Masala Bonds

The Enforcement Directorate (ED) has issued notices to the Kerala Chief Minister in connection with the KIIFB (Kerala Infrastructure Investment Fund Board) Masala Bond investigation.

• This marks a significant escalation in the ongoing conflict between the LDF state government and central agencies over Kerala’s state financing model.

About Masala Bonds

• Definition: Masala bonds are rupee-denominated bonds issued outside India by Indian entities.

• Origin: The International Finance Corporation (IFC), part of the World Bank, issued the first Masala bonds in October 2013 as part of its $2 billion offshore rupee programme.

• Purpose: They allow Indian entities to raise funds from foreign investors in Indian rupees, with currency risk borne by the investor, not the issuer.

• Attractive Returns: To offset currency risk, these bonds often offer higher interest rates than in the investor’s home country.

• Issuers: Both government bodies and private companies can issue Masala bonds.

Who Can Invest?

• Investors Outside India: Any resident from countries that are members of the Financial Action Task Force (FATF) can invest.

• Eligible Entities: Individuals, institutions, financial organizations, and multilateral/regional financial institutions of which India is a member.

• Standards: Investments must adhere to internationally accepted norms for safe and fair investing, like those under IOSCO.

Maturity Period

• Smaller Bonds (up to USD 50 million): Typically 3 years.

• Larger Bonds: Up to 5 years, providing flexibility for investors.

Use of Funds

Funds raised via Masala bonds are generally for productive and regulated purposes:

• Infrastructure projects

• Affordable housing

• Refinancing rupee loans

• Corporate working capital

Restrictions: Funds cannot be used for buying land, stock market investments, or real estate projects without specific government approval.