product note on: masala bonds - vinod kothari...
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Product Note on: Masala Bonds
Vinod Kothari Consultants Private LimitedSpecial credits to Mr. Saurabh Jain
1006-1009 Krishna224 AJC Bose RoadKolkata – 700017Phone 033-22811276/ 22813742/ 22817715
601C, Neelkanth, 98, Marine Drive, Mumbai-400002Phone: 022-22817427
A/11, Huaz Khas (Opposite Vatika Medicare)
New Delhi-110016Phone: 011- 41315340
www.vinodkothari.comEmail: [email protected]
What are Masala Bonds?
• Masala Bonds are debt securities denominated in INR issued by Indian entities to
overseas investors but settled in foreign currency. In other words, they are rupee-
denominated bonds issued to overseas buyers.
• These are Indian rupee denominated bonds issued in offshore capital
markets. The issuance of rupee denominated bond is an attempt to shield issuers
from currency risk and instead transfer the risk to investors buying these bonds.
• Interestingly, currency risk is borne by the investor and hence, during repayment
of bond coupon and maturity amount, if rupee depreciates, RBI will realize marginal
saving.
• While masala bonds are issued to overseas investors, still the same is
denominated in Indian rupees. Accordingly, the term ‘masala’ is used to give Indian
flavour to the said bonds.
From where does Masala Bonds Originate?
• International Finance Corporation, an arm of the World Bank and a major
global financial institution that fosters private sector development in developing
countries, has seen its rupee-denominated borrowing in international markets
during fiscal 2015 (year ended June, 30, 2015);
• It came up with two bond issues: Maharaja Bonds which were issued to Indian
investors and the other one was Masala Bonds that were issued to overseas
investors.
• Further, in July 14, 2016, HDFC was the first Indian company to issue masala
bonds and in August 04, 2016, NTPC came up with green masala bonds to
support renewable power projects .
• HDFC was first to list its masala bond on the London Stock Exchange on
August 08, 2016
Product Snapshot
•
•
•
•
The proposed offering is INR denominated fixed rate bonds settled in foreign currency like USD, EUR, SGD etc. distributed tointernational institutional investors
The investors assume both credit and exchange rate risk in this product as exchange rate is fixed on every coupon payment date based
on pre agreed formula
The documentation for the proposed offering is governed by international law like English law or New York Law and follows distribution
format like Reg S only or 144A / Reg S
The bonds are settled through Euroclear, Clearstream or DTC
• No FPI License: Offshore investors who do nothave access to the domestic INR market throughFII/FPI license but want INR exposure and do not• INR Borrowing: Issuer does not have to bear
the hedging cost for cross currency conversion
– it’s an INR borrowing for them
want to go through the
exposure to certain Indian
issue in FCY
Want Offshore Settled
process but wantcredits who do not
• Investor Diversification:
the investor base for
offerings beyond existing
FPI investors
It further diversifies • Bonds: OffshoreINR
localdenominated
investors andinvestors who want INR exposure but do not
access domestic markets as they are required by
mandate to buy into papers settled through
Euroclear/Clearstream and prefer foreign law
governed documents (English / NY law)
Pricing Arbitrage: Potential arbitrage opportunity
in terms of pricing
• Pricing Benefit: Might expectbenefit over local funding costs
some pricing
•
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Product
Summary
Issuer
Consideration
Potential Investor
INR Offshore/Masala Bonds as a Financing Source
The INR Offshore bond market is a significant source of funding for many sovereigns, corporates and banks throughout the world. The
primary reasons for why this is the case are set out below
• Long tenors are achievable (investment grade corporates can potentially raise up to a 10 year tenor for a senior issue)
focus on performance and risk
• Showcases the credit story internationally
3
Flexibility
Diversifies Funding
Profile
Validation of Credit
• Typically bonds are repaid with a bullet repayment on maturity as opposed to amortizing over the life of the debt
• Diversifies funding source away from bank funding, which is typically concentrated on relationship based lending
• Typical investors are pension funds, insurance companies, asset managers, central banks, commercial banks and private banks. These investors
• Provides access to a global investor base which presents a significant alternative to the local currency debt and foreign currency loans
• Raises the issuer’s profile in the global markets
• The issuance process involves a comprehensive diligence process examining all aspects of an issuer’s business
• By issuing a Masala bond, an issuer is providing a signal to the market that it is able to successfully withstand high levels of scrutiny
• Investor demand validates the strength of the credit
INR Offshore/Masala Bonds as a Financing Source
• Ongoing equity reporting requirements means minimal effort required in preparation
3
Provides PriceReference
Quick Process
SustainableFunding Platform
• A bond issue provides a reference price for other peers of the issuer looking to borrow in the international market
• Price is a reflection of the market’s assessment of the issuer’s credit
• For publicly listed companies, the execution process can be fairly quick
• Can provide a long term sustainable funding platform
Key Documentation & Process
The first step is to initiate a “No Deal Road Show” with Joint Lead Manager (JLM) in order to gather feedback from
various investors from overseas market. If JLM shows a thumps up then next step is towards appointment of a
relevant parties as briefed below:
Once all parties are on board, Issuer needs to start preparing Offer Document as per Overseas Standard
Core Team Formation
1 Joint Lead Managers
2 Issuer International counsel
3 Issuer Domestic counsel
4 Joint Book Runner International counsel
5 Auditors
6 Trustee and Paying Agent
7 Trustee counsel
8 Printer
9 Singapore Counsel/ listing agent
10 Tax International
Key Documentation Features
Key Documentation & Process
Step by Step process is as below:
List of activity Parties involved
Reconfirm appointment of counsels, trustee, paying agent and printers Issuer
Arrange a call between Auditor and counsel on deliverables Issuer/ Auditor / Counsels
Circulate DDQ questionnaire Counsels/ JLMs
Update status of internal/ regulatory approvals Counsels/ Issuer
Start updating disclosures in OC Issuer
Circulate revised drafts of Transaction Documents to JLM group Counsels
Management DD call/ meeting ALL
Circulate revised draft of Investor Presentation and Investor FAQ JLMs
Circulate draft arrangement letter and comfort letter Counsels
Provide comments on Transaction Documents and circulate revised versions ALL
Prepare SGX listing application Issuer
Auditors to provide comments on Arrangement Letter & Comfort Letter Auditors
Circulate updated version of OC Issuer / Counsels
Provide comments on Investor Presentation Issuer / JLMs
Submit Deed of Covenants to Central Depository Pte (“CDP”) for review Counsels
Provide comments/ markups and circulate revised version of OC Issuer / Counsels
DD call on Latest Result ALL
Conduct Auditor DD call ALL
Finalise form of arrangement and comfort letters Auditors/ Counsels
Continue…
Step by Step process is as below:
Circulate revised / near final version of OC Auditors/ JLMs/ Counsel
Circulate draft Signing Agenda for the programme for review Counsels
Pay listing fees to SGX Issuer
Submit listing application Issuer to HSF
Finalise OC All
Finalise Investor Presentation and Investor FAQ JLMs
Circulate draft Signing Agenda for the programme for review Counsels
Execute and deliver Legal Opinions for the programme Counsels
Execute the transaction documents All
Submit soft copy to the Singapore Exchange Securities Trading Limited Issuer/ Counsel
Programme established Issuer
Road Show in respective country Issuer/ Joint Book Runner
Launch Transaction/pricing/allocation Issuer/ Joint Book Runner
Deliver Pricing Comfort letter All
Printing Final offer Circular Printer
Final Legal Opinion, Bridgedown comfort letter & Execute all documents Issuer, Joint Book runner, Counsels
Sign Subscription agreement Issuer/ Joint Book Runner
Closing of transactions All
Global INR Mechanics
Flow 1: Issue Date
Assumptions:
INR 64 bn equivalent size 10Y Global INR
Coupon: 8.000% per annum
USD/INR Rate: 64.0011
INR 64 bn cash -expensesUSD 1 bn cash
32
Bonds with notional
amount of INR 64 bn
delivered
Bonds with notional
amount of INR 64 bn
delivered4 4
• Reference FX rate will be determined preceding the Rate Calculation Date
1
2
3
4
Description
Calculation Agent sets Reference FX
Rate
Investors Pay USD Subscription
Amount
Settlement Agent Remits Proceeds to
Issuer
Issuer Delivers Bonds to Investors
• Calculation Agent determines the Reference FX Rate for settlement as per documentation
• Assume Calculation Agent sets the USD/INR Rate at 64.00 for an equivalent bond size of INR 64 bn of 10Y Global
INR Bonds. The INR notional principal amount will be used to calculate the coupon payments on each couponpayment date and the bullet repayment on maturity date
• Investors pay USD 1 bn to the Settlement Agent as subscription to the Global INR bonds
• The Settlement Agent remits INR proceeds of INR 64 bn less expenses to Issuer
• Issuer delivers Bonds with a notional amount of INR 64 bn to Investors
Global INR
Bonds
IssuerSettlement
AgentInvestors
Calculation
Agent
Global INR Mechanics
Flow 2: Maturity Date
Assumptions:
INR 64 bn equivalent size 10Y Global INR
Coupon: 8.000% per annum
USD/INR Rate: 70.00
(Cont’d)
11
USD 914.28 mn cash INR 64 bn cash23
• Reference FX rate will be determined preceding the Rate Calculation Date
1
• USD amount that will be paid to investors will be calculated based on Notional Principal Amount (INR 641 bn) /
2
3
Description
Calculation Agent sets Reference FX
Rate and Computes Bullet Payment
that Needs to be Made at Maturity
Issuer Pays USD Principal to Paying
Agent
Paying Agent Pays USD Principal to
Investors
• Calculation Agent determines the Reference FX Rate for settlement as per documentation
• Assume Calculation Agent sets the USD/INR Rate at 70.00 for the Maturity Date
• Notional principal amount is INR 64 bn which was calculated based on the Reference FX Rate determined on Issue
Date
Reference FX Rate determined 3 days prior to Maturity Date (70) = USD 914.28 mn
• Issuer pays INR principal of INR 64 bn to Paying Agent
• Paying Agent pays USD principal of USD 914.28 mn to Investors
IssuerPaying AgentInvestors
Calculation
Agent
Key Considerations for Investors
• Global INR Bonds is a important investment route for Offshore investors who do not have access to domestic marketthrough FII / FPI license and are not able to currently take exposure in INR denominated credit risks
• Transactions are settled through Euroclear / Clearstream
• Investors who have a view on the currency (USD – INR) and India Credit would be best placed to invest in GlobalINR Bonds
This product become very attractive as the current view is positive on the Indian growth story going forward.•
• Due to market dynamics, different markets could be pricing same credit differently and this provides a window ofopportunity to investors to take exposure in Global INR Bonds
• Investors would prefer liquidity in secondary market to manage their exposure based on their views on credit and FXrate, thus size of the offering will an important parameter for investors
Fungibility of Offshore INR bonds with onshore bonds will help induce liquidity•Liquidity
Arbitrage
Risk
Settlement
Limitation of
Access
Provisions of Companies Act, 2013 applicable to Masala
Bonds
• Masala Bonds are debt securities under section 2(30) of the Companies Act, 2013 ('Act'). Therefore, provisions as applicable to issuance of debt securities shall apply to Masala Bonds as well.
• However, MCA vide its General Circular No: 09/2016 dated 3rd August, 2016 has issued a clarification regarding the applicability of provisions of Chapter III (Prospectus and Issue of Securities) of the Act with respect to the issuance of Rupee denominated bonds to overseas investors by an Indian company;
• Accordingly, Indian companies issuing Rupee denominated bonds overseas (Masala Bonds) under RBI’S policy on ECB Guidelines will not be required to comply with the following:
o Provisions of Chapter III of the Act; ando Provisions governing the issue of secured debentures under Rule 18 of the Companies (Share Capital
and Debentures) Rules, 2014.
• In addition to the above, listed entities in India shall also comply with the provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 with respect to issuance of debt securities.
Peep into the relaxations given through
MCA’s clarification
• In broad terms issuance of Masala Bonds will not require compliance relating to :
o Issue of private placement offer letter (PAS-4);o Preparation of list of allotees (PAS-5);o Filing of return of allotment (PAS-3);o Mentioning the prescribed particulars in the prospectus;o Various other requirements mentioned under Chapter III of the Act; ando Provisions of rule 18 of the Companies (Share Capital and Debentures) Rules, 2014.
Process Chart under Company Law to issue bonds
1•Reg 29(1) of SEBI LODR , 2015 - In case of an equity listed co. - Prior intimation to recognised St. Ex. atleast 2 working days in advance about the board meeting in which proposal for issuing
bonds is to be considered.
2•Section 179(3) - Calling of a board meeting / committee meeting, as may be the case
3•Section 117 (3) - File e-Form MGT-14 with the Registrar of Companies within 30 days of passing the above resolution.
4•Reg 30 of SEBI LODR, 2015 - Intimation to the stock exchange regarding the outcome of board meeting within 30 minutes of the conclusion of the meeting.
5
•Section 71 and 180(1)(c) - Call extra-ordinary general meeting
•In case the bonds are to be issued with an option for conversion into equity shares , pass SR; and
•if current as well as the proposed borrowing exceed aggregate of the paid-up capital and free reserves, pass SR for the same.
6•Section 117 (3) - File e-Form MGT-14 with the Registrar of Companies within 30 days of passing SR.
7•Section 77 - File CHG-9 within 30 days of creation of charge, in case of issue of secured bonds.
Applicability and non-applicability under the Companies Act, 2013
after relaxations given through MCA’s clarification
MCA’s clarification on Rupee denominated
bonds
Relaxations given
Sections 23-42 of the Companies Act, 2013
Rule 18 of the Companies (Share
Capital and Debenture) Rules,
2014
Provisions still applicable
Sections 71, 117 and 179 of the Companies
Act, 2013
Masala Bonds V/s Foreign Currency Bonds-
(1/2)
Basis of Difference Masala Bonds Foreign Currency Bonds
Denomination Indian rupee Foreign currency
Guiding Regulation RBI’s ECB Policy on Issuance of Rupee denominated bonds
RBI’s Issue of Foreign Currency Exchangeable Bonds Scheme, 2008 and Master Direction on External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers
Risk owned by Overseas investors Eligible issuers or borrowers
Masala Bonds V/s Foreign Currency Bonds-
(2/2)
Apart from the differences mentioned in the previous slide, both masala bonds and foreign currency bonds are similar with respect to the following:
• Both are issued by Indian companies under ECB route;
• Both are issued to person resident outside India and compliant with the disclosure requirements pursuant to laws of the foreign investor’s jurisdiction; and
• Both are listed on offshore stock exchanges, if listing is contemplated.
SEBI’s circular on Rupee denominated bonds-
• Considering the fact that Masala Bonds are governed by RBI and in order to further streamline the regime, SEBI vide its circular SEBI/HO/IMD/FPIC/CIR/P/2016/67 dated 4th August, 2016 has clarified the following:
• Foreign investment in Masala Bonds will not be treated as investment by Foreign Portfolio Investors (FPIs) ; and
• Will not be covered under the purview of SEBI (Foreign Portfolio Investors) Regulations, 2014, as amended.
• Foreign investments in Masala Bonds will be calculated against the existing corporate debt limit set for investment by FPIs, presently INR 244,323 crore and will be available on tap to the foreign investors.