Kerala Chief Minister Pinarayi Vijayan rang the opening bell at the London Stock Exchange (LSE) on May 18 to mark the listing of masala bonds sold by Kerala Infrastructure Investment Fund Board (KIIFB).

With this, Kerala has become the first sub-sovereign entity in the country to access the international market by listing masala bonds issued through its off-budget mechanism. Pinarayi also became the first chief minister to open trading at the LSE.

The masala bond market till date had seen issuance only from large Indian corporates and public institutions such as NHAI and NTPC, which are all rated AAA in the domestic market. LSE claims to be the largest masala bond centre, with 49 such rupee-denominated bonds listed across its markets.

What are masala bonds?

Masala bonds are rupee-denominated borrowings issued by Indian entities in overseas markets. The objective of masala bonds is to fund infrastructure projects in India, fuel internal growth via borrowings and internationalise the Indian currency.

According to the RBI, any corporate (entity registered as a company under the Companies Act, 1956/2013) or body corporate (entity specially created out of a specific Act of Parliament) and Indian banks are eligible to issue rupee-denominated bonds overseas.

Such bonds can only be issued in a country and can only be subscribed by a resident of a country that is a member of the Financial Action Task Force (FATF).

The minimum maturity period for masala bonds raised up to $50 million equivalent in rupee per financial year should be three years and for bonds raised above $50 million equivalent in rupee per financial year should be five years.

When was KIIFB established?

KIIFB came into existence in 1999 under the Kerala Infrastructure Investment Fund Act 1999 (Act 4 of 2000) to manage the Kerala Infrastructure Investment Fund. Comprehensive modifications to the Act and scheme were made through an amendment ordinance in August 2016. With a new strategy and structure, KIIFB aims to dynamically mobilise funds for the infrastructure development of Kerala.

What is KIIFB’s target?

KIIFB plans to tap the offshore rupee bond market with the $312 million (Rs 2,150 crore) senior secured fixed-rate bond, which is aimed at accessing capital from international investors. It plans to raise Rs 5,000 crore through masala bonds to fund large and critical infrastructure projects in Kerala.

“KIIFB strives to be at the forefront of creating a sustainable development model for infrastructure financing in the emerging markets and an exemplar for best practices in corporate governance and fund management,” said KIIFB CEO K.M. Abraham.

The bond, with a five-year tenor and a 9.723 per cent coupon, has been admitted to LSE’s International Securities Market (ISM).

Kerala’s finance minister Thomas Isaac had earlier stated that the KIIFB was securitising future revenue. The government passes on a share of the motor vehicles tax and cess on petroleum products to KIIFB every year. KIIFB will be able to meet all debt servicing obligations arising out of these borrowing just from the revenue escrowed by the government, he added. 

Which entities have issued masala bonds?

NTPC, India’s largest power generating company, raised Rs 2,000 crore through rupee-denominated green masala bonds from the offshore markets on August 3, 2016.

In 2017, the Indian Renewable Energy Agency (IREDA) issued a climate bonds certified masala green bond worth $300 million at the LSE. IREDA’s masala bond is the first green climate bonds certified and investment grade rated bond by a financial institution.

NHAI also launched a masala bond at the LSE in 2017. The initial benchmarked issue of Rs 1,500 crore was upsized to Rs 3,000 crore at a price yielding 7.30 per cent annually.