Masala Bonds

The Enforcement Directorate (ED) has issued show-cause notices to senior political leaders in Kerala for the alleged violation of the Foreign Exchange Management Act (FEMA) and Reserve Bank of India (RBI) directions in connection with the issuance of Masala Bonds. This has brought renewed attention to the regulatory framework governing these instruments.

What are Masala Bonds?

Masala Bonds are rupee-denominated bonds issued by Indian entities to overseas investors to raise funds from international markets.
Although issued abroad, the bond value and interest payments are denominated in Indian Rupees (INR).

A key feature of Masala Bonds is that the foreign exchange risk is borne by the foreign investor, not the Indian issuer. This protects Indian borrowers from losses caused by rupee depreciation.

Origin and Objective

The term “Masala Bond” was introduced by the International Finance Corporation (IFC), drawing from India’s cultural identity, where “masala” refers to a spice blend.

The primary objectives of Masala Bonds are:

• To enable Indian entities to raise foreign capital without exposure to forex risk

• To promote the internationalisation of the Indian Rupee

The first Masala Bond was issued by the IFC in November 2014 and was listed on the London Stock Exchange.

Regulatory Framework

Masala Bonds are governed by:

• RBI guidelines under the External Commercial Borrowing (ECB) framework, and

• SEBI regulations, wherever applicable.

They are generally listed on international exchanges such as the London Stock Exchange (LSE) or the Singapore Exchange, which helps attract global investors.

Maturity Norms

According to RBI guidelines:

• The minimum maturity period is 3 years for bonds raising up to USD 50 million (or equivalent).

• For amounts exceeding this limit, the minimum maturity period is 5 years.

Eligible Issuers and Investors

Eligible Issuers

• Indian corporates

• Non-Banking Financial Companies (NBFCs)

• Government-affiliated and public sector entities

Eligible Investors

Masala Bonds are aimed at qualified foreign investors, including:

• Sovereign wealth funds

• Global pension funds

• Insurance companies

These investors are willing to take on rupee-denominated currency risk.

Permitted and Restricted Use of Funds

Permitted Uses

Funds raised through Masala Bonds may be used for:

• Refinancing existing rupee-denominated debt

• Infrastructure development

• Affordable housing and integrated townships

• Corporate working capital requirements

Restricted Uses

The funds cannot be used for:

• Real estate activities (except approved housing projects)

• Activities prohibited under FDI guidelines

• Investment in domestic capital or equity markets

• Purchase of land or on-lending for restricted activities

Similar International Bond Instruments

Masala Bonds are comparable to other global local-currency bond instruments:

• Dim Sum Bonds (China): RMB-denominated bonds issued outside mainland China

• Panda Bonds (China): RMB-denominated bonds issued in mainland China by foreign entities

• Samurai Bonds (Japan): Yen-denominated bonds issued in Japan by foreign issuers

• Yankee Bonds (USA): US dollar-denominated bonds issued in the US by foreign entities

• Kangaroo Bonds (Australia): Australian dollar-denominated bonds issued by foreign firms in Australia