There are a lot of people who are not aware of the term “Masala Bonds”, but at the same time, there are people who are well aware of it as they deal with the bonds. The term “Masala” is a Hindi word that means spices. The International Finance Corporation (IFC) named these rupee-denominated bonds as “Masala Bonds” as it wanted to give an Indian flavour to these bonds in the international markets. A similar version of these bonds from China is known as “Dim Sum Bonds” and from Japan is known as “Samurai Bonds” and both are available in the international market.
In November 2014, the World Bank-backed International Finance Corporation had issued the first Masala bond and through which it raised 1,000 crores to fund infrastructure projects in India. Thereafter, it brought two bond issues: “Maharaja Bonds” which were issued to raise capital from the Indian investors, and “Masala Bonds” which were issued to raise capital from the overseas investors. Masala bonds are financial (debt) instruments and through which Indian entities or corporate bodies can raise capital (or external commercial borrowings i.e., ECB) from overseas markets.
These bonds are rupee-denominated and therefore, if the rupee rate depreciates then it will not affect the company or entity that issues Masala Bonds but the investors who invest in it. In other words, as we know that these bonds are rupee-denominated bonds, so if the rupee depreciates, in that case, whoever invested in these bonds, or will incur loss but not the company that issues it. In September 2015, RBI had issued guidelines that allowed Indian companies to issue Rupee-dominated bonds in international markets.
There are multiple Indian companies such as India bulls Housing, NTPC, and HDFC that have raised capital through the issuance of Masala Bonds. Apart from the Masala Bonds, there are Green Masala Bonds too, which are also debt instruments that are specially issued to raise capital for climate and environmental projects from the international markets. They are typically issued with tax incentives such as tax exemptions and tax credits to attract more investors. Raising funds from the international markets is legally recognized as “External Commercial Borrowings” and it is governed by the RBI framed ECB Framework or Guidelines and hence, the ECB Framework has two categories – (i) ECB which is foreign currency-denominated, and (ii) ECB which is Indian rupee-denominated (which also includes Masala Bonds in itself).
As per section 2(30) of the Companies Act, 2013, as we know Masala Bonds are debt securities and therefore, provisions as applicable in case of issuance of debt securities, shall apply to Masala Bonds as well.
MEANING OF ECB
External Commercial Borrowings are those commercial loans that can be raised by only eligible domestic companies from recognized offshore companies and thus they need to comply with certain criteria which have been mentioned under the ECB framework.
FORMS OF ECB
The following are the categories of ECB:
- Loans which includes bank loans floating/fixed-rate notes/ bonds/ securities (except the fully and compulsorily convertible instruments)
- Trade credits more than 3 years
- Financial lease and
- Plain vanilla (which is nowhere defined in the ECB framework) Rupee-denominated bonds which companies issue in the international markets, can be either allocated privately or listed on exchanges according to the legal framework of the host country.
MINIMUM MATURITY PERIODS OF MASALA BONDS
According to the RBI updated ECB Circular, 2021, the following MAMP would be applicable for Masala Bonds:
- All manufacturing companies are allowed to raise capital not exceeding 50 million or equivalent in rupee through the issuance of masala bonds and its maturity period would be 1 year.
- Any eligible company which wishes to raise capital for its working capital objectives, repayment of rupee loans, or general corporate objectives from the foreign equity holder, the maturity period of masala bonds would be 5 years.
- Any eligible company which wishes to raise capital for its working capital objectives, or general corporate objectives and on-lending by NBFCs for the same purposes, the maturity period of masala bonds would be 10 years.
- Any eligible company which wishes to raise capital for repaying of Rupee loans availed domestically for capital expenditure and on-lending by NBFCs for the same purpose the maturity period of masala bonds would be 7 years.
- Any eligible company which wishes to raise capital for repaying of Rupee loans availed domestically for various objectives but not for capital expenditure and on-lending by NBFCs for the same objectives the maturity period of masala bonds would be 10 years.
In addition to this, for the categories as mentioned in 2 to 5 – capital raising is not allowed from offshore branches or subsidiaries of Indian banks and the above-mentioned maturity period of masala bonds has to be strictly followed under all circumstances.
THE COUNTRIES WHICH ARE ALLOWED TO ISSUE MASALA BONDS AND PERSONS WHO CAN SUBSCRIBE TO IT
A foreign investor who wants to invest in Rupee denominated bonds has to fulfil the criteria given below:
- A country that is a member of the Financial Action Task Force (FATF) is allowed to issue Masala Bonds and residents of such countries are allowed to subscribe to these bonds.
- The securities market regulator of such country should be a member of the International Organisation of Securities Commission (IOSCO) or must have signed a Memorandum of Understanding with SEBI
- The residents of IOSCO countries are allowed to subscribe to the bonds and those multilateral and regional financial institutions where India is a signatory country can also subscribe to it.
RESTRICTED USE OF CAPITAL RAISED FROM THE INTERNATIONAL MARKETS
Masala bond proceeds can be used for all purposes except a list of prohibited things for which, capital or proceeds raised through the issuance of Masala Bonds, cannot be used are mentioned below:
(i) Apart from the development projects, capital raised from offshore markets, cannot be used for real estate activities
(ii) Capital raised from offshore markets cannot be used to invest in capital markets and using such money for domestic equity investment;
(iii) Capital raised from offshore markets cannot be used for those activities which have been prohibited under FDI guidelines
(iv) Working Capital requirements other than the Capital raised from offshore markets as mentioned in (ii) and (iii)
(v) General corporate objectives other than the Capital raised from offshore markets as mentioned in (ii) and (iii)
(vi) Repayment of Rupee loans other than the Capital raised from offshore markets as mentioned in (iv) and (v) above
(vii) For the purpose of lending money to the other entities for any of the above-restricted objectives other than the Capital raised from offshore markets by NBFCs as mentioned in (iii), (iv), and (v).
A list of companies/entities which are eligible to raise capital by the issuance of Masala Bonds is given below:
All the eligible companies are allowed to raise FCY capital and the registered companies that are related to micro-finance activities viz., registered not-for-profit companies, registered as societies or trusts or cooperatives, and organisations that are not the government are allowed to capital i.e., ECB through the issuance of Masala Bonds from the international markets.
An eligible company is allowed to raise a maximum amount of US$ 75O million for which no prior approval from the RBI is required but to raise more than such amount will require prior approval of the RBI.
BENEFITS TO THE BORROWERS
- In these bonds, companies are shielded against the risk of rupee depreciation.
- These bonds make an attempt to internationalisation the Indian currency i.e., the rupee, and give strength to the Indian economy.
BENEFITS TO INVESTORS
- Investors get a high rate of interest through these bonds
- The capital which earns from these bonds are exempted from tax
- Investors get benefitted at the time of maturity if the rupee appreciates.
Although the Masala Bonds is coupled with some risks involved with rapid fluctuation in capital flows and the international markets may portray liquidity from the domestic market, even then the issuance of masala bonds can be a major advantage to the Indian economy. But depending more on the capital raised through the Masala Bonds in the coming days can lead to negative exposure and which in long run will affect the investments in India, and therefore, Masala Bonds can be used in moderation.
Author(s) Name: Priyanka Gupta (Adamas University, Kolkata)
 ‘Masala Bonds? Here’s everything you need to know’ (The Times of India, 25 April 2019) <https://timesofindia.indiatimes.com/business/faqs/market-faqs/masala-bonds-heres-everything-you-need-to-know/articleshow/69048358.cms> accessed 9 December 2021
 Shikha Mehra Chawla ‘All about External Commercial Borrowings (ECB)’ (Tax Guru, 1 April 2015)
<https://taxguru.in/rbi/external-commercial-borrowings-ecb.html> accessed 10 December 2021
 Companies Act 2013, s 2(30)
 ‘MASTER DIRECTIONS’ (Reserve Bank of India, 10 December 2021) <https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510#21> accessed 12 December 2021
 External Commercial Borrowings (n 4)
 STA Law Firm, ‘India: Overview: External Commercial Borrowings (ECBs) In India’ (Mondaq, 19 August 2020) <https://www.mondaq.com/india/contracts-and-commercial-law/977312/overview-external-commercial-borrowings-ecbs-in-india> accessed 13 December 2021