HDFC Bank raised Rs. 739 cr by issuing and allotting ‘masala bonds’ overseas on 30 September 2021. The bank will use the proceeds for banking activities. The masala bonds carry a coupon rate of 7.55%.
These will be listed on the India International Exchange (IFSC) Ltd. and NSE IFSC. The subordinated additional tier I bonds (AT1 bonds) are compliant with Basel III norms.
AT1 bonds are perpetual bonds. As the name suggests, perpetual bonds don’t have a maturity date. These bonds are unrated and unsecured.
What are masala bonds?
Popularly known as masala bonds, the rupee-denominated bonds are quite “masaledar”.
These are instruments issued outside India but in the Indian rupee and not the local currency. So, if the rupee rate falls, the investors or subscribers incur a loss.
Masala bonds were first introduced by International Finance Corporation (IFC) in 2014 in India. IFC had issued them in India to fund infrastructure projects. Similarly, Indian companies issue these in overseas markets.Masala bonds are rupee-denominated bonds that are issued outside India but in the Indian rupee; not the local currency. Click To Tweet
The RBI had permitted Indian companies to issue masala bonds in November 2016. As per the apex bank, the maturity period for bonds raised to the rupee equivalent of $50 mn in a fiscal is 3 yrs and for those raised above the rupee equivalent of $50 mn, the maturity period is 5 yrs.
These bonds are converted at the market rate on the date of settlement of transactions taken on to issue the bonds and service interest thereon.
How can the issuing company use the proceeds of these bonds?
- To refinance rupee loan and non-convertible debentures (NCD)
- To develop integrated townships and affordable housing
- To meet working capital requirements
Where can these proceeds not be used?
- For real estate activities other than the development of integrated townships and affordable housing
- To invest in capital markets and use the proceeds for equity investment domestically
- Activities prohibited as per Foreign Direct Investment (FDI) guidelines
- To lend to other entities for the above purposes
- To purchase land
Benefits of masala bonds to the issuing company and country
- Capital gains arising from these bonds are exempted from tax
- These have no currency risk and thus protect the borrower from fluctuations in the currency
- Depreciation of the rupee doesn’t impact the issuing company as the bonds are issued in Indian currency