The masala bonds listed on the London Stock Exchange on 17 May by India’s southern state Kerala are receiving limited response from investors.
For such offshore rupee-denominated bonds there are few takers for currency bets at a time when volatility is predicted in view of the US-China trade tensions and political uncertainty in India after the general elections to install a new government next week.
The state government’s masala bonds were sold by its infrastructure investment arm Kerala Infrastructure Investment Fund Board (KIIFB), which raised INR 21.50bn ($312m, £245m, €279m) crore through the bonds at a fixed interest rate of 9.723% per annum.
The KIIFB is the first state-owned entity to issue masala bonds, after pricing the five-year notes in March. The issuance was jointly led by Axis Bank and Standard Chartered and is guaranteed by the Kerala state, which plans to spend INR500bn ($7.17bn, £5.63bn, €6.43bn) on infrastructure projects to rebuild the state over the next five years.
Masala bonds are bonds issued by an Indian entity in a foreign market in rupee denomination. It is a way for an entity to borrow from foreign investors and is due to be paid at a fixed end date.
These bonds are usually issued to fund infrastructure and development projects and should have a minimum maturity of five years. The bonds idea was floated to raise funds to rebuild infrastructure in Kerala which recently saw devastating floods. The bond is guaranteed by the Kerala government.
Sceptical advisers
Investment advisers are sceptical of the bonds being issued now as the masala bond market has been struggling since it came into existence in 2015 and at a time when the overall demand for masala bonds is low. Investors are also cautious as they view the US-China trade tension a deterrent for them to take bets on currency.
It is generally viewed that the state government could have mobilised funds from other sources at much lower rates.
“The 9.73% interest is on the higher side, when some multilateral agencies, such as the World Bank, Asian Development Bank and specific agencies of countries like Japan and France, can lend at less than 2%,” said Manoj Vallikudiyil, partner Manjul Associates, securities and investment consultants, Dubai.
NRIs find it attractive to subscribe as the bonds offer higher rate of 9.73% compared to average bank fixed deposit rate of less than 7%. However, NRIs in the UAE have limited access to the London market unless routed through a fund house.
Investment advisers in the UAE blame the state government for resorting to raise the money at such higher cost.
“Instead, the state should have come out with an NRI bond offering interest at a range of more than 9%. NRIs would have jumped at it as at present they do not have any attractive investment avenues, other than the bank fixed deposits with yield of less than 7% annually,” said Binoo Nayyar, chief financial officer, TrendRiser Securities, Dubai.
A majority of NRIs prefer to park their money in bank fixed deposits rather than taking the risk of investing in stocks or other securities, though investment advisers push them to subscribe to SIPs.
“At 9.72%, the state government mobilised INR21.50bn with annual interest burden of INR2.10bn. That means, in five years the government will have to defray almost INR10.50bn by way of interest and management fee alone.
“This is at a time when the government could have mobilised from international multilateral agencies who offer long-term lending at less than 2%,” said Binoo.
