Story Of The Week

HDFC’s Flavour of the Week: First Desi MASALA BOND

Housing Development Finance Corporation (HDFC) has turned out to be the first Indian company to sell the Masala bonds as it plans to raise around Rs.3000 crores through foreign investment. Axis Bank, Credit Suisse and Nomura have been appointed as investment bankers for the sale.


Bonds are, primarily, the instruments of debt that are used by corporates to raise money from investors. Before the entry of masala bonds, Indian corporates had to resort to External Commercial Borrowings (ECBs) to raise money from the overseas investors. ECBs are fraught with currency risks since they have to be raised and, within a gap of few years, repaid in dollar terms, with the currencies being susceptible to fluctuations in the market. This poses a challenge to the bond issuing entity.

With the foray of Masala bonds into the market, the currency risks now shift on to the investor. Masala bonds are rupee denominated bonds that are sold to investors and are listed on the overseas stock exchanges. Indian institutions are not permitted to buy them, and foreigners can’t sell them in local markets.


 The catchy name “Masala Bond” was the brainchild of the International Finance Corporation (IFC), the investment arm of the World Bank. IFC issued a Rs. 1,000 crore bond on the London Stock Exchange in November, 2014, with intent to fund infrastructure projects in India. Based on the same lines, we have, Dim sum bonds, Yankee and Bulldog bonds, and Samurai bonds that are, typically, a reflection of the local flavour of that country. 2

                                     Source: International Finance Corporation, World Bank Group, 2015


In April 2016, the Reserve Bank of India (RBI) eased the norms, to give a push to the Masala bonds, by reducing the tenure of these bonds from 5 years to 3 years. In addition to this, the ceiling has been set at Rs.5000 crores, which a single issuer can raise through these bonds. Moreover, capital gains from rupee appreciation are exempted from tax.


Recently, during the Brexit, the Indian economy maintained its stability and this was also appreciated by the IMF Chief. This, in turn, has lent credibility to the Masala bonds and made them more attractive for overseas investors.

To incentivize the investors, a few appealing measures have been taken up. For example, the withholding tax (a tax deducted at source on residents outside the country) on interest income of such bonds has been cut down from 20 per cent to 5 per cent. Also, capital gains from rupee appreciation are exempted from tax. However, the investors need to scrutinize the credit ratings of the company before investing and also keep an eye on the exchange rate environment.


The move would help HDFC diversify its borrowing portfolio by going global through the rupee denominated route. Apart from this, it would help tap in a large number of investors. Masala bonds would attract foreign investments in the country and consequently, our currency would strengthen.

HDFC, being a big institutional player, would set a good benchmark and pave way for more companies to follow suit. As a result, this would make the Masala Bonds more attractive and creditworthy. Moreover, this would also inspire the PSUs to explore this segment and raise capital through foreign investments. Further, such bonds would gradually lower the cost of capital for the Indian industries over a period of time.

Finally, this move would not only elevate the status of the Indian Rupee at the global level, but would also prove to be a significant step towards full currency convertibility. The success of this bond would show the macroeconomic situation of our country in good light and highlight the role of our Central bank in currency management.



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4 replies »

  1. Masala Bonds are likely to emerge as primary source of raising fund in international market by Indian companies, which however is contingent upon two factors, continued endeavour by Government of India to accelerate economic reforms like GST and transforming regulatory space for ease of doing business in India.

  2. India’s growth and ease of doing business are major driving factors to the Masala Bonds concept. There’s a lot of liquidity in the global markets because of low interest rates offered by major banks throughout the world. India seems to be the right destination because of it’s growth in a declining world economy due to which it can attract foreign investors.