Masala bonds function as international debt instruments which Indian companies use for capital raising through global markets while issuing them in Indian Rupees (INR). Foreign investors who purchase these bonds receive all payments which include interest and principal in Indian rupees. The structure protects Indian issuers from currency risk because all exchange rate variations between currencies impact the investor instead of the borrower. The Reserve Bank of India (RBI) allows masala bonds to operate through its External Commercial Borrowing system while they trade on international stock markets. Indian entities use masala bonds as their main method to attract international investments because this approach protects them from currency risks while maintaining domestic economic stability.
Why is It Called a "Masala Bond"?
The Hindi term ‘masala’ denotes a combination of spices which creates the unique taste of Indian dishes. The IFC chose this name deliberately when it introduced the instrument in 2014 because the organisation wanted to showcase Indian culture and cuisine to worldwide audiences through their chosen name which resembles the practice of other nations who name their foreign currency bonds after local cultural symbols.
For instance, China has Dim Sum Bonds which are yuan-denominated bonds issued in Hong Kong and named after the popular Cantonese dish, while Japan has Samurai Bonds which are yen-denominated bonds issued by foreign entities in Japan. India's version got its name the same way, a nod to where the money is ultimately going and where the currency belongs.
Types of Masala Bonds
Here are the main types of masala bonds in India:
Short-Term Masala Bonds
These bonds usually have a maturity of around 3 years, which is the minimum allowed by RBI for certain issuances. They are suitable for companies needing funds for short-term needs like working capital or refinancing. Their shorter duration also reduces risk for investors.
Long-Term Masala Bonds
These bonds have longer maturity periods, generally greater than 5 years, and can be as high as 10 to 20 years. These bonds are typically used in infrastructure, housing, and power sectors, among others.
Fixed-Rate Masala Bonds
This is the most common type, where the interest rate remains fixed throughout the bond’s tenure. It provides stability and predictable returns for both issuers and investors.
Floating-Rate Masala Bonds
In this type, the interest rate is linked to a benchmark and can change over time. These bonds are less common but offer flexibility and are linked to interest rate movements in India.
Key Features of Masala Bonds
Here are some key features of masala bonds:
INR Denomination
Masala bonds are denominated in Indian Rupees. Thus, the amount, rate of interest, and repayment amount will be in Indian Rupees only. In case there is a devaluation of Indian Rupees, the risk will be entirely borne by the foreign investor and not the Indian company. Thus, currency risk is being minimised.
Listed on Foreign Stock Exchanges
Such bonds are traded on international stock exchanges like the London Stock Exchange and Singapore Stock Exchange. This allows Indian companies to tap a larger universe of investors like pension funds and insurance companies.
Regulated by RBI and SEBI
Masala bonds are governed under the External Commercial Borrowing guidelines set by the Reserve Bank of India. The Securities Exchange Board of India also regulates masala bonds in some instances. Moreover, foreign investors must adhere to global regulation requirements to invest in masala bonds.
Who Can Issue Masala Bonds?
The RBI restricts masala bond issuance to eligible Indian entities. The approved categories include:
- Indian corporates registered under the Companies Act, 2013
- Body corporates set up through Acts of Parliament (such as PSUs)
- Scheduled commercial banks — for specific purposes like infrastructure financing or perpetual debt instruments
- Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) regulated by SEBI
- Non-Banking Financial Companies (NBFCs) meeting RBI eligibility criteria
Maturity Period of Masala Bonds
The RBI sets minimum maturity requirements that depend on the size of the issuance:
Bond Size (INR equivalent) | Minimum Original Maturity |
Up to USD 50 million per financial year | 3 years |
Above USD 50 million per financial year | 5 years |
There is no fixed upper limit for maturity, and some bonds may stretch for 10–20 years. This increases currency risk, and higher returns are usually expected.
How Masala Bonds Reduce Currency Risk
Masala bonds help Indian companies avoid currency risk because all payments are made in Indian Rupees. This means the issuer’s repayment amount stays fixed, regardless of exchange rate changes.
In foreign currency loans, a weakening rupee increases repayment costs. In masala bonds, this risk shifts to the investor. Companies also save on hedging costs, making borrowing simpler and more predictable.
Permitted Use of Masala Bond Proceeds
The Reserve Bank of India allows funds from masala bonds to be used for:
- Refinancing rupee loans and NCDs
- Affordable housing and township projects
- Working capital needs
- Infrastructure sectors like power, roads, and renewable energy
Restricted uses include:
- General real estate activities
- Investments in stock markets or equity
- Land purchase
- Activities not allowed under FDI norms
These rules ensure funds are used for productive purposes.
Notable Masala Bond Issuances in India
- 2014 – International Finance Corporation: First masala bond, ₹1,000 crore, listed on London Stock Exchange.
- 2015 – IFC: First green masala bond issued.
- 2016 – Housing Development Finance Corporation: First Indian corporate issuance, ₹3,000 crore, highly oversubscribed.
- 2016 – NTPC Limited: First corporate green masala bond.
- 2019 – Kerala KIIFB: First state-level issuer, raising ₹2,150 crore.
These issuances helped grow the global acceptance of masala bonds.
Advantages and Disadvantages of Masala Bonds
Here are some advantages and disadvantages of masala bonds for issuers and investors:
Bond Size (INR equivalent) | Minimum Original Maturity |
Up to USD 50 million per financial year | 3 years |
Above USD 50 million per financial year | 5 years |
Tax on Masala Bonds
These tax provisions make masala bonds relatively attractive for foreign investors while ensuring a steady inflow of global capital into India.
Section 194LD (Till June 30, 2023)
Provided a concessional TDS rate of 5% on interest income for FIIs and QFIs on rupee-denominated bonds and government securities.
Post July 1, 2023 (Section 115AD)
Interest income for Foreign Portfolio Investors (FPIs) is generally taxed at 20%.
Withholding Tax (Section 196D)
Applicable on interest earned by FPIs on these bonds.
Capital Gains Benefit
Gains arising due to rupee appreciation are exempt from tax in India, making masala bonds attractive for foreign investors.
Important Note: Tax rules may change over time. It is advisable to consult a tax expert or refer to the latest provisions of the Income Tax Act before investing.
Conclusion
Indian companies can use masala bonds to raise money from the global market because this bond will protect them from currency exchange risks. The bond issues local currency, which results in the issuer incurring fixed bond costs while investors face the risk of currency exchange fluctuations. Since 2014, Housing Development Finance Corporation and NTPC Limited have issued this bond successfully. The bond offers higher returns to investors who need to assess currency exchange rates before deciding to invest. The bond provides them with tax benefits which they will receive as advantages.
FAQs on Masala Bonds
What is the masala bonds meaning in simple terms?
A masala bond is issued outside India in INR, where foreign investors invest, and all payments are made in rupees. Currency risk is borne by the investor.
Which organisation issued the first masala bond in India?
The first masala bond was issued by International Finance Corporation in 2014 on the London Stock Exchange.
What is the length of time until masala bonds reach maturity?
The minimum requirement for smaller maturity periods is 3 years while bonds with longer tenure need 5 years. There is no fixed upper limit.
How do masala bonds protect issuers from currency risk?
The investor bears all risks of exchange rate fluctuations because the issuer makes all repayments in INR. The issuer will repay a fixed amount that stays constant in Indian rupees.
Who is allowed to purchase masala bonds?
Foreign investors from FATF member countries with IOSCO-compliant regulators, along with multilateral institutions, can invest in masala bonds.
What organisations have the right to issue masala bonds?
Indian corporates, NBFCs, banks, REITs, and InvITs can issue masala bonds under RBI guidelines.
What tax applies to masala bonds according to Section 194LD?
A 5% TDS applied until June 2023. Now, interest is generally taxed at 20% under Section 115AD. Tax authorities do not impose taxes on capital gains that result from rupee appreciation.
What interest rate do masala bonds carry?
The market sets interest rates which the RBI regulations limit. The interest rates typically vary between 7% and 9% based on current market conditions.
What are the main disadvantages of masala bonds?
Key drawbacks include currency risk for investors, low liquidity, regulatory complexity, and restrictions on how funds can be used.
How are masala bonds different from Dim Sum bonds?
Masala bonds are INR-denominated, while Dim Sum bonds are issued in Chinese yuan. Both shift currency risk to foreign investors.
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