With foreign investors looking for higher yields on ‘masala bonds’ than Indian issuers such as HDFC and NTPC are willing to pay, the latter are hoping the government might make the product more attractive. According to sources, masala bonds can be made more palatable if investors are exempted from paying withholding tax.
Moreover, issuers are hoping local investors will be allowed to buy the bonds in the secondary market so that they are more liquid. “While we have not formally written to the ministry, there is no doubt that an exemption on the withholding tax will make masala bonds more attractive,” Keki Mistry, vice-chairman and CEO of HDFC, told FE. Mistry added that if domestic investors were permitted to buy the bonds, it would add to liquidity.
In October, the government had clarified that the withholding tax applicable on masala bonds would be 5%. “If this tax is exempted, it will bring a difference of at least 40-45 basis points to the issue in this case which will help in bringing the price to comfortable levels,” the executive said.
Sources said prospective issuers of masala bonds have approached the Reserve Bank of India suggesting domestic investors be allowed to invest in masala bonds.
HDFC completed “no deal” roadshows for masala bonds in London, Hong Kong and Singapore. “We were trying to explain the product to investors and gauge their interest,” Mistry said, adding that with the holiday season
approaching the issue would be done only next year. “Once the Fed’s decision is clear investors will assess the currency risks,” Mistry said.