Masala bonds need liquidity to grow

Author: Lizzie Meager | Published: 10 Feb 2016
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Masala bonds – offshore rupee bonds – are key to maintaining economic momentum and internationalising the rupee, but the regulatory environment must be liberalised to boost liquidity.

That was the message throughout the day at IFLR’s India Capital Markets forum last month. Panellists explained that due to volatility in other emerging markets, India is frequently looked upon as a safe haven among investors.

Neville Fernandes, Citigroup
“Investors understand the features of the instrument and there is interest to invest. But conditions currently are not conducive for execution,” said Neville Fernandes, head of debt capital markets at Citigroup.

For investors, liquidity is the main issue. Other key factors include volatile global markets, emerging market underperformance, currency volatility, a strong US dollar and subsequent capital flows back to the US in a rising interest rate environment.

But Indian banks are feeling the squeeze of global capital requirements, albeit later than the rest of the world. And highly leveraged bank-dependent corporates need to be able to access alternate sources of financing to support the rapid growth needed.


  • Highly leveraged bank-dependent Indian entities need to be able to access alternative sources of finance to sustain growth, and for this masala bonds is ideal;
  • But the regulatory environment is onerous and a 5% holding tax deters investors in search of low prices and liquidity;
  • Market participants believe policymakers should continue to look at and take from China’s thriving dim sum market.

Issuing in rupees as opposed to dollars is a welcome option for companies without dollar revenues. December BIS data shows that dollar credit to emerging markets – India included – has reached $3.3 trillion, putting those companies at likely risk of increasing debt servicing costs.

“Raising capital through other avenues is important, and in that, masala bonds are critical,” said Mohit Saraf, senior partner at Luthra & Luthra.


The International Finance Corporation kick-started the market with its first issuance in October 2013, raising a total of $2 billion over the following years as part of its offshore rupee bond project.

Mohit Saraf, Luthra & Luthra
The Reserve Bank of India (RBI) granted corporates permission to issue the instrument last June, but so far only Indian housing group HDFC and energy generator NTPC have announced plans to enter the market. HDFC said it will sell the country’s first offshore bond in ‘early 2016’, though issuance has so far been delayed in lieu of more certainty on the Federal Reserve’s interest rate.

Issuers’ appetite was held back for some time by limits on domestic end use of the proceeds, but in a move welcomed by the market, the RBI issued new guidelines in September removing those restrictions.

Panellists described other teething problems with the central bank, including certain proposed structures being refused backing. These issues have also been resolved following further clarification from the bank.

Regulatory issues aside, in November 2015 Standard & Poor’s said it expects issuance to hit $5 billion annually over the next three years.


A minimum average maturity of three-years on masala bonds is a drain on the liquidity global investors so sorely need in the secondary market. The instrument can be sold to a like-for-like international investor – sale to a local institution is prohibited – and finding that buyer is no easy feat.

"If you don't give offshore investors that flexibility they'll slap a premium on the pricing or just not participate"

“Allowing investors to sell their bonds to local Indian take and hold investors, similar to what is allowed under the FPI [foreign portfolio investors] construct, would be a boon for the masala bond market,” said Fernandes.

In 2014 India was voted one of the top three worst places for trapped cash, along with China and Russia, despite efforts by the Ministry of Finance (MoF) to tackle the issue.

And a mandatory five percent holding tax on the instrument must be addressed. Several groups are lobbying the MoF on the issue, which they believe would boost appetite if resolved.

Panellists added that marketing is also an issue; deals by less traditional issuers including renewables and infrastructure firms which would place masala bonds in the spotlight have, for the most part, been privately negotiated.

Indian high yield is also held back by an onerous regulatory regime. Restrictions on what can be raised, end use, tenor and pricing are a critical dictator of volumes.

Dim sum

Prime Minister Narendra Modi’s government wants to create a global offshore rupee bond market to rival China’s renminbi equivalent. But the dim sum market has some advantages India could look to replicate.

“The dim sum market and the Singapore dollar bond market are good examples where offshore investors sitting anywhere in the world can get involved, and then exit in a seamless fashion by selling to onshore investors where liquidity is usually always strong,” said Fernandes.

“If you don’t give offshore investors that flexibility they’ll slap a premium on the pricing or just not participate,” he added.

Non-convertible debentures (NCDs), which offer high returns with the flexibility of choosing between short and long tenures, are another avenue of finance Indian institutions could tap. They only require rating from one agency as opposed to masala bonds, which require a minimum of two offshore ratings.

But again, regulatory clarity is needed, particularly surrounding approved structures and capital allocation. Banks and corporates alike need better education on the products available to them as there is often a mental block, according to panellists.

See also

Kick-starting India’s offshore bond market
Uncertainty surrounds masala bond hedge
All-out push for rupee internationalisation