India's securities regulator has suspended the issuance of offshore 'masala bonds' following strong investment in rupee-denominated debt that left foreign holdings pushing up against the legal limit. The Indian government has been keen to encourage the growth of masala bonds that have been enjoying strong foreign interest since the first corporate issuance last year.
The Securities and Exchange Board (Sebi) has ordered suspension of the issuance of masala bonds until foreign holdings of rupee-denominated Indian corporate loans fall below 92 per cent of the limit. Series of meetings between officials and investors and issuers said they looked to clarify the rules. A source said, “We thought they were keen to encourage more such bonds, not stop them.” However, sceptics believe the sudden intervention may prove to be a prudent move to ensure that new inflows did not push foreign holdings over the legal limit, promoting a more drastic action by authorities.
Sebi's intervention comes as the latest move revealing that Indian authorities now seek to restrain the market's rapid growth, and comes just a month after the Reserve Bank of India ordered that the overall cost to the issuer of masala bonds must be no more than 300 basis points above the yield of Indian sovereign bonds of equivalent maturity, a move seemingly aimed at restricting issuance by lower-rated companies.
Deepak Parekh, chairman of Housing Development Finance Corporation, said the rush of interest in masala bonds was a “nice problem to have”. “India's macro fundamentals are all positive, and if the country continues to do well, there will always be demand for masala bonds,” he said. Abhinav Harlalka, a lawyer, said the authorities could decide to increase the investment limit, if the foreign interest in Indian corporate bonds is sustainable. “They are waiting and watching to see whether this money is here to stay, and if that is the case, they would increase the limit,” he said.
