Indian companies spice things up in Singapore with masala bonds

Savvy food hunters here might be surprised to find Indian spice mixes on the Singapore Exchange (SGX).

Several masala - or rupee-denominated - bonds have listed on it in the past year.

Masala bonds allow Indian companies to raise funds for their projects by borrowing from overseas markets through the issuance of rupee-denominated debt instruments.

In exchange, these bond investors get a fixed rate of returns - known as coupons - at periodic intervals until they are repaid by the borrower.

The latest on SGX is Mumbai-based Shriram Transport, which raised 4.75 billion rupee (S$100 million) through a private placement of its masala bond.

Shriram Transport has nearly 900 branch offices and 906 rural centres across India. It aims to increase its market share in the pre-owned commercial vehicle segment and target a relatively new customer base in rural areas.

PROCEEDS

Proceeds from the masala bond will be used for Shriram's various financing activities and for portfolio diversification.

Mr Tng Kwee Lian, head of debt capital markets at SGX, said in a press release on Jan 20 that the bond listing offers investors "more opportunities to participate in India's growth story".

And Singapore is no stranger to investing with the world's second fastest-growing large economy.

More than 80 per cent of listed offshore bonds by Indian issuers are listed on SGX today, raising about US$66 billion (S$93 billion).

SGX also hosted several high-profile masala bonds last year (See report, above right.)

Masala bonds are a relatively new investment tool.

In September 2015, the Reserve Bank of India (RBI) issued guidelines that allowed Indian non-banking finance companies, real estate investment trusts and infrastructure investment trusts to issue masala bonds to overseas investors.

To further encourage the development of the overseas Indian rupee bond market, the RBI announced in August last year that banks will be allowed to issue masala bonds for their capital requirements, and for financing infrastructure and affordable housing.

Before the development of masala bonds, eligible Indian companies could only raise offshore funding with bonds usually denominated in US dollars, said SGX in a brochure about listing masala bonds here.

Bonds named after their country of origin are not new - think dimsum bonds which are denominated in Chinese yuan and issued in Hong Kong.

They are popular with foreign investors who want exposure to yuan-denominated assets, but are restricted by China's capital controls from investing in domestic Chinese debt.

Dimsum bonds have been available here since 2011.

Followers of the Korean wave might also be interested to know about kimchi (a Korean side dish) bonds.

These were indentures issued in South Korea by a foreign bank or corporation in a non-won denomination, and were only available to South Korean investors.

But every investment tool has its risk, especially in the current economic climate.

The most obvious challenge to bonds is the upcoming Fed hikes this year.

Bonds, with their relatively short tenure, were especially popular when interest rates were near-zero as they offer investors a better place to grow their money (See report, right.)

SLUMP

But in uncertain times, especially with the oil slump, default rates have gone up.

Bond holders may lose all or most of their investment if a company winds up, files for bankruptcy protection or misses a coupon payout.

Last year, locals who owned bonds of Swiber Holdings and Perisai were burned by the companies' financial troubles.

Nonetheless, bond holders can be comforted with the knowledge that the default rate for bond issuers worldwide is very low - about 2.5 per cent, reported The Financial Times.

The masala bonds on the SGX are wholesale bonds, which means they are placed only to institutional and accredited investors in larger denominations.

Current rules define those with over $2 million of net personal assets as an accredited investor, which is a status needed to be sold sophisticated investment products.

Last month, an amendment to the Securities and Futures Act was passed in Parliament. It tightens the way net personal asset is calculated.

The net equity of an individual's primary residence can only contribute up to $1 million of the $2 million threshold.

But wholesale bonds issued by issuers that meet eligibility criteria stipulated by SGX can be offered to retail investors after the bonds have been listed on SGX for six months.

Since May last year, these "seasoned" bonds can be re-denominated into smaller lot sizes and offered to retail investors on the secondary market.

Eligible issuers can also offer additional bonds to retail investors on the same terms as the "seasoned" bonds without a prospectus.