Kerala became the first Indian state to issue Masala Bonds: Know More about Masala Bonds

  • Masala Bonds are bonds issued outside India but denominated in Indian Rupees, as per the guidelines of Reserve Bank of India.
  • In March 2019 Kerala through Kerala Infrastructure Investment Fund Board (KIIFB) raised Rs. 2,150 crore rupees from Masala bonds and thereby became the first Indian state to issue masala bonds
  • Kerala Infrastructure Investment Fund Board (KIIFB) took a landmark decision  to issue Masala Bonds in the international markets  in the 31st Board Meeting held on 30.11.2017.
  • The board appointed Axis Bank as advisor to guide KIIFB through the process of issuing Masala Bonds.
  • Based on their advice tenders were floated for selecting International Rating Agencies and Bankers.  Fitch Ratings and S&P Global Rating have been selected as International Rating Agencies.
  • Axis Bank and Standard & Chartered Bank have been selected as Bankers to the issue.
  • Analysts from both agencies reached Kerala in July 2018 and had detailed discussions with Finance Minister T.M.Thomas Isaac, KIIFB chief executive officer K.M. Abraham and others.
  • Following a thorough evaluation, the agencies awarded BB grading which no other entity has obtained in the country. This made the entry easy for KIIFB and establish its fiduciary value in the international market
Read more about KIIFB here
Kerala Makes History 
  • Kerala Infrastructure Investment Fund Board (KIIFB) has created history on 29th March 2019 by successfully completing its debut international issue by closing Rs. 2150 Crore Masala Bond.
  • KIIFB’s Masala Bonds yields interest of 9.72%  for a maturity period of 5 years.
  • Till now, the masala bonds were issued only by large Indian corporates and public institutions like NHAI and NTPC which are all rated AAA in the domestic market.
  • In contrast, KIIFB had only a BB rating, much below the Central government grading of BBB.
  • This is the second largest mobilisation in the masala bond market by any public sector company in the country and in absolute size the third largest issue done by any Indian entity in the history of the bonds.
  • The money raised would be used for funding the infrastructure development projects cleared by the KIIFB director board.

What is Masala Bond? 
  • A Bond is a debt instrument issued by an entity (Individuals, businesses and governments) to raise capital for their needs. These entities issue bonds and investors buy them (thereby giving money to people who issued the bond). Bonds have a maturity date. This means that at some point, the bond issuer has to pay back the money to the investors. They also have to pay the investors periodic interests and at the time of maturity, a little bit more than they paid for the bond.
  • The Masala Bond is a special kind of bond denominated (expressed) in Indian rupee and issued to fund infrastructure projects.
  • The term ‘Masala Bonds’ was used to denote Rupee-denominated bonds by the International Finance Corporation (IFC) to evoke the culture and cuisine of India.
  • The peculiarity of rupee denominated bond is that buying of bonds, interest payments and repayment all are expressed in rupees. All payments are converted into corresponding dollar values at the time of payment.
  • As it is rupee denominated bond, the risk will be borne by the investor. If the value of Indian currency falls, the foreign investor will have to bear the losses, not the issuer which is an Indian entity or a corporate.
  • Besides this risk factor, the rupee denominated masala bonds is attractive to foreign investors because it will give them higher interest rate  ( 2 to 3% more) compared to the standard interest rate prevailing in their markets.

How the masala bonds or rupee denominated bond works?

For example, if an Indian financial entity issues Rs 1000 rupee denominated bond overseas, the buyer in overseas can buy the bond, paying equivalent amount of dollar/sterling.

If the exchange rate was 1$ = Rs 50, the bond buyer will pay $20 (or Rs 1000) to buy the rupee denominated bond.

Suppose the interest rate is 10%. Here, the Indian entity has to pay Rs 100 annually and this can be paid (in dollars etc.) at the prevailing exchange rate at the payment time.

Now if the exchange rate depreciates to 1$ = Rs 75, the bond buyer’s interest revenue of Rs 100 equals just around $1.3. He actually incurs losses in terms of dollars (might have got $2 if the exchange rate was the same or in the case of dollar denominated bonds).

Here, if the rupee’ value has changed, the risk should be borne by the foreign investor. At the end of the time period, the issuer will give Rs 1000 and this can be converted into dollar at the prevailing exchange rate at that time.   


Masala Bonds: Some Facts
  • The first Masala bond was issued by the World Bank- backed International Finance Corporation (IFC) in November 2014. IFC raised 1,000 crore bond to fund infrastructure projects in India.
  • The name ‘Masala Bond’ wa also given by IFC to evoke culture and cuisine of India.
  • The Reserve Bank of India (RBI) allowed issuance of these bonds by Indian corporates on September 29, 2015.
  • In July 2016 HDFC raised 3,000 crore rupees from Masala bonds and thereby became the first Indian company to issue masala bonds.
  • In August 2016, public sector unit NTPC issued first corporate green masala bonds worth 2,000 crore rupees.
What is Kerala Infrastructure Investment Fund Board (KIIFB) ?

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