The Enforcement Directorate (ED) has issued a show-cause notice to the Kerala Chief Minister, former Finance Minister, and the CEO of KIIFB (Kerala Infrastructure Investment Fund Board).
1. What are Masala Bonds?
- Definition: Rupee-denominated debt instruments issued outside India by Indian entities (corporates or statutory bodies).
- Purpose: To raise capital from overseas investors without incurring currency risk.
- Origin: The first Masala Bond was issued in 2014 by the International Finance Corporation (IFC) (an arm of the World Bank) to fund infrastructure projects in India.
- Key Distinction: unlike standard External Commercial Borrowings (ECBs) which are usually in Dollars or Euros, these are issued in Indian Rupees (INR).
2. How do they Benefit the Issuer?
- Currency Risk Transfer: The most significant feature is that the currency risk (exchange rate risk) is borne by the investor, not the issuer.
- Protection against Volatility: If the Indian Rupee depreciates against the Dollar, the issuer’s repayment burden does not increase. They pay back the fixed Rupee amount.
- Cheaper Funds: It allows Indian companies to access a wider pool of capital at potentially lower interest rates compared to domestic markets.
3. Who Can Invest?
- Eligible Investors: Any investor from a country that is a member of the Financial Action Task Force (FATF) and whose securities market regulator is a signatory to the International Organization of Securities Commissions (IOSCO).
- Target Audience: Foreign investors who want exposure to the Indian economy but do not have access to the domestic Indian market (FPI route).
- Examples of Issuers: HDFC, NTPC, Indiabulls Housing Finance, and KIIFB (Kerala Infrastructure Investment Fund Board).
