Revision in Masala Bonds Norms

The credit policy has fixed the maximum all inclusive cost for masala bonds. CARE Ratings has put together some information on companies which have borrowed such funds and the cost incurred as interest on them. it will be interesting to see as to how firms react to this new norm as they compare these rates with domestic borrowing costs.

The RBI came up with amendments in the framework for issuance of rupee denominated bonds overseas, called as masala bonds on the provisions of available routes of borrowing, recognised lender and all-in-cost among others. The new revisions, which are applicable currently, are as follows;

• Maturity period: As per earlier directive, the masala bonds had minimum maturity period of three years. As per revised norms, masala bonds up to $50 million should have maturity period of three years while the bonds raised above $50 million equivalent to rupees should have five years of maturity period per financial year.
• The all in cost ceiling earlier used to be as per the market conditions. As per new norms, the all in cost ceiling will be 300 basis points over the prevailing yield of government securities of corresponding maturity.

As of June 2017, the G-sec yield for three years is at 6.5 per cent, five years at 6.7 per cent and 10 years at 6.75 per cent.

This implies that the maximum borrowing cost for masala bonds at these rates with maturity of:

• Three years will be 9.5 per cent
• Five years will be 9.7 per cent
• 10 years will be 9.75 per cent

Impact on borrowers

The following table summarises some important masala bonds raised in the last year or so by various Indian entities.

Apart from these IFC has raised Rs 4,000 crore by way of masala bonds. The Power Ministry has suggested that state run power companies will raise $1 billion worth masala bonds in FY18. NTPC and Power finance Corporation are expected to raise Rs 2,000 to 3,000 crore in FY18.

The cost of borrowing of masala bonds will be contingent on the interest rate environment in global markets as well as the risk perception of such issuances. It does appear that the limits set by the RBI would provide enough elbow room for companies which are raising funds from these markets. However, they would be comparing such rates with domestic interest rates when taking a final decision. The present base rate of banks is 9.1-9.6 per cent and overnight MCLR is 7.75-8.10 per cent. It will be interesting to see how firms react to these two sets of interest rates.