Prelims: Current events of national and international importance | Economy
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, 1st 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, 1st 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
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Component
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Conventional Foreign Bond
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Masala Bond
|
|
Denomination
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Foreign currency
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Indian rupees
|
|
Currency risk borne by
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Issuer
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Investor
|
|
Exchange rate fluctuation
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Impacts Indian issuer
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Impacts foreign investor
|
|
Example
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USD bond by Indian firm
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INR bond sold to global investor
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- 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
- Indian Express | Masala Bonds & a Kerala political slugfest
- Clear Tax | Masala Bond
- Bajaj Finserv | Masala Bond
