The Enforcement Directorate (ED) has issued show-cause notices to Kerala Chief Minister Pinarayi Vijayan for alleged violations of the Foreign Exchange Management Act (FEMA) related to the  Masala Bond issued by the Kerala Infrastructure Investment Fund Board (KIIFB).

About Masala Bond

• Masala Bonds are rupee-denominated bonds issued abroad by Indian entities to raise capital.
• The International Finance Corporation (IFC) coined the term “masala” to reflect culture and cuisine of India.

• Why Masala Bonds Were Introduced? 
  • Before their introduction, Indian companies raised funds abroad mainly through External Commercial Borrowings (ECBs).
  • This posed a major risk, if the rupee weakened during repayment, borrowing costs would increase sharply.
  • Masala Bonds shift this exchange-rate risk from the Indian issuer to foreign investors.
• How Masala Bonds Work ?
  • Investors pay in foreign currency an amount equivalent to the rupee value of the bond on the transaction date.
  • The bond is priced entirely in rupees, ensuring the issuer does not face exchange-rate volatility.
• Maturity Period: According to RBI Rules for Masala Bonds (2017)
  • Minimum maturity must be 3 years for issuances up to USD 50 million per financial year.
  • Minimum maturity must be 5 years for issuances above USD 50 million.
• First Masala Bond: 
  • The first Masala Bond was issued by IFC in 2014 for infrastructure projects.
  • HDFC became the first Indian company to issue rupee-denominated Masala Bonds on the London Stock Exchange in July 2016.
  • In 2019, Kerala became India’s first state to raise money using Masala Bonds.
  • KIIFB issued ₹2,678 crore worth of such bonds, dual-listed on the London Stock Exchange and Singapore Exchange.

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Benefits and Objectives of Masala Bonds

• Access to Global Capital: Masala bonds allow Indian companies, infrastructure agencies, and financial institutions to raise capital in international markets by issuing rupee-denominated debt instruments, thereby expanding their access to global capital pools and foreign investors.
• Mitigating Currency Risk: By issuing bonds in Indian rupees, Masala bonds mitigate currency risk for Indian issuers, as the repayment is made in INR, thus shielding them from exchange rate fluctuations in foreign currencies like USD or EUR.
• Promoting the Indian Rupee: Masala bonds contribute to the internationalization of the Indian rupee, increasing demand for the currency in global markets.
• Attracting Foreign Investment: By offering an opportunity to invest in Indian projects while earning returns in rupees, Masala bonds attract foreign investment, which helps balance India’s current account.

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