How masala bonds works and what are its returns?

Sameer Aggarwal

Sameer Aggarwal, studied at Indian Institute of Management Kozhikode

Répondu il y a 133w · L'auteur dispose de réponses 1.3k et de vues de réponses 2.4m

Masala bonds are the new type of bonds, which are rupee-linked bonds, issued to offshore investors but the settlement happens in dollar terms. The major benefit of this bond is that the currency risk is not borne by the http://issuer.An issuer can issue masala bonds worth a maximum $750 million a year and the bonds must have a minimum maturity of five years.

How masala bonds works and what are its returns?

Par exemple, IFC issues Masala bond in the offshore market, the price of a bond will be denominated in Indian currency and not in the US $ but, at the time of maturity, it will be paid in the terms of dollar Value.

Renseignements

Valeur

Price of a bond in Rupee terms

1050

INR/USD rate on the investment date

70

Amount Invested in USD ($)

17.5

Redemption Amount in Rupee terms

1200

INR/USD rate on Redemption date

60

Redemption amount in USD ($)

20

Source: Advisesure

The above table helps one to understand how the bond is issued to an offshore investor, the investor is required to pay in rupee terms i.e. $17.5 (Rs.1050/Rs.70) at the time of purchase whereas, on maturity he receives the returns in the dollar terms i.e. $20 (Rs.60* $20=Rs.1200) for his investments.

History behind this bonds

IFC issued a 10-year, 10 billion Indian rupee bond in November 2014 to increase foreign investment in India and mobilise international capital markets to support infrastructure development in the country. Masala bond was the first Indian bond to get listed in London Stock Exchange. IFC named it Masala bonds to give a local flavour by calling to mind Indian culture and cuisine.

List of the companies who issued and planning to issue Masala Bonds in Offshore Markets

Nom de l'entreprise

Issue Size

Year of Issue

Répertorié dans

Société financière internationale (IFC)

Rs.1000 Crore

Nov-14

London Stock Exchange

Société financière internationale (IFC)

Rs.170 Crore

Nov-15

London Stock Exchange

Société financière internationale (IFC)

Rs.200 Crore

Nov-16

London Stock Exchange

Housing Development Finance Corporation

750 millions de dollars

Not Declared

London Stock Exchange

Oui banque

500 millions de dollars

Dec-16

London Stock Exchange

NTPC Limited

$500-$750 Million

Not Declared

London Stock Exchange

Power Finance Corporation (PFC)

$500-$750 Million

Not Declared

London Stock Exchange

Indian Railway Finance Corporation (IRFC)

$300-500 Million

Not Declared

London Stock Exchange

Source: AdviseSure, Newsreports

Benefits of Masala Bonds

  1. It helps the Indian companies to diversify their bond portfolio. Par exemple,earlier companies used to issue only corporate bonds. Masala bonds is an addition to their bond portfolio.
  2. It helps the Indian companies to cut down cost. If the company issues any bond in India, it carries an interest rate of 7.5%-9.00% whereas, Masala Bonds outside India is issued below 7.00% interest rate.
  3. It helps the Indian companies to tap a large number of investors as this bond are issued in the offshore market.
  4. Masala bonds will help in building up foreign investors’ confidence in Indian economy and currency which will strengthen the foreign investments in the country.
  5. An offshore investor earns better returns by investing in Masala bonds rather than byinvesting in his home country.Par exemple, if he had invested in the bond offered in his home country the US, the bond yield is hardly 2% whereas if he invests in rupee denominated masala Bond the yield ranges from 5.00% to 7.00%.
  6. An investor will benefit from his investment in masala bondsif the rupee appreciates at the time of maturity. Par exemple,
    ParticularsValuePrice of a bond in Rupee terms1050INR/USD rate on investment date70Amount Invested in USD ($)17.5Redemption Amount in Rupee terms1800INR/USD rate on Redemption date60Redemption amount in USD ($)30Source: AdviseSureThe investor pays $17.5 and receives $30i.e. the investor is earning a profit of $12.5 on his investment.

risque

As it is rupee denominated bond the risk will be borne by the investor. The issuer does not carry any currency risk by issuing this bond in the foreign market.

Par exemple

Renseignements

Valeur

Price of a bond in Rupee terms

1050

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INR/USD rate on investment date

60

Amount Invested in USD ($)

17.5

Redemption Amount in Rupee terms

1110

INR/USD rate on Redemption date

70

Redemption amount in USD ($)

15.85

Source: Advisesure

The investor pays $17.5 and receives $15.85. The loss of $1.65 on his investment due to fluctuation in exchange rate has to be borne by the investor.

Conclusion

Masala bond will help the Indian corporates to reduce its interest cost burden on the debt amount on its balance sheet. The more of foreign funds can be used for infrastructural development in the country. Overall, the development of a Masala bond market would be positive for Indian firms, opening up potentially significant new sources of funding over External Commercial Borrowings (ECB).

Rohit Yadav

Rohit Yadav, a étudié la finance

Répondu il y a 138w · L'auteur dispose de réponses 106 et de vues de réponses 72.9k

Bonds are instruments of debt - typically used by corporates to raise money from investors. Masala bonds have to be explained in the context of Indian corporates raising money from overseas investors. Before masala bonds, corporates have had to rely on avenues such as external commercial borrowings or ECBs. The challenge with the likes of ECBs is the entity raising money is faced with a currency risk - they have to be raised and repaid in dollar terms. A year is a long time in forex markets - currencies fluctuate sharply. So, imagine the risk a bond issuing entity, especially one with largely rupee earnings, if issue and repayment are years apart.

Masala Bonds are rupee-denominated bonds issued to overseas buyers. This is how it is different from other instruments. With a masala bond, a corporate could issue Rs. 10 billion worth of bonds with the promise of paying back Rs. 11 billion in one year. But as the Indian rupee has limited convertibility, the investors will lend the dollar equivalent of the Rs. 10 billion. After one year, the Indian corporate needs to pay back the dollar equivalent of Rs. 11 billion. The currency risk is with the investor.

The International Finance Corporation (IFC), the investment arm of the World Bank, issued a Rs. 1,000 crore bond in November last year. The purpose of the issue was to fund infrastructure projects in India. IFC named them ‘masala’ bonds to reflect the Indian angle to it. This kind of naming has been done before. This is, in fact, much like IFC's Chinese yuan-denominated Dim sum bonds. It isn't unusual in the foreign bonds market to encounter names such as Yankee and Bulldog. By the way, Japanese yen-denominated bonds are called Samurai. There was even much speculation about what the rupee-denominated bonds would be called before 'masala' was confirmed. Samosa, Ganga, and Peacock were apparently some of the names doing the rounds.

The Reserve Bank of India has issued guidelines allowing Indian companies, non-banking finance companies (HDFC, India Bulls Housing Finance are examples of such companies) and infrastructure investment trusts and real investment trusts (investment vehicles that pool money from various investors and invest in infrastructure and real estate sectors) to issue rupee-denominated bond overseas.

The rules put the issue limit to $750 million and also has a pricing cap for various tenures of issue. Experts say the move to permit masala bonds is an attempt to increase the international status of rupee and is also a step toward full currency convertibility (the freedom to convert Indian currency into other internationally accepted currency without any restrictions).

The Finance Ministry has cut the withholding tax (a tax deducted at source on residents outside the country) on interest income of such bonds to 5 per cent from 20 per cent, making it attractive for investors. Also, capital gains from rupee appreciation are exempted from tax.

Globally, there is ample liquidity thanks to lower interest rates in developed markets, but there are very few investment options due to weak economic conditions globally. India is that rare fast-growing large economy, and masala bonds is one way for investors to take advantage of this.

By the way, these bonds are bought by retail investors as well as big institutions overseas.

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An important consideration for issuers is the access to cheaper funding than what's available in the domestic markets, according to ratings firm S&P. For corporates, who would be the main issuers, masala bonds will be one other key source of funding apart from banks and local debt markets. Another ratings firm India Ratings and Research says such bonds would lower the cost of capital over a period of time - the cost remains one of the highest in Asia. This also makes sense given that Indian banks are reluctant to lend to sectors facing weak demand and heavy debt.

Investors would need to keenly watch the credibility of the issuer. For example, it would easy for an HDFC or NTPC to easy to raise the bond when compared to a smaller firm. Higher the credit rating of a firm, the better would be the appetite for their issues. Since the currency risk is on the investors, they will like the rupee to be stable. S&P says the initial excitement over masala bonds will give way to the ultimate realisation that because currency and economic growth are external factors, investors will subject issuers to a lot more scrutiny.

Gaurav Sau

Gaurav Sau

Répondu il y a 1d

The “Masala” bonds in Rupee Denominated

Le "Masala” having Rupee Denominated obligations

Rupee Denominated obligations [RDBs] commonly known as “Masala obligations”, 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 namedobligationsissued to remote financial specialist. In spite of the fact that these obligations are issued to speculators in seaward purviews, still they are designated in Indian cash. Subsequently, the expression "Masala" has been attributed to these obligations to give an Indian flavour to the equivalent. The China also issue obligations name called as “Dim Sum Bonds” and similarly the Japanese obligationsnamed called as “Samurai Bonds”. These obligations 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 obligations. 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 $27 to buy the rupee denominated bond. Assume the rates of interest applicable on these obligations are 10%, the Indian company has to pay ₹200 annually and this is paid by the issuer means Indian company. at the prevailing exchange rate at the time of payment. However, if the exchange rate decry to 1$= ₹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 private sector to development in under devloped countries, has witnessed its rupee-designated acquiring in global markets amid year financial 2015. From that point, it thought of two bond issues: "Maharaja obligations" 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 obligations to fund inexhaustible power ventures. Besides, HDFC was first to list its masala bond on the London Stock Exchange in 2016.

Les Masalaa 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.

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2.

Les obligations are denominated in rupee, so there is no exchange rate risk.

3.

Iissuing Masala obligations helps to Indian corporates to diversify their bond portfolio. While the bond issue is in the off-shore market, it facilitates Indian companies to catching a large number of investor base.

4.

Even for investors, theseobligations serve a remunerative purpose as an investor overseas can earn good returns through Masala obligations compared to the investment returns from its residency country.

5.

obligations are also exempted from tax.

Legal Framework:-

Masala obligations having debt securities under section 2(30) of the Companies Act, 2013. Therefore, provisions also applicable to issuance of debt securities shall apply to Masala obligations 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 obligations overseas [Masala obligations] 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 issuance of debt securities.

Selon le lignes directrices issued by Reserve Bank of India in modified policy in August 2016, the money borrowed underMasala obligations 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 obligations or RDBs in August 2016. The overall guidelines underlying for rupee denominated obligations will be similar to that for ECBs.

Considering the fact that Masala obligations are governed by the RBI and in order to further streamline the regime, the Securities and Exchange Board of India (SEBI) through its circulaire 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 abroad market may depict liquidity far from the local market, the issuance of Masala obligationscould 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 obligationsfor 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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