Masala bonds have been slow to grow, with Indian issuers debuting in the space just last summer. At the time, when offshore RMB issuance was well and alive, there was plenty of excitement that the rupee market had the potential to be the next dim sum.
RBI continues to regularly put out new guidance for Masala issuance and investment, slowly opening the market, but its latest circular has created major roadblocks instead of new progress.
Its June announcement caught flak for its new all-in-cost ceiling for bonds, putting it at 300bp over the prevailing yield of Indian government bonds with corresponding maturities — a move that effectively cuts off high yield borrowers.
Barring high yield issuance is certainly a problem in the long term, especially given global investors’ craving for yields that these borrowers can offer. For now, the chances of it hindering growth of the Masala market is slim, mainly because the Indian names that have braved the market have been higher quality credits, many with links to the government. There has not been enough incentive financially for many high yield borrowers to venture offshore for rupees.
For instance, National Highways Authority of India, the most recent Indian issuer to sell Masalas, priced a Rp30bn ($466.1m) 2022 with a coupon of 7.3%, sold at par in May. The autonomous government agency holds a domestic rating of AAA from Fitch, as well as Crisil (majority owned by S&P) and ICRA (majority owned by Moody’s).
In April, state-owned NTPC secured a Rp20bn 7.25% 2022, rated BBB- by S&P and Fitch.
Another part of the new rules is far more damaging than the cost ceiling, and that is the new minimum maturity requirement. Under the latest regulations, issuers raising up to a rupee equivalent of $50m will need to have a minimum maturity of three years for their notes, while anything more than $50m needs to have a minimum maturity of five years.
Large, and presumably stronger quality, issuers will easily seek more than $50m if they are going offshore — so the RBI rules are restrictive, pure and simple.
Creating minimum tenor requirements is bound to deter issuers that can’t find value in selling longer term notes offshore or that want to debut in Masalas with shorter tenor notes. Housing Development Finance Corp (HDFC), for instance, reopened the Masala market in 2017 with the sale of a three year and one month bond. Its Rp33bn deal is the largest corporate Masala transaction so far. The company was also the first Masala issuer from India when it sold a three year and one month deal last July.
The requirement for longer tenors will likely turn away investors as well. Masalas already struggle to garner much buy-side attention, with some of the deals this year reported to be seeking upwards of Rp50bn, but falling well short of their goals.
The new rules also go against some of RBI's moves earlier this year, when in February it decided to open up the niche product to more investors, saying that multilateral and regional financial institutions where India is a member country can invest in offshore rupees. But it has missed the mark by trying to create a Masala market for longer maturities.
For cautious investors dipping into the nascent asset class, shorter tenors are better while they get their bearings. Market watchers have said that around three years is typically investors’ sweet spot for Masalas.
To add to issuers and buy-side woes, the RBI said in June that investors cannot be related to borrowers anymore, a ruling that targets issuers that have previously used a special purpose vehicle structure for their fundraising.
At this point, India’s actions around growing the Masala market should be encouraging, not discouraging. India can turn the tap off when it has an overflow of offshore rupee issuance, but only a handful of Indian issuers have ventured into the market so far.
RBI can’t afford to over-regulate if it truly wants to build the Masala market. Otherwise it may end up being a case of too little, too late for international rupee debt.