In the recent turn of events, the Kerala Infrastructure Investment Fund Board (KIIFB), a state-owned organization, launched its inaugural ‘masala bond’ issue, estimated at ₹ 2,150 crore, on the London Stock Exchange. This event marked KIIFB as the first sub-sovereign entity in India to venture into the offshore rupee international bond market. With a five-year tenure and a 9.723 per cent coupon, this secured fixed-rate bond is an essential part of the Kerala government’s initiative to attract multinational corporations to invest in the state’s economic activities.
The Relevance of the Masala Bond Issue
Historically, Kerala had earned a reputation for its unfriendly business policies, bureaucratic delays, and frequent industrial strikes. However, the launch of the masala bond aims to rewrite this narrative by encouraging global businesses to invest in the region. According to the Kerala state government, the funds stemmed from the bond issue are projected to be utilized for the reconstruction of infrastructures damaged in the catastrophic floods of 2018.
Masala Bonds Explained
Masala Bonds are bonds denominated in Indian rupees that are raised from the international market. The Reserve Bank of India (RBI) permits any corporate and Indian bank to issue rupee-denominated bonds overseas. However, there are restrictions regarding the spending of the proceeds from these bonds. For instance, funds cannot be utilized for real estate activities, except for the development of integrated townships or affordable housing projects. Other restrictions include investing in capital markets, purchasing land, and lending to other entities for similar activities.
Rules Around Rupee Denominated Bonds
Rupee-denominated bonds can only be issued in a country, and be subscribed by a resident of such a country that is a member of the Financial Action Task Force (FATF) and whose securities market regulator is a member of the International Organization of Securities Commission. While residents of such countries can subscribe to these bonds, they can also be subscribed by multilateral and regional financial institutions where India holds membership.
Maintenance of Masala Bonds
The rules state that the minimum maturity period for masala bonds raised up to the rupee equivalent of USD 50 million in a financial year should be 3 years. In contrast, for bonds raised above the USD 50 million equivalent in INR per financial year, the minimum maturity period must be 5 years.
| Bond Type | Minimum Maturity |
|---|---|
| Masala bonds up to USD 50 million equivalent in INR | 3 years |
| Masala bonds above USD 50 million equivalent in INR | 5 years |
About the Kerala Infrastructure Investment Fund Board (KIIFB)
Founded in 1999 under the Finance Department of the Government of Kerala, KIIFB was established to manage the Kerala Infrastructure Investment Fund, as mandated by the Kerala Infrastructure Investment Fund Act. Its primary role was to provide investments for significant infrastructural projects in the State of Kerala. However, in 2016, the present government transitioned KIIFB from managing investment bonds to becoming an entity responsible for mobilizing resources for developmental projects over and above the budget.
