What are Masala Bonds? Definition, Characteristics, Benefits and Significance

Characteristics of Masala Bonds

Masala bonds are bonds issued outside of India that are denominated in rupees. They are debt products that aid in the raising of funds in local currency from overseas investors. Both the government and commercial entities can issue these bonds. These bonds can be purchased by any citizen of the country, however there are some restrictions.

Only those masala bonds whose security market regulator is a member of the International Organization of Security Commission can be subscribed to by investors.

These bonds are also available for purchase by regional and multilateral financial institutions.

Minimum Maturity Period for Masala bonds

Masala bonds raised to the Rupee equivalent of USD 50 million in a financial year should have a minimum maturity duration of 5 years, according to the RBI. The bonds raised over the rupee equivalent of 50 million dollars in a financial year, however, have a five-year maturity period.

The conversion of such bonds will take place at the market rate on the date of settlement of transactions for the issuing, servicing, and redemption of the bonds.

Benefits of Masala Bonds

Benefits for Investors

• It contributes to the development of foreign investors' trust in the Indian economy.
• It provides greater interest rates, which helps investors.
• It contributes to the country's foreign investment strength by increasing investor confidence in Indian currency.
• The tax on capital gains from rupee denominations is mainly free.
• If the value of the rupee rises at maturity, investors will receive the highest possible return.

Benefits for Borrowers (Companies)

• Masala bonds protect the borrower from currency fluctuations because they have no currency risk.
• The borrower has the ability to raise a large sum of money.
• It assists the Indian organization in diversifying their portfolio by issuing these bonds.
• Investors do not need to be concerned about rupee depreciation because the bonds were issued in Indian currency rather than foreign money.
• It helps borrowers save money because it is issued outside of India at a cheap interest rate of less than 7%.
• Because these bonds are sold on the secondary market, they let debtors reach a broad number of investors.