Masala bonds pick up, $1.24 bn raised, another $3-4 bn in pipeline

However, while the instrument passes on currency risk to the investor, it may still be an expensive option for some issuers

Masala bonds are catching on with $1.24 billion raised by three Indian companies and a bank and another $3-4 billion likely to be issued over the next year.

Adani Transmission, HDFC, NTPC and Indiabulls have issued these bonds through which Indian entities can raise money in global markets with investors bearing the currency risk. Funds raised through any other instrument in the overseas market place the currency risk on the issuer of the bonds.

Several private and state-owned banks, infrastructure companies and infrastructure finance companies are interested in issuing masala bonds.

“I am receiving encouraging responses from Indian companies and banks that either have a global investor base or would like to raise their profile on the global financial platform,” said Jasmine Arora, head of India, Africa and the Middle East for primary markets at the London Stock Exchange Group.

“This includes bonds denominated in all currencies and green bonds. In the past four months Axis Bank, HDFC and NTPC have successfully raised debt in London. HDFC listed three masala bonds in five weeks,” she added.

Banks can raise additional Tier-1 capital through masala bonds to meet Basel -III requirements. Rating agency Fitch estimates a capital shortfall of $90 billion among Indian banks as Basel-III requirements build from 2016-17.

“The masala bond is a good instrument to diversify the investor base for entities whose balance sheets are largely rupee oriented, such as small and mid-sized banks and NBFCs,” said Saswata Guha, director, financial institutions, Fitch Ratings.

"With permission to raise funds through masala bonds, NBFCs have the only route for raising funds overseas," said Chetan Joshi, head of debt capital markets, HSBC India. However, their success depends upon whether investors see enough liquidity in trading masala bonds (which are being quoted at a premium now), whether the government provides relief in the withholding tax of 5 per cent, and how the rupee performs, he added. A couple of NBFCs dropped the idea of issuing masala bonds recently because they had to offer a much higher coupon rate, said a source in the know of the development.

“The coupon rate is a function of the investor’s appetite for credit risk, liquidity risk and foreign exchange risk,” Guha pointed out.

Investment bankers are also expecting relief in the withholding tax of five per cent, which results in a higher cost of funds through this route. “So far, the government has not clarified this and other issues relating to capital gains tax on NRIs,” said a person connected with this form of fund raising.

“The London Stock Exchange is the preferred platform for masala bonds because of its record in supporting issuances in local currencies from across the world, such as dim sum bonds (yuan denominated) issued by Chinese and non-Chinese companies,” Arora said. “London-listed bond issuances from Indian companies—green, masala and green masala—have received strong investor support with cornerstone investors, dedicated green investors and a completely new pool of investors, demonstrating investor preference for good quality Indian paper,” she added.