"Masala" Bonds to diversify funding sources for Indian issuers

SINGAPORE - The nascent market for rupee-denominated offshore bonds, colloquially called "masala" bonds, holds good promise for diversifying the funding for Indian issuers, says Standard & Poor's, which expects Government-owned entities, finance companies and corporate entities in stable, domestic-focussed sectors such as utilities to lead the process for gauging investor interest.

S&P credit analyst, Abhishek Dangra, says:  "Issuer creditworthiness, India's economic growth trend, and investors' view of currency risk will all play equally important parts in the growth of masala bonds, given the medium- to- long-term tenor of these instruments."

According to the report, masala bond issuers will seek competitive pricing and diversification of funding, while investors will pursue adequate returns that factor in their estimates of currency risk.

It says issuers that use masala bonds can benefit from diversification of their long-tenor funding, wider use of proceeds, and shifting of the currency risk to investors, who will benefit from a simpler funding structure, absence of a hard price ceiling, and exemption from capital gains tax on rupee appreciation.

"The domestic bond market will remain important for Indian companies for maturities of less than five years due to the central bank's guidelines on masala bonds," says S&P. "Foreign currency bonds will continue to be an important funding source, particularly for issuers in export-focused sectors."

The agency adds that Masala bonds will allow more financial companies, including housing companies, to be eligible to borrow because the central bank has allowed a wider use of the proceeds. www.standardandpoors.com (ATI).