Q. With reference to `IFC Masala Bonds’, sometimes seen in the news, which of the statements given below is/are correct?

  1. The International Finance Corporation, which offers these bonds, is an arm of the World Bank.
  2. They are the rupee-denominated bonds and are a source of debt financing for the public and private sector.

Select the correct answer using the code given below

  • 1 only
  • 2 only
  • Both 1 and 2
  • Neither 1 nor 2

Answer: (c) Both 1 and 2

Masala bonds:
  • Masala bonds are bonds issued outside India but denominated in Indian Rupees, rather than the local currency.
    • Masala is a Hindi word meaning spices. The term was used by the International Finance Corporation (IFC) to evoke the culture and cuisine of India.
  • Unlike dollar bonds, where the borrower takes the currency risk, Masala bonds makes the investors bear the risk.
  • Masala Bonds were introduced in India in 2014 by International Finance Corporation (IFC).
  • The first Masala bond was issued by the World Bank-backed IFC in November 2014 when it raised ₹10 billion bonds to fund infrastructure projects in India.
    • Later in August 2015 International Financial Cooperation for the first time issued green masala bonds and raised ₹3.15 Billion to be used for private sector investments that address climate change in India.
    • In July 2016 HDFC raised ₹30 billion from Masala bonds and thereby became the first Indian company to issue masala bonds.
    • In the month of August 2016 public sector unit NTPC issued first corporate green masala bonds worth ₹20 billion.
  • Characteristics of Masala Bonds:
    • Masala Bonds are rupee-denominated bonds issued outside India by Indian entities.
    • They are debt instruments which help to raise money in local currency from foreign investors.
    • Both the government and private entities can issue these bonds. Investors outside India who would like to invest in assets in India can subscribe to these bonds.
    • Any resident of that country can subscribe to these bonds which are members of the Financial Action Task Force. The investors who subscribe should be whose securities market regulator is a member of the International Organisation of Securities Commission. Multilateral and Regional Financial Institutions which India is a member country can also subscribe to these bonds.
    • According to RBI, the maturity period is three years for the bonds raised to the rupee equivalent of 50 million dollars in a financial year. The maturity period is five years for the bonds raised above the rupee equivalent of 50 million dollars in a financial year.
    • The conversion of these bonds happens at market rate on the date of settlement of transactions undertaken for issue and servicing of interest of the bonds.
  • The proceeds raised from these bonds can be used:
    • In refinancing of rupee loan and non-convertible debentures.
    • For the development of integrated townships and affordable housing projects.
    • Working capital to corporate.
  • RBI mandates the proceeds raised from these bonds cannot be used:
    • In real estate activities, not including the development of integrated townships and affordable housing projects.
    • Activities prohibited according to Foreign Direct Investment guidelines.
    • Investing in capital markets and usage of the proceeds for equity investment domestically.
    • Purchase of land.
    • On-lending to other entities for any of the above purposes.
International Finance Corporation
  • The International Finance Corporation (IFC) was founded in 1956 with Washington, DC as its headquarters.
  • It is the private sector arm of The World Bank. It is a member of the World Bank Group.
  • Mandate: Advance economic development and improve the lives of people by encouraging the growth of the private sector in developing countries.
  • Functions: It helps countries develop their private sectors in a variety of ways
    • Investing in companies through loans, equity investments, debt securities and guarantees.
    • Mobilizing capital from other lenders and investors through loan participations, parallel loans and other means.
    • Advising businesses and governments to encourage private investment and improve the investment climate.
  • Governance: The IFC is owned and governed by its member countries. It is a corporation whose shareholders are member governments that provide paid-in capital and have the right to vote on its matters.
  • The President of the World Bank Group is also the President of the IFC.
International Finance Corporation (IFC)