Masala bonds: Investor base to widen; banks can market bonds to NRIs, HNIs

With the government and the Reserve Bank of India (RBI) allowing Indian banks to underwrite and market Masala bonds, the investor base for the rupee-denominated bonds is expected to widen.

Also, removing withholding tax of 5 per cent for bonds issued this year can see some more than usual issuances, but a flurry of issuance is unlikely.

Some regular issuers could issue some more than usual, but in a limited number. Masala bonds are essentially dollar bonds settled in rupee. The issuer doesn’t need to bother about currency risk, since he needs to pay in local currency. But the buyer of the bonds has to be mindful about the adverse currency movement. Considering the recent rupee movement, the value of such Masala bonds has fallen in the hands of investors.

The credit market has become tight for every issuer in the international market. Hitendra Dave, the head of global markets for HSBC India, reckons the spreads have widened at least 50 basis points for even well-rated borrowers. 

Lower rated issuers, who offer high yields, never had much of a market, so the impact on them would be even more. This means that international bonds could be off limit for lower rated borrowers. 

It is not that Masala bonds have become a great avenue for Indian companies. Since September 2016, Indian companies have raised just Rs 505 billion through this route, RBI data shows. The interest level is also steadily falling. In some months, issuances have been nil. Compared to it, local bond issuance is close to Rs 7-8 trillion in a year. 

There are many reasons for Masala bonds’ failure, the primary reason could be that there is actually not much of a difference in pricing between onshore and offshore.

“It’s not that international investors lend funds at a cheaper rate,” said Ashish Parthasarthy, treasurer at HDFC Bank.

Lifting of withholding tax, though, saves 40-50 basis points on the coupon for the issuers, Parthasarthy said. With withholding tax removed, at least for bonds issued this year, the issuer can expect to pay that much in less coupon cost.

But allowing banks to become underwriters of these bonds would be akin to giving rupee loans from Indian operations itself, which defeats the purpose, experts said.

However, the investor base of these bonds will increase with Indian banks getting involved, as banks can now market these bonds to their non-resident Indian and high net worth customers, said N S Venkatesh, former treasury head of IDBI Bank.

“These banks can also create liquidity for the papers. The liquidity itself brings more investors,” Venkatesh said.

 

Salient features 

• Removing withholding tax can lower the cost for issuers
• Move unlikely to lead to a huge number of issuance
• Spreads have tightened in overseas markets
• Indian banks can market bonds to NRIs, HNIs