The Housing Development Finance Corporation (HDFC) has become the first Indian company to issue rupee-denominated bonds “masala bonds” on the London Stock Exchange (LSE). HDFC has issued the first-ever Masala Bonds of Rs 3,000-crore. It is the unsecured rupee-denominated bonds sold overseas. The bonds have fixed semi-annual coupon of over 7.8% per annum and has a tenor of 3 years and 1 month.
Masala bonds are plans through which Indian entities can raise funds by accessing overseas capital markets, without taking on the currency risk related with foreign-currency denominated bonds or loans. These bonds refer to a rupee-denominated bond through which Indian entities can raise money from foreign markets in rupee, and not in foreign currency. By issuing such bonds in rupees, an Indian entity is protected against the risk of currency fluctuation, typically associated with borrowing in foreign currency.
The bond will help HDFC, India’s biggest mortgage lender (home finance company) to diversify its borrowing profile and access global investors. With this issuance of Masala bonds, HDFC is planning to raise 750 million dollars from the overseas market during the current financial year.
Earlier in September 2015, the Reserve Bank of India (RBI) had allowed the Indian companies to raise rupee-denominated bonds in order to reduce the risk of borrowing in foreign currencies, but the concept faced concerns over tax treatment and liquidity. It has attracted a global group of capital to further diversify the borrowing profile. Bankers were promoting for the removal of the withholding tax of 5% on the interest payment and to allow Indian institutions to buy these bonds in the overseas market to reduce the fear of liquidity.
Since then Private and public sector companies have lined up plans to issue these bonds. State-owned NTPC, Indian Railway Finance Corporation (IRFC) and India Infrastructure Finance Company (IFC) also have planned to raise funds through the Masala bonds. Masala bonds also help in internationalization of the rupee and in expansion of the Indian bond markets. These bonds are usually traded on the LSE and not in India.