Masala Bonds

Why in news?

ED suspects that rules under Foreign Exchange Management Act (FEMA) were violated when Kerala Infrastructure Investment Fund Board (KIIFB) raised funds through Masala Bonds.

• Definition – Masala Bonds are bonds issued outside India but denominated in Indian Rupees (INR).
• Name – Coined by the International Finance Corporation (IFC) in 2014 to give the bonds a uniquely Indian identity, similar to “Samurai Bonds” (Japan) or “Dim Sum Bonds” (China).
• Origin – In India, 1^st introduced in 2014 by IFC, which issued the Masala Bond worth Rs.1,000 crore for Indian infrastructure.
• Purpose – To help Indian entities raise funds internationally without facing exchange rate volatility.
• Types –
  • Short-term bonds – Maturity < 3 years, lower risk, lower returns.
  • Long-term bonds – Maturity > 3 years, used for large projects, higher yields.
  • Fixed-rate bonds – Stable interest, predictable returns.
  • Floating-rate bonds – Interest varies with market benchmarks.

Key Characteristics

• Denomination in INR – It is issued in Indian rupees, unlike conventional foreign bonds.
• Issuer – Indian entities such as Corporations, Financial institutions, or Government-backed entities.
• Listing – These bonds are listed on foreign exchanges, usually in financial centres like London or Singapore.
  • For example, 1^st Masala bond was listed on the London Stock Exchange (LSE).
• Regulator – Governed by RBI and SEBI despite being issued in abroad.
• Maturity period –
  • 3 years if raised up to USD 50 million equivalent in INR per year.
  • 5 years if raised above USD 50 million equivalent.

Comparison between Conventional Foreign Bond and Masala Bond

• Uses of Funds –
  • Approved use – Refinancing rupee loans/debentures, affordable housing & township projects, working capital.
  • Restricted use – Real estate (except affordable housing), domestic equity investments, land purchase, prohibited FDI activities.
• Limitations – Currency risk for investors, restricted usage of funds, limited investor appetite in volatile markets.
• Significance – It reduce the currency risk for issuers, helps attract foreign capital for infrastructure and strengthen rupee & globalize Indian markets.

References

1. Indian Express | Masala Bonds & a Kerala political slugfest
2. Clear Tax | Masala Bond
3. Bajaj Finserv | Masala Bond