Category: Investment Management

A snapshot into Masala Bonds

Masala bonds are similar to corporate or government bonds which are issued to raise money by companies or the government. Masala bonds are rupee-denominated borrowings by Indian entities in the overseas market.They are issued to foreign investors such as UK markets (London Stock exchange)and Asian markets and settled in US dollars. Hence the currency risk lies with the investor and not the issuer, unlike external commercial borrowings (ECBs), where Indian companies raise money in foreign currencyloans.These masala bond borrowings have maturity anywhere between three and ten years.

It was in 2015, Finance minister- ArunJaitley, permitted Indian companies to sell masala bonds. The initial year was a non-starter for masala bonds. However, in the month of June 2016, India’s largest mortgage lender HDFC had opened subscription for its masala bonds and found itself oversubscribe by 4 to 5 times. It had issued 30 billion rupees on July 14th’ 2016, yielding 8.33% and was listed in the London stock exchange.

Purpose of introducing masala bonds

Through ECB’s- the major threat faced by Indian companies was currency risk. Banks were also unsupportive in re-financing Indian corporates who succumbed to outstanding foreign currency loan of over $200 million last year (2015), due to US fed tapering of quantitative easing, devaluation of Chinese currency (Yuan) and fall in Indian currency.

  1. Hence, with the approval of RBI, masala bonds firmly shields Indian firms against currency risk. Instead the risk is transferred to the investors who buy these bonds.
  2. Another purpose was to internationalize Indian rupee or gain more global recognition to rupees which will in turn strengthen foreign investments in India.
  3. In reference to Indian economy, the main motive to issue these bonds are to support investments in infrastructure sector, railways and sectors which contribute to economic growth and job creation. Also, to cater to lot of private companies in raising funds easily, when Indian banks cannot support or finance these companies.
  4. To helpIndian companies to cut down cost. If the company issues any bond in India, it carries an interest rate of 7.25%-8.85% whereas; Masala Bonds is issued below 7.00% interest rate.
  5. Finally, masala bonds were introduced to mitigate existing liquidity concerns in the Indian debt market.

Advantages of Masala bonds

  1. A clear advantage is that currency risk is not borne by the issuer.
  2. There are more options to raise money by corporates. Earlier companies used to issue only corporate bonds and now masala bonds can be an addition to their portfolio.
  3. Indian companies can invariably increase the number of investors, through offshore market as well.
  4. A foreign investor will be benefited if rupee appreciates during the bond maturity.


  1. One challenge the RBI may face is setting the currency rates once the issuance of these bonds grow.
  2. If foreign investors hedge their rupee investments in their respective market, the RBI has no control over these markets.
  3. Another worry would be- locally raising money through corporate bonds might reduce and the growth in Indian corporate bond markets and Indian banks will be affected.

Impact on currency markets in India

Experts from global markets feel that rupee is over-valued. Even though, rupee is steadily appreciating since February 2016, many argue that it would be a temporary phenomenon and rupee is said to weaken if US fed rates are hiked in December’2016.

But, with positive response towards issuing masala bonds by big companies like HDFC, NTPC- foreign investor’s awareness to currency risk they are exposed to, will influence them to have a better understanding on the valuation of Indian currency. Moreover, continued increase in foreign inflows will result in making Indian rupees stronger.

Tax implications

For Masala bonds, there is withholding tax of 5% which is valid until June 30th 2017, unless extended. This withholding tax is borne by foreign investors on the interest earned from masala bond investments.This tax was levied “in order to provide broad based incentive and encourage greater off-shore investment in debt market by FIIs and QFIs. It has been decided that the benefit of lower withholding tax [i.e. 5 per cent instead of 20 per cent] shall be available in respect of interest on investment made in bonds issued by Indian companies and Government securities” quoted by the finance ministry of India.

Taxation of STCG and LTCG:

Any gain arising on transfer of rupee denominated bonds by a non-resident Indian will be treated as accrued in India and therefore they are liable to pay tax.

  • On short term capital gains (held for less than 3 years): tax rate is 40%
  • On long term capital gains (held for more than 3 years): tax rate is 10%

Overall, masala bonds can be a shield for corporates against exchange rate risk, diversified options to raise money by corporates and provides more global recognition for the Indian rupee.

A glimpse into HDFC masala bonds and its success

That said- HDFC was remarkably the first corporation to raise money through masala bonds. Annualised yield for the HDFC masala bonds works out to 8.33%, lower than the final guidance of 8.35%. The funds have raised at a fixed semi-annual coupon of 7.875% per annum and has a tenor of three years and 1 month.

This issue was managed by Credit Suisse, Axis Bank and Nomura Securities.

HDFC was able to pull this big revolutionary issue since global environment on bond yields have fallen sharply and improved liquidity.

This success from HDFC gave confidence to many corporates to raise funds through these rupee denominated bonds. Companies like, Power Finance Corp., NTPC, National Highways Authority of India (NHAI), Rural Electrification Corp. and Adani Group arm Adani Transmission have all been in discussions with investment bankers to issue masala bonds. The size of these issues are between Rs.500 crore and Rs.1,500crore.

Recently (on August 8th 2016) NTPC raised Rs. 2,000 crore by selling five-year “green” bonds to support renewable power projects.

Both HDFC and NTPC issues were over-subscribed, attracting many international investors and making pavement to other corporates to issue masala bonds.

–Ashok Eshwaran

Research Head and Manager – Client Relations


15 August 2016