Rupee denominated bonds (masala bonds)

This article gives an overview about masala bonds as how it can be issued, its uniqueness, merits, demerits and its future.
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Rupee denominated bonds (masala bonds)International Journal of Management (IJM)Volume 7, Issue 7, November–December 2016, pp.382–386, Article ID: IJM_07_07_042Available online athttp://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=7&IType=7Journal Impact Factor (2016): 8.1920 (Calculated by GISI) www.jifactor.comISSN Print: 0976-6502 and ISSN Online: 0976-6510© IAEME Publication RUPEE DENOMINATED BONDS (MASALA BONDS) Syamala Devi Challa Research Scholar, Department of Commerce & Business Administration, Acharya Nagarjuna University, Andhra Pradesh, India Dr. A. Kanakadurga Assistant Professor, Department of Commerce & Business Administration, Acharya Nagarjuna University, Andhra Pradesh, India ABSTRACT 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. This article gives an overview about masala bonds as how it can be issued, its uniqueness, merits, demerits and its future. Key words: Rupee denominated bond, External Commercial Borrowing, Overseas investment Cite this Article: Syamala Devi Challa and Dr. A. Kanakadurga, Rupee Denominated Bonds (Masala Bonds). International Journal of Management, 7(7), 2016, pp. 382–386. http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=7&IType=71. HISTORY AND EVOLUTION OF MASALA BONDSMasala bonds are creating hype in Indian as well as foreign markets. The recent success of HDFC hasgeared so many organizations such as YES bank and the Railways, had also announced their entry into theoverseas market. Before these rupee denominated bonds, the main source for the corporate to raise moneyfrom 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 securitizedinstruments 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 averagematurity of 3 years. ECBs can be accessed under automatic and approval routes. Automatic route coversthe borrowings for industrial sector, real estate, infrastructure and some special service sectors. Approval http://www.iaeme.com/IJM/index.asp 382 editor@iaeme.com Rupee Denominated Bonds (Masala Bonds)route covers borrowings for the financial sector. ECBs are dollar denominated bonds which are issued andrepaid in US Dollars. The main threat allied with ECBs is currency risk – if the domestic currencydepreciates, the liability can significantly increase. In ECBs the majority of the risk has borne by theissuers. While in a rupee denominated bond, an Indian entity issues a bond in foreign markets and theprincipal reimbursement and interest payments are articulated in rupees. Masala bonds are issued in rupeeterms 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 inorder 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 andprivate 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 werethe first rupee denominated bonds listed on the London Stock Exchange (LSE). IFC named masala bondsas ‘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 isJapanese Samurai bond, which is Yen-denominated bond and named after its country’s warrior. Like anyother off-shore bonds, masala bonds are meant for those overseas investors who want to take experience tothe Indian assets from their locations. But they have been attached to the currency risk or exchange raterisks since the settlement will be in US dollars. This is because of the limited convertibility of rupee thanthe US dollars.2. RBI’S GUIDELINES ON RDB’SAccording to the guidelines issued by Reserve Bank of India (RBI) in September 2015 and modified policyin August 2016, the money borrowed under masala bonds can only be used for infrastructure fundingpurposes. In order to achieve the capital needs and to accumulate fund for the infrastructure projects, RBIallowed banks to issue masala bonds or RDBs in August 2016. The overall guidelines underlying for rupeedenominated bonds will be similar to that for External Commercial Borrowings (ECBs) 1.2.1. Iss ...