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Bonds are debt instruments. They are issued by companies and governments to raise money for operations or expansions in infrastructure, etc. Bonds are issued to creditors who lend money to these companies in return for a fixed rate of interest over a fixed amount of time.
In this article, we’re going to talk about rupee-denominated bonds, which are a special kind of bond that is denominated in the Indian rupee.
Understanding rupee-denominated bonds
Rupee-denominated bonds, also known as Masala Bonds (a playful term reflecting their Indian origin), are debt instruments issued by entities in foreign markets, but denominated in Indian Rupees (INR).
Imagine borrowing money from someone abroad, but instead of repaying them in their currency (like US Dollars or Euro), you repay them in Indian rupees.
For instance, if an Indian company wants to raise money in foreign markets to fund a manufacturing expansion project, it is tapping into a market that doesn’t work in INR to raise funds in INR. Hence, investors who want to buy these bonds will have to convert their native currency into INR first.
Who can issue rupee-denominated bonds?
Several entities can issue, and have issued rupee-denominated bonds in the past:
- Sovereign governments: The Indian government itself can leverage rupee-denominated bonds to raise funds from foreign investors for specific projects or infrastructure development.
- Indian companies: Domestic companies seeking to tap into foreign capital markets can issue masala bonds to raise funds in rupees, potentially at competitive interest rates compared to borrowing domestically.
- International organisations: Multilateral institutions like the World Bank or Asian Development Bank might issue rupee-denominated bonds to support development projects in India or other emerging economies.
How are rupee-denominated bonds issued?
There are several steps involved in issuing bonds. A simplified version is given below:
- Approval: The issuer of bonds, which is the company or the entity lending the money, has to obtain necessary approvals from Indian regulatory bodies like the Reserve Bank of India (RBI) for the issuance and the intended use of the funds raised.
- Selection of the lead arranger: Investment banks have to be involved in the transaction to advise the fundraiser. A choice is typically made on which bank has the most expertise in the industry or the country the funds are being raised for / in.
- Marketing and investor targeting: The lead arranger and the issuer work together to market the bonds to potential investors in international markets, highlighting the creditworthiness of the issuer and the attractive features of the bond offering.
- Bond issuance and settlement of the transaction: Once sufficient investor interest is secured, the bonds are formally issued and traded on designated international stock exchanges with rupee settlement mechanisms.
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Advantages of issuing bonds denominated in Indian rupees
Let’s look at these advantages from the perspective of both the issuer and the investor (lender):
Advantages for the issuer
- Access to foreign capital: Issuers gain access to a broader pool of investors beyond the domestic market, potentially raising significant capital in Indian rupees.
- Reduced currency risk: By borrowing in rupees, issuers hedge against potential fluctuations in foreign exchange rates also.
Advantages for the investor
- Portfolio diversification: Rupee-denominated bonds provide investors with an opportunity to diversify their portfolios by including an asset class with exposure to the Indian economy.
- Attractive yields: Masala bonds can offer potentially higher yields compared to similar bonds issued in developed markets corresponding to a higher risk associated with emerging markets.
- Hedging against currency fluctuations: For investors holding foreign currency, rupee-denominated bonds can act as a hedge against depreciation of their home currency.
Frequently Asked Questions
Generally, there are no specific restrictions on nationality for investors. However, some issuers might target specific investor segments based on their marketing strategy or regulatory requirements.
FCCBs are issued in foreign currency but can be converted into equity shares of the issuing company at a predetermined price and time. Rupee-denominated bonds, on the other hand, remain rupee-denominated throughout their tenure and offer a fixed interest rate payout to investors.
Look for credit ratings issued by reputable credit rating agencies for the issuer. Research the issuer’s financial health, track record, and the purpose of the bond issuance.
Tax implications can vary depending on your residency status and the specific tax laws of your country. We recommend that you consult a tax expert for your personal tax case.
Yes, the RBI imposes regulations on the total amount of funds that can be raised by Indian entities through Masala Bond issuances each year. This helps manage potential impacts on domestic liquidity and exchange rates.