RBI To Examine Masala Bond Issuances, Caps Pricing
Masala bond issuances will need RBI nod.
The Reserve Bank of India (RBI) has capped the pricing of rupee-denominated or masala bonds issued overseas, besides tightening the norms for such issuances. The review in norms comes at a time when the issuance of such bonds had started to pick up. Masala bonds are rupee denominated bonds issued in the overseas markets and are intended to be instruments that can help reduce the currency risk for Indian borrowers.
“The all-in-cost ceiling for such bonds will be 300 basis points over the prevailing yield of the Government of India securities of corresponding maturity,” RBI said in its guidelines. There was no such ceiling earlier and the regulator had said the pricing should reflect the market conditions when the issuance happens. Masala bonds are typically priced higher to account for the currency risk, which is borne by the investor.
The banking regulator also said that all such issuances by Indian entities will be examined by the RBI’s foreign exchange department. It added that investors in these rupee-denominated bonds cannot be ‘related parties’ to issuers going by accounting standards Ind-AS 24.
While it is not clear whether the changes announced by the RBI were prompted by any specific deal, the regulator may have done this to ensure that such related party transactions don’t take place in the future, said Ajay Manglunia, head of fixed income markets at Edelweiss Capital.
As part of its revised rules, the RBI has also set a minimum maturity period for masals bonds, depending on the issue size. Issuances up to $50 million must have a minimum maturity of three years, while those above the $50 million mark will need to have a five-year minimum maturity.
It (the RBI’s new norms) will not impact quality issuers much going forward. Weaker credit borrowers will have a challenge, particularly due to the pricing cap.Jayesh Mehta, Managing Director & Country Treasurer, Bank of America
The issue of rupee denominated bonds has picked up this year due to a favorable outlook on the Indian currency. Periodic data released by the central bank shows that Indian firms secured an approval to raise masala bonds to the tune of nearly $2.5 billion between January and April 2017.
Housing Development Finance Corporation (HDFC) Ltd. and the National Highway Authority of India (NHAI) have used masala bonds to raise cheaper funds.
