch US $5 billion annually over the next two to three years.

1.1 HISTORY AND EVOLUTION OF MASALA BONDS

Masala bonds are creating hype in Indian as well as foreign markets. The recent success
of HDFC has geared so many organizations such as YES bank and the Railways, had also
announced their entry into the overseas market. Before these rupee denominated bonds,
the main source for the corporate to raise money from the foreign market was external
commercial borrowings or ECBs. External commercial borrowings
(ECBs) are commercial loans in the form of buyers’ credit, suppliers’ credit, bank loans
and securitized instruments like fixed rate bonds, floating rate notes and preference
shares which are non-convertible, optionally convertible or partially convertible, issued to
the non-resident lenders with a minimum average maturity of 3 years. ECBs can be
accessed under automatic and approval routes. Automatic route covers the borrowings for
industrial sector, real estate, infrastructure and some special service sectors. Approval
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route covers borrowings for the financial sector. ECBs are dollar denominated bonds
which are issued and repaid in US Dollars. The main threat allied with ECBs is currency
risk – if the domestic currency depreciates, the liability can significantly increase. In
ECBs the majority of the risk has borne by the issuers. While in a rupee denominated
bond, an Indian entity issues a bond in foreign markets and the principal reimbursement
and interest payments are articulated in rupees. Masala bonds are issued in rupee terms
and at the maturity time it will be paid in dollar terms leaving the risk of currency to the
investors.
In November 2014 International Finance Corporation (IFC) issued the first masala bond
in London in order to increase the foreign investment in India. IFC is the largest global
development institution, established in 1956, owned by 184 member countries. It is
mainly focused on financial companies and private sector companies in developing
countries. IFC raised 10 billion Indian rupee bonds ($163 million) with 10 years of
maturity (Nov 2014) to sustain infrastructure developments in India. Masala bonds were
the first rupee denominated bonds listed on the London Stock Exchange (LSE). IFC
named masala bonds as ‘Masala’ to reflect the spiciness and culture of India. The idea
was similar to Chinese Dim-Sum Bonds, which are Yaun-denominated bonds and named
after a popular dish in Hong Kong. Another one is Japanese Samurai bond, which is Yen-
denominated bond and named after its country’s warrior. Like any other off-shore bonds,
masala bonds are meant for those overseas investors who want to take experience to the
Indian assets from their locations. But they have been attached to the currency risk or
exchange rate risks since the settlement will be in US dollars. This is because of the
limited convertibility of rupee than the US dollars.

2. RBI’S GUIDELINES ON RDB’S

According to the guidelines issued by Reserve Bank of India (RBI) in September 2015
and modified policy in August 2016, the money borrowed under masala bonds can only
be used for infrastructure funding purposes. In order to achieve the capital needs and to
accumulate fund for the infrastructure projects, 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 External Commercial Borrowings (ECBs).

2.1 ISSUERS OF RDBS

Any corporate body or corporate (an entity registered under Companies Act as a
company) formed with a specific Parliament Act is eligible to issue Masala bonds
overseas. According to the September 2015 regulation Infrastructure Investment Trusts
(InvITs), Real Estate Investment Trusts (REITs) coming under SEBIs jurisdiction are
also eligible. From the recent August 2016 regulation, banks are also permitted to borrow
such bonds in order to finance their tier 1, tier 2 and infrastructure funding.

PAGE 3
2.2 CORPORATE ISSUERS AND MATURITY PERIOD

Indian corporate who is entitled to raise External Commercial Borrowings (ECBs) is also
allowed to issue off-shore Rupee denominated bonds. The RDBs borrowing procedure
pursues the same guidelines as the corporate follows to issue ECBs. The corporate need
RBI permission to avail masala bonds if they issue ECBs under approval route, whereas
under automatic route of ECBs issue, RBI approval is not needed. The payments of
coupon and redemptions are settled in foreign currency. The amount to be issued, the
average maturity period (minimum of 3 years) and end use protection (the reason for
which these masala bonds are issued) also consider as per the guidelines under External
Commercial Borrowings (ECB).

2.3 INTEREST PAYMENTS AND MAXIMUM AMOUNT

The payments of interest (coupon payment) should not be more than 500 basis points that
means under consequent maturity it shouldn’t be above the superior yield of the Indian
Government’s security. For instance, if the interest rate of a G Sec five-year bond is 6%,
then the rate of interest for rupee denominated bond should not be above 11%. For the
conversion of USD-INR, the reference rate of the Reserve Bank on that date of issue will
be pertinent. An eligible issuer can raise a maximum of INR 50 billion or its equivalent
through RDBs under automatic route during a financial year. This limit may be more than
the permitted amount under automatic route of ECB. The fund collected from rupee
denominated bonds must not be used for some restricted areas of FDI and for real estate
activities (except for the development of housing projects and townships).

PAGE 4
ILLUSTRATION 1 MASALA BOND ISSUERS IN LONDON STOCK
EXCHANGE (AS ON OCTOBER 2016)

British
NTPC HDFC ERBD IFC
Columbia

4 21Mar2016
09 September 10 August
Issue Date 21 July 2016 March 10Aug2015
2016 2016
2016 18Nov2014

INR 2 bn/
INR 5 bn
Issue Size INR 20 bn INR 30 bn INR 5 bn INR 3.15bn/
INR 10 bn

7.1%
Coupon Rate 6.6% 7.375% 7.875% 6.4% 6.45%
6.3%

15 year/ 5
Maturity 40 months 5 year 37 months 3 year
year/ 10 year

3. INTERPRETATION
3.1 INTERNATIONAL FINANCE CORPORATION (IFC)
 IFC is one of the world’s prime investors for developing countries, mainly investing
about $11 billion over the last decade in long-term financing for climate-smart projects
like energy efficiency, green buildings, sustainable agriculture, private sector adaptation
to climate change and renewable power.
 IFC issued INR 2bn in 15 year masala bond in March, 2016 marking as a historic
longest-dated overseas bond.
 The proceeds of the bonds will be used to progress private sector development in India.

3.2 NATIONAL THERMAL POWER CORPORATION (NTPC)

 NTPC is India’s biggest power utility company and its headquarters are located in New
Delhi. NTPC was established by Government of India in 1975 and it was awarded
Maharatna status in May 2010.
 The company’s core business entails producing and selling electricity to State Electricity
Boards and state owned power distribution companies in India.
 NTPC initiated a green bond structure which has been certified by Climate Bonds, an
associate of London Stock Exchange independently.
 The proceeds of the bond will be invested to support solar and wind projects
supplementing Indian Government goal to produce 175 GW of renewable energy by
2022.
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3.3 HOUSING DEVELOPMENT FINANCE CORPORATION (HDFC)
 HDFC founded in 1977, is a foremost provider of Housing Finance and it is established
as the first specialized Mortgage Company in India.
 HDFC stand for the world’s first Indian corporate issued Masala bond.
 The corporation has raised a total amount of Rs 5,000 crore through the issue of Rupee
denominated bonds (as on October 14, 2016).

3.4 BRITISH COLUMBIA

 British Columbia, a Canadian Province was the first foreign government unit to issue a
rupee denominated bond.
 The income from the bond will be utilized by HDFC (one of India’s leading financial
services and banking companies) in India’s housing industry.

3.5 EUROPEAN BANK FOR RECONSTRUCTION AND

DEVELOPMENT (EBRD)
 EBRD was founded in 1991, is a multilateral international financial institution which
uses investments as a device to build market economies. It is owned by two governmental
institutions (EU and EIB) and 65 countries.
 The European Bank for Reconstruction and Development has been an important issuer of
Indian Masala bonds in London.

ILLUSTRATION 2: OVERSEAS ISSUE OF INR DENOMINATED

MASALA BONDS

Masala bonds Issued

by Indian Companies

Offshore Listed Issue

Offshore Unlisted
on Offshore Stock
Private Placement
Exchange

No Agent Medium Term Note Offshore standalone

Bond Trustee and
Fiscal Paying Agent Programme - INR issue of INR
Fiscal Paying Agent No Trustee
Structure Denominated denominated Masala
Structure No clearing systems drawdown bonds

PAGE 6
ILLUSTRATION 3: GLOBAL INR MECHANICS (1/2)
Flow 1: Issue Date
Assumptions:
INR 64 bn equivalent size 10Y Global INR
Coupon: 8.00% per annum
USD/INR Rate: 64.00

ILLUSTRATION 4: GLOBAL INR MECHANICS (2/2)

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 4. MERITS OF MASALA BONDS

4.1. TO CORPORATE
 It helps the Indian corporate to diversify their bond portfolio. While the bond issue is in
off-shore market, it facilitates Indian companies to valve a large number of investor base.
 As interest rates in developed countries are much lower compared to India, Corporate can
borrow from overseas market at low interest rates.
 Being an issuer, Indian entity do not have to bear the risk of currency. That means there
is any fluctuation in the currencies, the risk is totally lies with the off-shore investor.

4.2. TO INVESTORS
 An investor in overseas can earn better returns through masala bonds compared to the
investment returns from his home country (In US the bond yield3 is only just 3% whereas
in masala bond it ranges from 5% to 8%).
 An investor benefits from the masala bond if the rupee appreciates at the time of
maturity.
 Rupee denominated bonds are building interest in the investors who are even unwilling to
invest in the offshore market.
 In order to attract and benefit more foreign investors, the Ministry of Finance has cut the
withholding tax (a deducted tax at source on populace outside the country) on interest
proceeds of bonds from 20% to 5%. And capital gains from appreciation of rupee are also
exempted from tax.

4.3. TO INDIA
 As India has ambitious with few many goals like digital India, developing smart cities,
Make in India etc, it will need around INR 26 lakh crore in next five years. Rupee
denominated masala bond is an efficient way to tap foreign capital.
 Masala bonds help in rising up the off-shore investor’s confidence and knowledge about
Indian economy.
 In India many long term projects like infrastructure and power are hindered due to
shortage of capital. Long term Rupee denominated bond is the best solution for road,
power and infrastructure companies.

5. DEMERITS OF MASALA BONDS

 Along with the benefits of the masala bonds there are some risks involved with
rapid shifts in capital flows, financial candidness, and the risk that overseas
market may portray liquidity away from the domestic market.

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 6. FUTURE OF RDB
 The issuance of masala bonds by the RBI could be the major advancement for the
Indian economy. The recent opportunity for Indian banks to raise foreign currency
through RDBs is also an enlightening step towards the growth. Depending on the
masala bonds for getting foreign investment is good for some extent but too much
dependence will lead to a negative exposure and ultimately it affect the
investments to India.

7. CURRENT AFFAIRS
June 21 2017:

Masala bond issuance on hold for now, says Sebi

Issuance temporarily ceased till FPIs’ utilisation limits in corporate bonds falls below
92%.
Markets regulator Sebi on Thursday indicated that the issuance of Masala bonds, or
rupee-denominated bonds in the overseas market, has been temporarily ceased till foreign
portfolio investors’ (FPIs) utilisation of investment limits in corporate debt falls below
92%.

“As rupee-denominated bonds issued by Indian corporates overseas are covered under
CCDL, issuance of such bonds overseas shall temporarily cease, until the limit utilisation
falls back to below 92%,” the Securities and Exchange Board of India (Sebi) said in a
circular. CCDL stands for Combined Corporate Debt Limit.
According to latest depository data, FPIs have utilised 92.89% of the available quota of
Rs 2.44 lakh crore.
Bond market experts pointed out that the step might be a result of appreciating currency
due to huge amounts of foreign inflows into debt and equity.
Sebi indicated that the CCDL shall be available on tap for investment by foreign
investors till the overall investment reaches 95%, after which, the auction mechanism
shall be initiated for allocation of the remaining limits.
So far, rules indicated that if the FPI utilisation of limits crossed 90%, the remaining
limits have to be put up for auction. This is the process which has been followed for
government securities that witness significant interest from FPIs.
Sebi stated that in the event the overall FPI investment in CCDL exceeds 95% as
indicated by the debt utilisation status updated daily on the websites of NSDL and CDSL,
the depositories shall direct the custodians to halt all FPI purchases in corporate debt
securities.
Following this the exchanges have to be notified. Auctions will then be conducted on the
exchanges — alternatively on the BSE and the NSE. The auction mechanism shall be

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discontinued and the limits shall be once again available for investment on tap when the
debt limit utilisation falls below 92%, Sebi stated.

September 23 2017:

RBI removes masala bonds from corporate bond limit

The Reserve Bank of India has removed masala bonds, or rupee-denominated debt
securities sold abroad, from the corporate bond investment limit that remains almost full
amid strong overseas investor interest.

The move will release additional space for yield-hungry foreign portfolio investors (FPI),
who can now invest up to another Rs 44,000 crore in the debt securities of companies like
Housing Development Finance CorporationBSE 0.56 % and NTPCBSE -1.19 %.

With effect from October 3, masala bonds will no longer form a part of the limit for FPI
investments in corporate bonds, the RBI said in a notification on Friday. “They will form
a part of the external commercial borrowings and will be monitored accordingly.”

FPIs can invest in corporate bonds up to a maximum of Rs 2,44,323 crore, less than 1%
of which currently remains unused.

The space (Rs 44,000 cr) left by masala bonds will be made available to domestic
Corporate bond investors in next two quarters.

Typically, top-rated government-owned entities, including NTPC, Rural Electrification

Corp, National Highways Authority of India and private players like Housing
Development Finance Corporation attract investors the most in the domestic corporate
bond market.

“The revised limit is expected to result in higher FPI flows and a likely compression in
corporate bond spreads, given the above change,” said Karthik Srinivasan, group head-
financial sector Ratings, ICRA.

In July, the Securities Exchange and Board of India had suspended the issuance of
offshore masala bonds. Such bond sales were stopped until foreign holdings of rupee-
denominated Indian corporate loans fell below 92% of the limit, the capital market
regulator had said.

Masala bonds are rupee-denominated debt sold to offshore investors, who take the
foreign exchange risk to earn higher interest rates compared with dollar-denominated
overseas bond sales. These securities gained momentum in the past year and half with the

PAGE 10
country’s largest mortgage lender, HDFC, hitting the market first. Other issuers included
the National Highways Authority of India and NTPC.

The masala bonds were reckoned under both corporate debt and external commercial
borrowings for FPI investment. It will now be counted only under the ECB category,
where a borrower just needs to seek the RBI’s approval to sell those securities.

“Bringing masala bonds under the ECB framework will ensure better monitoring
framework, especially on sources and the purpose of investment,” said Soumyajit Niyogi,
associate director at India Ratings & Research.

September 26 2017:

Easy norms turn masala bonds spicy

Indian companies may line up masala bond issues in the next few months to lower their
overall cost of capital after the central bank eased rules on the sale of the rupee-
denominated securities overseas.

The Reserve Bank of India (RBI) lifted a two-month moratorium on the sale of these
bonds that now stand excluded from the overall corporate bond limit. Masala bonds are
sold overseas, but are denominated in Indian rupees instead of the local currency, thus
transferring the forex risk to the investor from the borrower. The first such bond by an
Indian company was issued last year

Bankers said that demand from foreign investors remains strong and once the current
volatility in the rupee subsides, Indian companies will look to raise more funds through
these instruments.

"The masala bond limit is now under the overall ceiling for external commercial
borrowings (ECBs), which would differ from one company to another," said Hitendra
Dave, head global banking and markets for HSBC in India. "This will give companies
more room to raise funds. Our expectation is that once the rupee stabilizes, there should
be more interest from investors."

The Indian rupee is currently trading near a six-month low of 65.12 to the dollar,
weakening from around 64 at the start of the month. Concerns over slowing growth in
Asia's third-biggest economy, and the likelihood of federal borrowing beyond the budget
have weighed on the currency.

Dave said that the local currency has also been hurt because the market is adjusting its
'rupee-long' position after a steady rise earlier this year. However, he expects the rupee to
stabilise by next month after which top-rated companies are expected to begin masala
bond sales.

PAGE 11
Bloomberg data show that Indian companies have raised about Rs 200 billion so far
through these instruments, most of which mature in less than five years.

"Investors abroad still have an appetite for paper from India. In fact, if this announcement
had come even ten days earlier, we would have seen fresh issues. HDFC, NTPCBSE -
1.19 %, NHAI and REC will be ready once the rupee stabilizes, although this will have to
be in the framework proposed by the RBI," said Shashikant Rathi, head of Treasury at
AXIS Bank.

In June, RBI had issued fresh guidelines for the issuance of masala bonds, asking
borrowers to set the minimum maturity at three years for sales up to $50 million per
financial year, and at five years for bond issuances above $50 million.

It also introduced an all-in-cost ceiling of 300 basis points over the prevailing yield of the
benchmark government bond of corresponding maturity to prevent companies from
raising funds by paying a rate they cannot afford.

So far, foreign investors have invested Rs 32,381 crore in these instruments abroad and
have unused limits of Rs 11,620 crore. If companies get RBI approvals, these limits now
wouldn't apply.

October 26 2017:

PNB Housing Finance board okays sale of $1 billion masala bonds

PNB Housing Finance board also approves the issuance of secured and unsecured non-
convertible debentures aggregating up to an amount of Rs6,000 crore in tranches.
PNB Housing Finance Ltd, a housing finance company sponsored by state-owned lender
Punjab National Bank and backed by private equity investor Carlyle Group, Thursday
said its board has approved raising up to $1 billion by selling masala bonds.

Masala bonds are rupee-denominated bonds sold in offshore capital markets. “The board
has approved issuance of rupee denominated bonds (masala bonds) to overseas investors
up to an amount of $1 billion in one or multiple tranches,” the filing said.

PNB Housing Finance board also approved the issuance of secured and unsecured non-
convertible debentures aggregating up to an amount of Rs6,000 crore in tranches.

World Bank arm International Finance Corp. (IFC) was the first to issue masala bonds in
November 2014. It raised Rs1,000 crore to fund Indian infrastructure projects.

In March, Housing Development Finance Corp. Ltd (HDFC) raised about $504 million
(about Rs3,300 crore) through masala bonds, to fund its business expansion, the company
had said in stock exchange filings.

PAGE 12
Earlier this month, Fullerton India Credit Co. Ltd, a non-banking financial company
(NBFC) owned by Singapore-based Temasek Holdings Pte. Ltd, on Thursday said it had
raised Rs500 crore ($76 million) from IFC. PNB Housing Finance shares rose 1.75% to
Rs1,418.35 on BSE, while the benchmark Sensex rose 0.32% to 33,147.13 points.

8. REFERENCE
1. International Journal of Management (IJM)
Volume 7, Issue 7, November–December 2016, pp.382–386, Article ID: IJM_07_07_042
Syamala Devi Challa
Research Scholar, Department of Commerce & Business Administration,
Acharya Nagarjuna University, Andhra Pradesh, India
Dr. A. Kanakadurga
Assistant Professor, Research Scholar, Department of Commerce & Business
Administration,
Acharya Nagarjuna University, Andhra Pradesh, India
2. www.livemint.com › Money › Markets
3. https://economictimes.indiatimes.com › Markets › Bonds
4. Other research articles

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