The Tasteless ‘Masala’ Bonds

The Masala Bond issue has come to the limelight in the wake of CAG audit of KIIFB and related controversies. This article discusses the Masala Bond threadbare
The Tasteless ‘Masala’ Bonds

The Kerala Infrastructure Investment Fund Board (KIIFB), in a desperate effort to mobilise funds from across the globe, dual-listed its Rs 2,150 Crore Masala Bonds on London Stock Exchange and Singapore Stock Exchange. The masala bonds issued by the KIIFB have triggered a hornet’s nest of controversies in Kerala. The exorbitant interest rate of 9.723% and unholy association with a company having close nexus with the tainted SNC Lavalin has rendered the “masala” bonds murky and tasteless.

As per the documents available in KIIFB website, the Masala Bond issue was opened and priced on March 26 and settled on March 29. The amount was credited into KIIFB’s accounts on the same day of the settlement. The reason for the haste opening of the KIIFB Masala Bonds in stock exchanges was that the exemption on withholding tax (WHT), which is the tax levied on the dividend/interest for a person resident outside that country, would lapse on March 31, 2019. The Central Government had announced an exemption on WHT, which was at 5%, from September 17, 2018, to March 31, 2019. With the bonds already sold out, it’s quite puzzling on why a listing ceremony (ring the bell) is planned on May 17, at London Stock Exchange, with Pinarayi Vijayan supposed to attend the function.

Highest Interest rate in the Market

“Masala Bond” is a term used to refer to a financial instrument through which Indian entities can raise money from overseas markets in Indian Rupee. They are rupee-denominated bonds issued to overseas buyers and are free from the risk of fluctuations in the value of the foreign exchange. Leading Indian companies have analysed these risk and had factored the fluctuations by providing a maximum 2% increase in their interest rate as compared to other non-rupee denominated bonds.

The first masala bond was listed in London Stock Exchange by the International Finance Corporation (IFC), in 2015 at an interest rate (coupon rate) of 6.3%. Since then, 49 Masala bonds have been listed on the London Stock Exchange and Singapore Stock Exchange. HDFC is the first offshore company to list a Masala bond on the London Stock Exchange at an interest of 6.875%. Subsequently, many public limited companies including NHAI (7.3%), IREDA (7.125%), and NTPC among others have listed in LSE with interest rate hovering below 8%.

Shockingly, the interest rate of 9.723% on KIIFB bonds surpassed the interest rate of all companies listed in LSE by quite a margin. The next highest Indian company being HDFC with the interest pegged at 7.87%.

Private Placement at CDPQ

The KIIFB Masala bonds triggered a controversy with a news report in leading vernaculars that revealed the presence of CDPQ — the largest shareholder of the tainted SNC Lavalin company — as a key investor in Masala bonds. CDPQ, headquartered in Quebec, is the largest shareholder of SNC Lavalin with close to 20% share.

Rubbishing allegations of connivance between the Lavalin funder CDPQ and Kerala government, the Finance Minister and KIIFB CEO KM Abraham have issued multiple statements that the KIIFB masala bonds were publicly placed on London Stock Exchange (LSE) and Singapore Stock Exchange (SSE). Finance Minister Thomas Isaac, in his Facebook post, has elaborated the distinction between public and private placement of bonds. He has also stated that the interest rates on publicly placed bonds are determined by clearinghouses but in a private placement, the interest is decided by the negotiations between the issuer and the buyer. Both Finance Minister and KIIFB CEO have maintained that the CDPQ is just one of those buyers who bought the publicly placed KIIFB Masala bonds from the LSE and SSE.

But, the KIIFB Offering Circular available in LSE and SSE shows that the Masala bonds are “privately” placed in Quebec, the headquarters of CDPQ and the tainted SNC-Lavalin. The offering circular states, “The offering of Notes in Canada is being made only on a private placement basis. The offering in Canada is being made only in the Province of Quebec”.

The private placement agreement also contains non-disclosure agreement, which states, “The offering of the Notes in Canada is being made in Quebec. No person has been authorised to give any information or to make any representations concerning this Offering other than those contained herein and, if given or made, any such information or representation may not be relied upon.”

The non-disclosure clause raises serious apprehension and opens the bonds to any company based in Quebec including the SNC-Lavalin.

It’s also intriguing on why KIIFB has made a private placement in the Quebec province apart from dual listing it on LSE and SSE. Going by the Facebook post of Dr Thomas Isaac, see Annexure III, that the buyer plays a major role in determining the interest rate on a private placement of bonds, CDPQ has undoubtedly been a major player in deciding the exorbitant interest rate on KIIFB Masala bonds.

Rebutting the allegations of close nexus between CDPQ and SNC-Lavalin, the State Government has reiterated that CDPQ is just a pension fund manager, which invests in multiple countries including India, which is not true.

Though floated as a pension fund manager in 1965, CDPQ has diversified itself by venturing into real estate sector in 1984, infrastructure development (CDPQ Infra) in 1999 and lately to Artificial intelligence. Interestingly, CDPQ Infra subcontracts its major projects to a consortium Groupe NouvLR that comprises SNC-Lavalin as a major player. The contract for the construction of Le Réseau express métropolitain (REM) — fourth-longest automated transportation system in the world — was handed over to Groupe NouvLR by CDPQ infra.

Notably, Offering circular for other major companies including NHAI, IREDA, and NTPC don’t have any private placement.

Hidden charges on Debt Securities

The KIIFB offering circular available in London Stock Exchange divulges the presence of eight different companies to facilitate the selling of Masala bonds. This includes Axis Bank Limited and Standard Chartered Bank as arrangers and dealers; Hong Kong and Shanghai Banking Corporation (HSBC) Limited as Trustee, Principal Paying Agent, Registrar, and Transfer agent; DLA Piper UK LLP, Cyril Amarchand Mangaldas as legal advisors; TSMP Law Corporation as Singapore Listing Agent; and Sridhar & Co as auditors (Annexure VIII). The presence of multiple international players and multiple jurisdictions requisites the presence of these much companies. The fees charged by these firms to felicitate the selling of Masala Bonds, though still in dark, would obviously add to the financial burden of the State. Moreover, the cost to dual listing the masala bonds on LSE and SSE would obviously incur a fee/ yearly interest.

The offering circular also mentions about a 2% additional interest on withholding tax, which needs clarity. It states:

All interest payable on the Notes shall be subject to applicable laws including but not limited to the ECB Directions. 7.1 Interest on the Notes Each Note bears interest on its outstanding nominal amount semi-annually from (and including) 29 March 2019 (the ‘Issue Date’) at the rate of 9.723 per cent per annum (the ‘Rate of Interest’). Interest will be payable in arrear (subject as provided in Condition 17) on 29 March and 29 September in each year (an ‘Interest Payment Date’) up to (and including) 29 March 2024 (the ‘Maturity Date’); provided that the Issuer shall pay interest on overdue principal, interest and additional amounts payable under Condition 10 (Taxation) at a rate that is 2.0 per cent per annum higher than the Rate of Interest on the Notes.

10. TAXATION 10.1 Payment without Withholding All payments of principal and interest (including, for the avoidance of doubt, the difference between the issue price of the Notes and the final redemption price of the Notes, if applicable) in respect of the Notes by the Issuer will be made without withholding or deduction for or on account of any present or future taxes or duties of whatever nature (‘Taxes’) imposed or levied by or on behalf of any Tax Jurisdiction unless such withholding or deduction is required by law. In such event, the Issuer or, as the case may be, the Guarantor will pay such additional amounts as shall be necessary in order that the net amounts received by the holders of the Notes after such withholding or deduction shall equal the respective amounts of principal and interest (including, for the avoidance of doubt, the difference between the issue price of the Notes and the final redemption price of the Notes, if applicable) which would otherwise have been receivable in respect of the Notes in the absence of such withholding or deduction (the ‘Additional Amounts’), except that no such Additional Amounts shall be payable with respect to the Notes.

The State Government has evaded queries on fees/commissions paid to the different facilitating firms, which reinforces the apprehensions on the deal.

The Left going Modi’s way

The Masala bond was first introduced in London Stock Exchange by the Narendra Modi Government in 2015. He has used this as a disguised tool to disinvest public sector companies including Indian Railways, National Highway Authority, and NTPC among others. From a left ideological standpoint, the masala bond qualifies as a neo-liberal economic policy that would sell public assets and promote foreign investments. The Left parties, particularly the Communist Party of India (Marxist), have also been critical about the very concepts of stock markets as “fictitious capital”. In short, the Masala Bonds issue is a violation from the party’s hard and uncompromising stand on such matters.


The issuance of Masala bonds by the Kerala State Government, acting as the Industrial Infrastructure Fund Board (KIIFB) upon the unconditional and irrevocable guarantee provided by the State Government is in blatant violation of the Article 293 (1) of the Indian Constitution. Article 293 (1) of the Indian Constitution restricts the executive power of a State to borrow only within the territory of India. The legality of the Masala bonds gains extreme importance in the context that the English law governs the issuance of these bonds and any legal implications would plunge the State into deep peril.

In this regard, Article 292 and 293 of the Constitution of India (extracted below) are relevant:

292 Borrowing by the Government of India — The executive power of the Union extends to borrowing upon the security of the Consolidated Fund of India within such limits, if any, as may from time to time be fixed by Parliament by law and to the giving of guarantees within such limits, if any, as may be so fixed.

293 Borrowing by States — (1) Subject to the provisions of this article, the executive power of a State extends to borrowing within the territory of India upon the security of the Consolidated Fund of the State within such limits, if any, as may from time to time be fixed by the Legislature of such State by law and to the giving of guarantees within such limits, if any, as may be so fixed.

From a plain reading of the above two articles, it is amply clear that while the Union executive is free to raise borrowings externally (within the limits set by Parliament), the borrowing power of the State executive is confined to raising loans only within the territory of India.

This makes the issuance of Masala Bonds unconstitutional.

The opinion piece was written by Adv Veena S Nair, who is Mahila Congress State Secretary

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