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Masala Bonds

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Revision as of 11:33, 23 July 2015

"Masala Bonds" are the 10 year off-shore rupee bonds issued by International Finance Corporation (IFC), a member of the World Bank group, in the international capital market in November 2014, to raise funds for supporting private sector infrastructure development initiatives in India. Masala bonds are listed in London Stock Exchange.

Masala bonds, like any other off-shore bonds, are intended for those foreign investors who want to take exposure to Indian assets, yet constrained from doing it directly in the Indian market or prefer to do so from their offshore locations. The settlement of the bonds will be in US dollars but since they are pegged to the Indian currency -rupee-, investors will directly take the currency risk or exchange rate risks. Settlement is done in US dollars because of the limited convertibility of rupee.

The term "masala" stands for Indian spices, which gives Indian cuisine its characteristic flavour, and helped India gain a place in the global trade map. IFC, established in 1956 and owned by 184 member countries, is the largest global development institution focused exclusively on the private sector companies and financial institutions in developing countries.

Masala bonds were issued on 10 November 2014 under IFC’s $2 billion offshore rupee program and yields 6.3%. IFC issued the bonds in London, a premier financial center and the investment banker, J.P. Morgan was the sole arranger for the bond. The vast majority of investors in masala bonds are European insurance companies. Proceeds from this 10-year, 10 billion Indian rupee bond (equivalent to $163 million) will be used to support a forthcoming infrastructure bond issuance by Axis Bank, back in India. Thus, Masala bonds pave the way for more foreign investment to help meet India’s private sector development needs.

Masala bonds are the first rupee bonds listed on the London Stock Exchange. They are the longest-dated bonds in the offshore rupee markets, building on earlier offshore rupee issuances by IFC at three-, five-, and seven-year maturities. However, these earlier bond issuances were not issued under the nomenclature of masala bonds. As on date, the present issue of masala bonds is a one-time issue. Hence, subsequent issuances of the off shore rupee bonds by IFC may also not be under this nomenclature.

Yet by usage of the term, Masala Bonds are similar to dimsum bonds -bonds issued outside China but denominated in Chinese currency. But they are different from samurai bonds which are Yen (Japanese currency)-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations.

Offshore bonds have its own set of advantages and disadvantages for both the issuer and the investor as well as for the economy. Competition from offshore markets may induce improvements in domestic bonds markets such as strengthening of domestic market infrastructure, improving investor protection and removing tax distortions that hinder domestic market development etc. Against these benefits come the risks associated with financial openness and sudden shifts in capital flows, and the risk that offshore markets may draw liquidity away from the domestic market.


References

  1. IFC Issues First Masala Bonds in London, Attracting International Investment for Infrastructure in India, Press release, IFC dated 10 November 2014
  2. Why issue bonds offshore? by Susan Black and Anella Munro, BIS Working Papers, No 334


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