Kerala's masala bonds could be one-off offering after the tax rebate window

The state-owned Kerala Infrastructure Investment Fund Board’s (KIIFB) rupee-denominated masala bonds could be a one-off offering for now as it was issued after the tax rebate window closed in March.

KIIFB had registered for issuance before the March 31 deadline, data from the Reserve Bank of India (RBI) shows, but may have delayed issuing papers overseas, incurring a withholding tax of 5 per cent on the coupon.

As per government rules, foreign investors in Indian bonds have to pay a withholding tax on the coupon. For example, if the coupon of a bond is 10 per cent, the investor gets 9.5 per cent after deduction of the withholding tax.

In case of masala bonds, though, the issuer builds the withholding tax within the coupon itself, since the issuer is the one chasing an investor who may not be keen on investing in Indian bonds.

The RBI had exempted masala bonds from withholding tax to make the investment tax free till March 31.

“This masala bonds is a one-off. Quasi sovereign companies, such as the Power Finance Corporation and the Rural Electrification Corporation can still raise money, but state backed companies don’t need to unless the pricing is fine, or they want to diversify their sources of fund,” said a senior investment banker, requesting anonymity.

Kerala borrows through the domestic bond market and those bonds are called state development loans, or SDLs. On May 14, Kerala paid 8.01 per cent for Rs 500 crore in 10-year bonds. However, KIIFB had to pay 9.723 per cent for its five-year masala bond offering.

The masala bond market, once thought to be the panacea for fund-starved Indian companies, has not been very effective. According to bankers, the market is regularly tapped by highly rated companies, which anyway have a ready onshore market. It is the companies with lower ratings that need financing the most and the masala bonds market remains largely unreachable for them.

Data from RBI shows that $548.77 million worth of registration for masala bonds were done with RBI in March. This included approval for Rs 2,673 crore by KIIFB and Rs 1,000 crore by Housing Development Finance Corp. (HDFC). HDFC’s was a private placement and KIIFB’s a public offering. 

In December last year, approval for issuance of Rupee Denominated Bonds or RDBs worth $37 million was taken from the RBI. No approvals were sought in January and February.

The KIIFB’s Rs 2,150 crore bonds carry a coupon of 9.723 per cent, which is paid on a semi-annual basis. The maturity date is March 2024 and they will be listed on Singapore Stock Exchange and International Securities Market of the London Stock Exchange as per KIIFB’s website.

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