Home / Industry / RBI cuts maturity of masala bonds to three years to raise their appeal

Mumbai: To make masala bonds more attractive, the Reserve Bank of India (RBI) has reduced the minimum tenure of such bonds that an Indian company can issue offshore to three years from the previously stated five years.

“It has been decided to reduce the minimum maturity period for the rupee-denominated bonds issued overseas to three years in order to align with the maturity prescription regarding foreign investment in corporate bonds through the foreign portfolio investment (FPI) route," the central bank said in a circular on Wednesday.

Money raised through masala bonds overseas will be counted in the overall investment limit for FPIs in corporate bonds, which now stands at 2.44 trillion. FPI investment limit in corporate bonds will be expressed in rupees instead of dollars, bringing it on a par with limits in government bonds. The maximum amount a single issuer can raise through masala bonds is 5,000 crore, RBI said.

According to bankers, the reduction in maturity of the bond may not make a big difference in terms of attracting investors.

“This was one of the demands but until the withholding tax and allowing domestic banks to invest is addressed, there is unlikely to be a significant improvement in demand for such bonds," said a banker on condition of anonymity.

Masala bonds are issued in rupees but can be settled in US dollars and thus besides the credit risk of the issuer, risk of the exchange rate also falls on the investor. In addition, the investor also has to pay 5% withholding tax.

In the pursuit of adequate compensation for credit and exchange rate risk, and the cost of withholding tax, foreign investors have sought higher yield from companies that marketed masala bonds over the last five months.

But to match the yield demanded by investors, companies will have to forego their advantage of borrowing cheap from the offshore market compared with local rates.

Further, Indian banks can only act as arrangers or underwriters of such bonds and cannot invest in them. If an Indian bank does underwrite a masala bond issue, it will have to offload the investment in six months.

Indian companies were allowed to issue rupee-denominated bonds in the offshore market in September last year but so far no company has been able to raise funds through this route.

The idea of masala bonds was first floated by RBI in April 2015 following which the central bank issued guidelines for the same in September. Over the last four months, Indian Railway Finance Corp. (IRFC), Housing Development and Finance Corp., NTPC Ltd, Shriram Transport Finance and Dewan Housing Finance Ltd have all hawked masala bonds without success. Adani Transmission Ltd was the latest to market masala bonds overseas last month.

The guidelines allow multilateral agencies such as the World Bank to also borrow through masala bonds and invest the proceeds in the Indian infrastructure sector.

International Finance Corp. (IFC), the investment arm of World Bank, has successfully raised 11,000 crore through such bonds from the international markets. British Columbia, a province of Canada, also intends to borrow through masala bonds and invest the proceeds in India.

In its Wednesday circular, RBI also said that masala bonds can only be issued to investors originating from countries that are listed in the Financial Action Task Force (FATF) or a member of a FATF-style regional body.

FATF is an inter-governmental body that seeks to combat money laundering and terrorist financing.

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