HDFC had set the spice flowing in the Street after pioneering the Masala Bonds for the first time in India. In the month of July, the bonds became the talk of the market after HDFC announced its plans of issuing Rupee-Denominated bonds worth Rs. 2000 crores to the Foreign Investors outside the US. The company has finally raised Rs. 3000 crores through the Masala Bonds. RBI had green-flagged the move in September last year for the companies.
In a Nutshell:
Masala Bonds are the Rupee- Denominated borrowings in overseas market by Indian Entities. Borrowing in the overseas market generally requires a Global Currency like Dollar, Euro or Yen. But these bonds give Indian Companies the liberty to borrow in Indian Denomination. Now, what is the need of borrowing in Rupees? The advantage of borrowing abroad in Indian Currency is that the companies do not have to worry about the Rupee depreciation- the usual big concern while raising money in the overseas market. And this is a big enough advantage. Even the buyers of the bonds are benefitted. They earn a higher yield in the form of coupon rates to compensate for the risk of currency depreciation. These bonds are traded on the foreign exchanges where they are issued and are not a part of Nifty Index or Sensex.
Days of yore:
The Masala Bonds marks the first Rupee bonds listed on the LSE. IFC had issued the Masala Bonds back in November 2014 to increase Foreign Investment in India. The intention was also to mobilize International Capital Markets to support Infrastructure development in the Country. The bonds had the span of 10 years with a value of 10 Billion Indian Rupee. IFC names these bonds as ‘Masala Bonds’ because ‘Masala is a globally recognized term evoking the culture and cuisines of India. That was not the first time for any bond to be named after the food or culture of a country. The Chinese Bonds are called ‘Dim Sum Bonds’ and Japanese bonds are called ‘Samurai Bonds.’
The Path to the Future:
HDFC and NTPC had paved the way for the borrowing through Masala Bonds. They have set off the beginning of the series of such borrowings that would help in broadening and diversify the market, especially for NBFCs. Even though the Masala Bond market is in its infant stage, the issues by HDFC and NTPC have mitigated the initial market concerns about liquidity. More companies have lined up for these bonds.
HDFC is hooked on the taste of Masala Bonds. Six weeks after issuing the first series of the bonds, the company is said to be in talks with investment bankers about launching the issue again in next three to six weeks. Apart from the two names, one more name of Adani Transmission is added to the list of Masala bond issuer who has raised 500 crores earlier this month.
Banks joins the Game:
On August 25th, RBI announced a slew of changes in fixed income and currency markets. The King of the Banks has allowed the lenders to issue Masala Bonds and to accept corporate bonds under the Liquidity Adjustment Facility. These actions will deepen the market development further with enhanced participation. It will also facilitate the greater market liquidity and improved communication in the market. RBI has allowed the Banks to issue Masala Bonds for their capital requirements, for financing infrastructure and affordable housing.
Masala Bonds are turning out to be the market’s favorite all around the Globe. The steps taken by RBI in this direction has eased a key constraint for the banks in accessing new AT1 and Tier II capital which was a challenging task in the domestic market. But it is yet to be seen that to what extent the banks will be able to use these Masala Bonds channel to raise capital. It will largely depend on the appetite of Foreign Investors for Risk and Pricing.
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