By Meghaa Gangahar
Masala, a word for spices which is quintessentially Indian, was used in 2014 to reflect the Indian flavour in foreign markets with a new crop of rupee-denominated masala bonds.
When masala bonds were introduced, they were heavily promoted for stimulating the growth of this market. This effort allowed Indian companies to borrow from foreign markets with considerable ease, and without the risk of fluctuating exchange rate as the bonds were denominated in the home currency: the rupee. According to debt analysts, the new guidelines on rupee-denominated bonds will slow down the masala bond market.
What are the RBI guidelines?
The recent guidelines laid out by the RBI are set to align it with the regulations for External Commercial Borrowings. Masala bonds, which had an original maturity of three years are now required to bump up the barricade to at least five years for deals over $50 million. The coupon rates for the bonds cannot exceed 300 basis points over the yield of government securities of the corresponding maturity, which is also in line with the ECB rules. The Foreign Exchange Department will examine all proposed issues regarding Masala bonds in the future. These changes are believed to oppose the earlier efforts.
The new guidelines also establish that the investors should not be related to the bond issuer. However, this raises questions over the system which had allowed Indian companies to access the high-yield international bond market in the first place. As many small and mid-sized companies are selling masala bonds privately in one-on-one deals, the RBI is also on alert for the possibility of the diversion of funds.
The buzzing bond market
The past few months saw many companies selling Masala bonds. These include the National Highways Authority of India (NHAI) and power generation company National Thermal Power Corporation (NTPC) who sold a five-year debt. A three-year bond, on the other hand, has been common amongst non-banking finance companies such as HDFC, Shriram Transport Finance and Indiabulls Housing Finance. Looking at the trend, the new guidelines may affect the housing finance companies which were keen on raising Masala bonds above the $50 million mark with a tenure of three years. Debt Capital Market (DCM) bankers feel that the move may further weaken the market which already has trouble gaining traction.
However, some may still argue that the demand for five-year bonds more than outweighs that for the three-year ones, implying that the new guidelines will not present much of a setback. The RBI move ensures a better credit quality to be offered to investors, who will also find it attractive to subscribe with a 300 basis points spread, said Ajay Manglunia, head of fixed income at Edelweiss Capital, who also expressed that “there has been a decent appetite, and good issuers will continue to tap the market.
Good news for the market, or just a mirage?
The empirical evidence supports this claim as the Asian Development Bank (ADB) declared on June 28th, 2017 that it raised about $217 million USD, from a new issue of offshore, Indian rupee-linked, five-year bonds. The masala bond market has witnessed heightened sales of bonds in the second half of June, although this upward trend is majorly due to the falling bond yields which in turn are a consequence of a record-low inflation. There is, however, speculation that the RBIs monetary policy for August will stand to correct this.
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