1 Introduction
Why should dfis participate in local capital markets? Is such participation consistent with their role and mandate? What will their participation in local
The author submits that sound capital markets are vital to development as they ensure efficient resource allocation,1 create jobs, and spur economic growth.2 Debt capital markets in particular are crucial sources of funds for entities looking to raise financing; they complement the financing available from traditional sources such as banks and financial institutions, and often play an important role in closing large financing gaps in critical sectors that are vital to development, such as infrastructure and housing.3 In playing this complementary role, capital markets can alleviate some of the stress on the commercial banking system by matching long-term investments with long-term capital. In addition, capital markets also create channels for domestic savings, such as those managed by pension funds, provident funds and other institutional investors, and mobilize those funds for long-term productive uses in the local economy.4 In such fashion, capital markets foster broader ownership of productive assets by retail savers. They enable individual and household savings to benefit from economic growth and wealth distribution and provide avenues for investment opportunities that encourage a thrift culture, critical in increasing domestic savings and investments that translate into economic growth.5
Given the role of local capital markets in economic development, it is natural for dfis, given their focus and emphasis on development, to be concerned with and interested in the establishment and deepening of local capital markets. Not only is participation by dfis in capital markets consistent with their role and mandate, but it is in fact imperative that dfis, with their unique profile, high creditworthiness and credibility, play a role in establishing such markets where none exist and, where already existing, contribute to deepening those markets with their continued participation. When dfis provide financial assistance to borrowers outside capital markets, their support impacts a project or a corporation or a sector; however, when dfis provide support to entities through the capital markets, not only does it translate into financial support for the concerned project or entity or sector, but it also sends a strong
There are several ways in which dfis can support the development of domestic capital markets. dfis can finance projects or companies using local capital markets instruments – as noted above, this signals to the market that the dfi in question has confidence in the robustness of the local market and the instrument at hand. This can have the effect of attracting other foreign investors and institutional investors to the same market. dfis can also help borrowers that, owing to their profile, credit rating or other reasons, have not yet been able to access the capital markets to raise financing and diversify their sources of funding. This can be done by having a dfi act as an anchor investor to such borrower’s issuance or by such dfi credit enhancing the instrument. This will enable such borrower to raise its profile or the credit rating of its instrument to access the capital markets. dfis are also uniquely placed, given their status and global experience, to provide policy advice to capital markets regulators, authorities, and market participants. Such advice can range from ways to strengthen the legal and regulatory framework for capital markets to strengthening key market infrastructure, as well as advice in the design of specific instruments, such as infrastructure debt funds or green bonds.6 Another significant way in which dfis can support domestic capital markets development is by issuing local currency bonds.7 This chapter focuses on the issuance of local currency bonds as a tool to establish and deepen local capital markets. It attempts to do this by undertaking a case study of ifc’s issuance of Indian rupee (inr) denominated bonds in the local domestic market as well as in the offshore market. For the purposes of simplicity, ifc’s issuance of inr denominated bonds in the offshore market will henceforth be referred to as ‘Masala Bonds’, and ifc’s issuance of inr denominated bonds in the local domestic market will henceforth be referred to as ‘Maharaja Bonds’, consistent with the nomenclature assigned to these instruments by the ifc.
2 Benefits of Local Currency Issuances by Development Finance Institutions
Issuance of local currency bonds by dfis can promote the development of local capital markets in several ways. The author will lay out five ways in which
3 ifc’s Masala Bond Issuance
In 2013, the ifc held a series of discussions with the Government of India to develop solutions to deepen Indian capital markets. The objective was to expand the participation of foreign institutional investors in Indian markets, both onshore and offshore, as well as to allow a larger base of Indian corporate borrowers to access diverse funding options, beyond what was then available in the market.13 These discussions took place in the context of the Indian economy’s growing investment needs, and a challenging economic backdrop. India’s investment requirements at the time were estimated at usd 4.7 trillion over a five-year period, to achieve average growth of 7 percent per annum. The public banking sector was expected to be constrained in respect of long term financing due to applicable prudential regulations.14 The Indian Rupee had fallen to a record low against the usd due to capital flights spurred by a severe current account deficit and the tapering of quantitative easing by the US Federal Reserve.15 In response, the ifc worked with the Government of India to develop offshore and onshore inr bond programs to support the development of capital markets in inr.16
This was an excellent instrument for investors seeking exposure to the inr. But what made it more attractive than other inr instruments was that it did not come with any of the restrictions of investing directly in India. Ordinarily, if a foreign investor wishes to invest in India, it must navigate through a complex maze of Indian rules and regulations. In many cases, the investor needs to register with local regulatory authorities to invest in inr instruments in India. What this instrument offered international investors was the ability to get inr exposure without needing to invest in India and therefore be subject to Indian rules and regulations. Masala Bonds gave investors the ability to benefit from India’s strong economic fundamentals while avoiding the cumbersome onshore rules, regulations, registration procedures, and currency convertibility issues.20 In addition, if you take into account ifc’s aaa rating, this instrument not only gave investors exposure to inr, but also gave them that exposure without taking much credit risk at all.
Under its Masala Bond program, the ifc issued bonds of several maturities ranging from 3-year bonds, 5-year bonds and 7-year bonds, to 10-year bonds and 15-year bonds.21 The 15-year tranche marked the longest-dated bonds in the offshore rupee market at the time.22 The ifc also issued the first green
The Masala Bond helped ifc diversify its sources of inr funding and created an alternative source of inr, ultimately with a view to optimizing the funding cost of local currency loans for borrowers in India. ifc had and continues to have large exposures in India – in fact, India is the country where ifc has its largest exposure globally.28 ifc provides both dollar funding and local currency funding to companies in India. Before the Masala Bond, ifc would provide local currency funding to Indian corporates by entering into cross currency swaps with a swap counterparty. However, the Masala Bond provided ifc with a readily available pool of inr, which was very attractively priced and could, in turn, be used to make local currency loans in India at favorable pricing levels for borrowers. In other words, ifc was not only able to raise resources that could be invested into India, but it also raised them at pricing levels that were attractive for Indian borrowers. Indian borrowers benefited not just from the improved pricing of ifc loans, but also from the certainty of pricing that ifc was now able to provide. In the past, whenever ifc had funded local currency loans in India, it had done so relying on cross-currency swaps to obtain inr for on-lending. By its very nature, this necessarily had to be done at the time of funding the deal, leaving the pricing of the ultimate loan uncertain
The impact of ifc’s issuance of Masala Bonds, however, went beyond the volume of financing in local currency that ifc generated for investment in projects in India or the price at which such investments were made. The Masala Bond issuance had a very significant signaling effect. Following the success of the Masala Bonds issuance by ifc, the Reserve Bank of India, in 2015, amended its overseas borrowing regulations and allowed Indian corporates to issue masala bonds or offshore inr denominated bonds,30 opening a new avenue for Indian companies to access foreign capital without bearing the currency risk of borrowing in foreign currency. Following this liberalization of regulations, several Indian corporates as well as state-owned firms have accessed the offshore market to raise financing by issuing inr denominated bonds. These issuers include Housing and Development Finance Corporation, which is one of India’s leading housing finance company, Axis Bank Limited, which is India’s third largest bank, ntpc Limited which is India’s largest power utility company31 and several others. A factsheet released by the London Stock Exchange on 14 July 2021 notes that there are 26 masala bonds listed on the London Stock Exchange with a combined outstanding value of over inr330 billion (approximately usd 5.1 billion equivalent).32 For Indian entities which have accessed this market as issuers, the market provides access to a large global investor base looking for high-quality, inr denominated assets, which in turn allows for a larger potential program size to be executed in offshore markets.33 Issuers who have accessed this market include not only Indian corporates, but also other dfis such as the Asian Development Bank (adb)34 and the European Bank for Reconstruction and Development (ebrd)35 which have raised funds,
4 ifc’s Maharaja Bond Issuance
In addition to the Masala Bond, in August 2014, ifc also announced the launch of an inr bond to be issued by ifc in India for usd 2.5 billion equivalent.39 This inr bond was later termed as a “Maharaja Bond” and was listed on the National Stock Exchange India (nse).40 The primary objective of the Maharaja Bond was to create a source of very long-term financing for ifc’s infrastructure lending program in India,41 and at the same time extend the maximum maturity of corporate bonds in the domestic bond market, in order to deepen the market.
The Maharaja Bonds had an innovative structure designed to attract different types of investors to India’s capital markets.42 The novel feature of the Maharaja Bond was that ifc created two separate classes of bonds to cater to different market segments. Four inaugural tranches worth usd 100 million equivalent were launched in September 2014. Tranches 1 and 2, which were constituted of bonds with 5-year bullet and 10-year bullet features, respectively, were targeted towards international investors active in the Indian
Domestic investors, on the other hand, consider the country’s sovereign government issues to be the risk-free benchmarks. Therefore, they would not necessarily be attracted to a bond priced lower than Indian sovereign bonds. Further, the domestic investors’ base largely comprised insurance companies, pension funds, and provident funds46 that were “buy and hold” investors and therefore required very long-term investment assets to match their long-term liabilities. In order to tap the demand from such domestic investors, ifc issued Tranches 3 and 4 bonds with tenors of 13–18 years and 19–20 years respectively. These bonds were priced in the range of 20 to 30 basis points above the relevant maturity igb benchmark yields.47 Tranches 3 and 4 were issued as separately tradeable redeemable principal parts (strpps), which essentially meant that the coupon and the principal were separate parts that could be detached and traded separately.48 In addition to the extremely long tenors of these bonds and the detachability of the principal and coupon parts, there were two other unique features of these tranches 3 and 4: First, ifc issued the bonds for the full amount but did not receive all of the cash immediately. Instead, ifc structured the bonds so that ifc could call for the remainder of the cash from investors, as required to be deployed for infrastructure projects in India over a period of up to two years. This was done to avoid negative carry in parking
5 Role of the Indian Government
The author would like to briefly touch upon another facet of the development of the Masala Bond and Maharaja Bond programs that may be of interest to legal practitioners. The bond issuances under these programs did not fit into any existing regulatory framework for inr bonds at the time. Indian regulations did not envisage an issuer with a profile like the ifc, that is, a foreign issuer making inr or inr-linked bond issuances either in the onshore or offshore markets. The launch and operationalization of these programs required intense interactions and dialogue with several regulators in India and were made possible by special approvals from the Government of India and the various Indian regulators involved. If one were to conjecture, it is possible that in a different economic setting, background and context, or given a different government, such approvals may not have been forthcoming, irrespective of the profile of the dfi seeking such approvals. It is important therefore to
6 Conclusion
The author submits that ifc’s Masala Bond issuance went a long way in achieving the goals that ifc and the Government of India had set out. First and foremost, it established an offshore market for inr instruments, in particular by encouraging the liberalization of local regulations which then allowed Indian corporates to tap this market to address their funding needs. It essentially resulted in the introduction of a new source of financing for Indian corporates that did not previously exist. The fact that the Reserve Bank of India allowed Indian corporates to issue other masala bonds highlights the catalytic impact and signaling effect of the program beyond ifc’s balance sheet. It ensured that any future use of the instrument will lead to inflows of institutional investments to the economy, without direct or indirect ifc involvement as issuer or anchor investor.52
The issuance also attracted a class of investors to India that had not previously invested in India and helped in raising funds that would directly be invested in Indian projects as loans to Indian borrowers. For the ifc, the issuance of Masala Bonds helped to diversify the sources of funding and optimize the cost of inr funding, with the ultimate goal of improving ifc’s product offerings for Indian companies.
It appears that the Maharaja Bond, though very innovatively structured and executed, did not have the same magnitude of impact on India’s domestic debt capital markets, and did not by itself, result in invigorating the debt capital markets. While India has a strong and vibrant equity capital market, the debt capital markets continue to be tepid. In 2020, India stood out with usd 13.7 billion worth of outflows from its bond market even as most of its Asian peers saw record inflows.53 The country’s equity market continues to see record dollar inflows but foreign investors are still exiting bonds. There could be a number of reasons for this, including the legal and regulatory framework for debt capital
To conclude, the author would like to re-emphasize that in talking about local currency bond issuances by dfis, the role of the relevant government in making such an issuance possible cannot be overlooked. Often such issuances are needed in jurisdictions where the regulatory framework may not yet have evolved enough to envisage or support such issuances. However, a government that has positive intent, and that recognizes the value of such issuances to the domestic capital markets, can partner with a dfi or possibly multiple dfis to put in place an enabling framework within which such issuances can take place.
Senior Counsel, International Finance Corporation (ifc), pchadha@ifc.org. The author acknowledges the contributions of Keshav Gaur (Director, Treasury Client Solutions, ifc), Glenn Jessee (Chief Counsel, ifc), and Kannagi Ragunathan (Senior Financial Officer, Treasury Client Solutions Asia, ifc) in sharing their experiences and perspectives from working on the ifc bond issuances referred to in this chapter, and in providing valuable insights and inputs that went into shaping this chapter.
Andries 2009, 70.
Ibid, 74.
ifc, ‘Debt Capital Markets Solutions’ 2017, 21.
Cytonn 2019, Section ii(b).
Ibid.
World Bank Group, ‘Capital Markets Development’ 2020, 18.
ifc, ‘Local Currency and Hedging Solutions’ 2017, 19.
Ibid.
Ibid.
Ibid.
Ibid.
‘Mobilization of Private Finance by mdbs and dfis’ 2018, 73.
Ibid.
ifc, ‘Masala Bond Program’ 2017, 1.
‘Mobilization of Private Finance by mdbs and dfis’ 2018, 73.
ifc, ‘ifc Capital Market Solutions in Asia’, 15.
lse, ‘Accessing the Global Markets through London’, 25.
ifc, ‘Masala Bond Program’ 2017, 1.
ifc, ‘Masala Bond Program’ 2017, 2.
Ibid.
Ibid.
Ibid.
ifc, ‘ifc Capital Market Solutions in Asia’, 15.
lse, ‘London Stock Exchange Welcomes ifc’, 1.
ifc, ‘ifc Capital Market Solutions in Asia’, 15.
ifc, ‘Masala Bond Program’ 2017, 2.
Standard & Poor’s 2020, 7 (ifc’s India exposure accounts for 12% of its committed portfolio).
ifc, ‘ifc issued first Masala Bonds in London’, 1.
lse, ‘Accessing the Global Markets through London’ 2017, 32.
lse, ‘Indian Rupee Bonds on London Stock Exchange’ 2021, 1.
ifc, ‘Masala Bond Program’ 2017, 2.
lse, ‘Accessing the Global Markets through London’ 2017, 32.
ifc, ‘Masala Bond Program’ 2017, 2.
Banerjee 2016, 5.
ifc, ‘ifc issued first Masala Bonds in London’, 1.
ifc, ‘ifc Capital Market Solutions in Asia’, 16.
ifc, ‘ifc Debuts Maharaja Bonds’, 1.
ifc, ‘ifc Capital Market Solutions in Asia’, 16.
ifc, ‘ifc Debuts Maharaja Bonds’, 1.
ifc, ‘ifc Debuts Maharaja Bonds’, 1.
ifc, ‘ifc Capital Market Solutions in Asia’, 16.
Crabtree 2014, 1.
ifc, ‘ifc Debuts Maharaja Bonds’, 1.
Ibid.
ifc, ‘ifc Capital Market Solutions in Asia’, 16.
‘Mobilization of Private Finance by mdbs and dfis’ 2018, 77.
World Bank, ‘Developing India’s Corporate Bond Market’, 33.
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