Getting the Masala right for an India-UK Bond

'India Investment Journal' looks at how Masala Bonds have caught on as a trend, with London Stock Exchange as a preferred hub. The UK government recently welcomed the world's first ever “Masala” or rupee-denominated bond issued outside India by an Indian corporate being listed on the London Stock Exchange. UK Chancellor Philip Hammond described the "landmark" listing by the Housing Development Finance Corporation (HDFC) as a "major vote of confidence" in London. HDFC became the first company to issue a bond of this type, which raised around $450 million (Rs 3,000 crores). It has a maturity of three years and an annual yield of 8.33 per cent and was more than four times oversubscribed. Hammond said: "It represents a major vote of confidence in London as the leading global financial centre and is further proof that Britain is a great place to do business. "This deal signifies a strengthening of the already close economic ties between the UK and India and paves the way for further masala bonds to be listed in the UK. It is a taste of things to come. Britain is open for business and one of the most attractive places in the world for foreign investment." Masala Bonds are rupee-denominated bonds issued to overseas buyers. As many as 30 off-shore Indian rupee bonds have listed in total on London Stock Exchange (LSE), raising an equivalent of approximately $3.5 billion, according to one of the world′s leading stock exchanges. Britain′s minister for Asia, Alok Sharma, described the HDFC launch as a reaffirmation that the UK is a "natural partner" for India. He said: "The tremendous investor demand demonstrates the UK's pivotal role in financing India's growth and further strengthens the close economic ties between the UK and India. I am confident that this will pave the way for many more Indian companies to raise capital in London to support India's ambitious infrastructure plans." London Stock Exchange last year saw the listing of the world's first-ever green Masala bond on its markets and there have been two further listings in 2016, raising around $104 million (Rs 700 crores). The latest bond will help HDFC diversify its borrowing profile and access global investors. HDFC chairman Deepak Parekh said the listing of India′s largest private sector mortgage lender′s bond on London Stock Exchange was the result of "unshakable trust from international investors" in the exchange. Parekh said: "While we did explore other markets for listing, the responsiveness and efficiency with which the officials at the UKLA [UK securities regulator] and London Stock Exchange responded to our urgent requirements was remarkable. Considering that this was the first issue of its kind in a global financial centre by an Indian company, the authorities were forthcoming and supportive. “UK is the global hub for financial services and the Reserve Bank of India's guidelines permitting overseas rupee-denominated bonds, will open up a new source of funding for us.” The listing follows Prime Minister Narendra Modi's announcement of $1 billion equivalent of Masala Bond issuance in the UK, made during his visit to London in 2015. He had also indicated plans for a railway rupee bond to be issued in London to finance the upgrading of India's railway network. “We will increasingly raise funds in London's financial market. I am pleased that we will issue a railways rupee bond in London stock market... for this is where the journey of Indian Railways had begun,” he said, famously adding: “We've got 'James Bond, Brooke Bond and now Masala Bonds!” Nikhil Rathi, London Stock Exchange CEO, said: “Taking advantage of the efficient listing process and tapping the global markets in London, global issuers can access a new vital channel of international finance and investors around the world without foreign exchange risk.

“These rupee-denominated bonds are hugely significant to the India-UK financial partnership. It is the most credible and transparent channel of finance that offers international investment for Indian infrastructure. “As India goes global, it can benefit hugely from this hook into global finance.” Previously, London Stock Exchange has played host to the world's first Green Masala Bond in partnership with IFC and YES BANK and the world's longest-dated Masala Bond, a 15-year issuance by IFC.

Rana Kapoor, founder, managing director & CEO of Yes Bank, said: “Yes Bank will strive to improve the access to long term overseas funds for corporations in India, through capital markets in the UK, particularly towards Green Infrastructure Financing, which is high on India's agenda. We also look forward to working with LSE in establishing London as the leading instrument for raising rupee denominated offshore capital via 'Masala bonds'.” This was followed up more recently by India's state-owned energy major, NTPC, raising $300 million (Rs 2,000 crores) with a 7.48 per cent annual yield with the launch of its “Green Masala Bond” at London Stock Exchange. NTPC′s bond issue was described as the “first-ever Indian quasi-sovereign to issue a Masala Bond”, the proceeds from which will be invested in the renewable energy market as it seeks to add more wind and solar power projects to its portfolio. Rathi explained: “NTPC's landmark independently certified Green Masala bond listing, the first Masala bond by an Indian quasi-sovereign issuer, represents another historic event for Indian finance. We are honoured to have been chosen to support NTPC access rupee-based financing in London's international capital markets, reinforcing India's ambitions to generate 175GW of renewable energy by 2022. “This cements London's position as the listing venue of choice for a variety of Asian issuers, from quasi-sovereign to supranational institutions, municipals and private companies. We are excited about continuing to build this market with Indian partners and authorities over the long-term, underlying the success of the India-UK Financial Partnership." The listing followed the visit of Piyush Goyal, Indian minister of state for power, coal, new & renewable energy, to the UK earlier this year to strengthen UK-India collaboration on power and renewable energy. He tweeted: “Congrats to NTPC for issuing first Green Masala Bonds at 20 bps lower than domestic AAA benchmark.”

A recent report by Fitch Ratings says the development of a masala bond market would be positive for Indian firms, “opening potentially significant new sources of funding”. However, it does highlight that the market′s development beyond a select group of large, higher-quality issuers could take time and would depend on global liquidity, domestic macro-economic variables and foreign investor sentiment.