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An overview of Masala Bond

Sep 23, 2016 18:28 IST

    The online examination for the next Common Recruitment Process (CWE PO/MT-VI) for selection of personnel for Probationary Officer/ Management Trainee posts in the Participating Organisations is tentatively scheduled in October / November 2016.

    Here the banking team of Jagran josh is providing the details about Masala Bond which is useful for IBPS PO General Awareness (with special reference to Banking) section.

    What are masala bonds?

    Bonds are instruments of debt - usually used by corporates to raise money from investors. Masala bond is a term used to refer to a financial instrument through which Indian entities can raise money from overseas markets in the rupee, not foreign currency.

    In other words, they are rupee-denominated bonds issued to overseas buyers. This is how it is different from other instruments.  Before Masala bonds, corporates have had to dependent on avenues such as External Commercial Borrowings (ECBs).

    How did the tag masala come about?

    Indian spices have been popular all over the world since ancient times.  It named ‘masala’ bonds to reflect the Indian angle to it.

    What has been the regulator's stance on this?

    RBI has issued guidelines allowing Indian companies, non-banking finance companies and infrastructure investment trusts and real investment trusts to issue rupee-denominated bond overseas.

    Important Facts about Masala Bonds

    • Masala bonds are a step to help internationalise the Indian rupee and also strengthen, the Indian financial system.
    • By issuing bonds in rupees, an Indian entity is shielded against the risk of currency fluctuation, typically associated with borrowing in foreign currency.  Besides helping diversify funding sources, the cost of borrowing could also turn out to be lower than domestic markets.
    • The first masala bonds were issued by the International Finance Corporation (IFC), an arm of the World Bank, in the year 2013. Similar offerings from other countries have also been after the food or culture of that country like "dim sum" label for Chinese offshore issues or "Samurai" bonds for Japanese offshore issues.

    Note: IFC established in 1956 and owned by 184 member countries, is the largest global development institution focused exclusively on the private sector companies and financial institutions in developing countries.

    • As masala bonds are denominated in rupees, foreign investors will be taking the currency risk. So the key for the success of these bonds will be a stable exchange rate.
    • Masala bonds are the first rupee bonds listed on the London Stock Exchange.
    • According to RBI's norms, an Indian entity is allowed to raise a maximum of $750 million per year through masala bonds with a minimum maturity of five years.

    Why should investors look at masala bonds?

    The Finance Ministry has cut the withholding tax (a tax deducted at source on residents outside the country) on interest income of such bonds to 5 per cent from 20 per cent, making it attractive for investors.

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