Masala Bond

03.12.2025

Masala Bond

Context

The Enforcement Directorate (ED) has issued show-cause notices to the Chief Minister of Kerala, former officials of the Finance Ministry, and executives of the Kerala Infrastructure Investment Fund Board (KIIFB). The notices pertain to alleged violations of the Foreign Exchange Management Act (FEMA) and Reserve Bank of India (RBI) guidelines regarding KIIFB’s issuance of Masala Bonds in 2019.

About the News

Definition: Masala Bonds are debt instruments denominated in Indian Rupees but issued in offshore capital markets. They allow Indian entities to raise funds from overseas investors.

• Key Distinction: Unlike standard foreign currency loans, the currency risk is borne by the investor, not the issuer.

History:

• Inception: The International Finance Corporation (IFC) issued the first Masala Bond in 2014 to raise ₹1,000 crore.
• Formalisation: The RBI officially permitted the issuance of rupee-denominated bonds under its regulatory framework in 2015.

Objectives

• Capital Access: To enable Indian corporates, Non-Banking Financial Companies (NBFCs), and infrastructure trusts to access global capital pools without currency conversion exposure.
• Risk Mitigation: To reduce reliance on External Commercial Borrowings (ECBs) in foreign currencies, thereby shifting the exchange rate risk from the Indian borrower to the foreign investor.
• Currency Strength: To deepen the offshore rupee market and aid the internationalisation of the Indian currency.

Key Features

Structure and Risk:

• Rupee Denominated: The bonds are priced in INR. Even though they are subscribed to and settled abroad, the redemption is calculated in rupee terms.
• Risk Allocation: If the rupee depreciates, the foreign investor absorbs the loss, protecting the Indian issuer’s balance sheet.

Operational Guidelines:

• Eligible Issuers: Includes Indian corporate entities, NBFCs, Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs).
• Listing: These bonds can be listed on major international exchanges, such as the London Stock Exchange (LSE) or Singapore Exchange (SGX).
• Maturity Period: The minimum maturity period is currently set at 3 years (reduced from the initial 5 years).

Restrictions on Use:

• Funds raised cannot be used for:
  • Real estate activities (excluding affordable housing).
  • Purchase of land.
  • Investing in capital markets.
  • Sectors where Foreign Direct Investment (FDI) is prohibited.

Taxation:

• Interest income is subject to a withholding tax of 5%.
• Capital gains arising from the appreciation of the rupee are exempt from tax.

Benefits

• For Issuers: significantly lowers the cost of borrowing compared to domestic markets while eliminating forex volatility risks.
• For the Economy: Diversifies funding sources for critical sectors like infrastructure and boosts global confidence in the stability of the Indian Rupee.

Conclusion

Masala Bonds serve as a strategic financial instrument allowing Indian entities to tap into foreign investment without the peril of currency fluctuation. While they are crucial for infrastructure financing, the recent scrutiny highlights the importance of strict compliance with FEMA and RBI regulations to maintain the integrity of cross-border financial flows.