Rupee Denominated Bonds (RDBs),more commonly known as “Masala Bonds”, are debt securities denominated in Indian rupees issued by Indian entities to overseas investors but settled in foreign currency. In other words, they are rupee denominated bonds issued to overseas buyers. Though these bonds are issued to investors in offshore jurisdictions, still they are denominated in Indian currency. Therefore, the term “Masala” has been ascribed to these bonds to give an Indian flavor to the same. The Chinese variant of this type of bonds are “Dim Sum Bonds” and similarly the Japanese version “Samurai Bonds”.   These bonds are attractive for foreign investors as they will provide a higher interest rate compared to the standard interest rate prevailing in the market.

Moreover, it encourages globalisation of the Indian Rupee as foreign buyers will deal more in rupees while buying these bonds. Interestingly, currency risk is assumed by the investor and, hence, during the repayment of bond coupon and maturity amount, if rupee depreciates, the Reserve Bank of India (RBI) will realize marginal saving.

One can understand the working of RDBs as follows. Suppose an Indian company issues the rupee denominated bond worth Rs. 1000 in US, the buyer can purchase the bond paying an equivalent amount in dollars. Assuming that the exchange rate is equivalent to Rs 50 for $1, the bond purchaser will have to pay $20 to buy the rupee denominated bond. Suppose the interest rates applicable on these bonds are 10%, the Indian company has to pay Rs 100 annually and this is paid by the issuer (an Indian company in this case) at the prevailing exchange rate at the time of payment. However, if the exchange rate deprecates to 1$= Rs 75, the buyer’s interest revenue of Rs 100 amounts to approximately $1.3 and it incurs losses in terms of dollars. The same buyer could have got $2 had the deprecation of exchange rate not occurred.

Masala Bonds were introduced in India in 2014 by International Finance Corporation (IFC). The IFC issued the first masala bonds in India to fund infrastructure projects. Indian entities or companies issue masala bonds outside India to raise money. The issue of these bonds is in Indian currency rather than local currency. Thus, if the rupee rate falls, the investor will bear the loss.

Masala Bonds are rupee-denominated bonds issued outside India by Indian entities. They are debt instruments which help to raise money in local currency from foreign investors. Both the government and private entities can issue these bonds. Investors outside India who would like to invest in assets in India can subscribe to these bonds. Any resident of that country can subscribe to these bonds which are members of the Financial Action Task Force. The investors who subscribe should be whose securities market regulator is a member of the International Organisation of Securities Commission. Multilateral and Regional Financial Institutions which India is a member country can also subscribe to these bonds.

According to RBI, the maturity period is three years for the bonds raised to the rupee equivalent of 50 million dollars in a financial year. The maturity period is five years for the bonds raised above the rupee equivalent of 50 million dollars in a financial year. The conversion of these bonds happens at market rate on the date of settlement of transactions undertaken for issue and servicing of interest of the bonds.

The proceeds raised from these bonds can be used:

  • In refinancing of rupee loan and non-convertible debentures.
  • For the development of integrated townships and affordable housing projects.
  • Working capital to corporate.

RBI mandates the proceeds raised from these bonds cannot be used:

  • In real estate activities, not including the development of integrated townships and affordable housing projects.
  • Activities prohibited according to Foreign Direct Investment guidelines.
  • Investing in capital markets and usage of the proceeds for equity investment domestically.
  • Purchase of land.
  • On-lending to other entities for any of the above purposes.

Masala bonds have various benefits. Both the investors and borrowers get benefits from subscribing and issuing of these bonds. The benefits for the investors are:

  • It offers higher interest rates and thus benefits the investor.
  • It helps in building up foreign investors’ confidence in the Indian economy.
  • It helps strengthen the foreign investments in the country as it facilitates foreign investors’ confidence in Indian currency.
  • The capital gains arising from rupee denomination are exempted from tax.
  • If the rupee appreciates at the time of maturity, it benefits the investor.

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