Naidu adding ‘masala’ to raise funds for Amaravati
The Chief Minister Mr N Chandrababu Naidu is literally ‘spicing up’ the process of raising funds for the Amaravati capital city project.
Mr Naidu, known for his penchant for innovative thinking, is exploring the option of the State Government issuing ‘masala bonds’ to raise funds for the capital city project.
It was just last week that the Reserve Bank of India further opened up the masala bond route to raise money from overseas, a relatively new and largely untapped debt instrument. The broadening of the scope to issue masala bonds was part of the elaborate measures unrolled by the central bank to further reform the debt market.
The Chandrababu Naidu Government has contracted the services of global consultant McKinsey to explore non-traditional options of raising funds such as green bonds and masala bonds. “The advantage of such bonds is they will enable us to swap higher cost debt,” Mr Ajay Jain, IAS, Principal Secretary, Energy and Industries, told VIS News Service.
Masala bonds- the hot advantage
To understand the advantage of masala bonds, one has to know what a bond actually is in the financial world. A bond is a debt instrument in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities.
Masala bonds are Indian rupee denominated bonds issued in offshore capital markets. These are rupee-denominated bonds issued to offshore investors settled in dollars and, therefore, the currency risk resides with investors.
These bonds were launched for the first time by International Finance Corporation, which issued a 10-year, 10 billion Indian rupee bond in November 2014 to increase foreign investment in India and mobilise international capital markets to support infrastructure development in the country.
The “Masala bonds” marked the first rupee bonds listed on the London Stock Exchange. IFC named these bonds ‘masala’ , which typifies the culture and cuisine of India. This is not the first time that a bond has been named after the food or culture of a country. Chinese bonds, for example, are called Dim sum (a traditional Chinese dish) bonds, and Japanese ones as Samurai bonds.
Here, the advantage for the issuer of the bonds (in this case perhaps the AP Government) is that it can raise money in foreign currency without worrying about currency risk, as the investor alone has to bear the risk.
“The government is however yet to finalise what types of bonds we would tap into. This will be based on the report of the consultant and the market conditions,” Mr Jain said.
AP ties up Rs 11,500 cr debt
The State Government has just tied up Rs 11,500 crore debt from Hudco and the World Bank.
This is in addition to part-funding provided by the Centre as a part of the AP Reorganisation Act. The Union Government has, thus far, provided assistance of Rs. 8,379.50 crore to AP, which includes Rs. 2,500 crore as assistance to the capital city. The AP Capital Region Development Authority (CRDA) will soon finalise the Rs. 7,500 crore loan from Hudco and another major loan of Rs. 4,000 crore from the World Bank will be inked by the State government next month, Mr Jain said.