KIIFB row: Former top Kerala officials were against issuing 'Masala bonds' in 2018

Thiruvananthapuram: Former chief secretary Tom Jose and former finance secretary Manoj Joshi had opposed raising money by issuing 'Masala bonds' at high interest rates at a meeting of the Kerala Infrastructure Investment Fund Board (KIIFB), documents show.

Masala bonds were discussed as part of the 14th agenda in the 34th general body meeting of KIIFB on October 2, 2018, that was chaired by Chief Minister Pinarayi Vijayan. KIIFB CEO KM Abraham had then sought the board approval to raise money by issuing the bonds and listing them on the London Stock Exchange.

Immediately after the discussion started, the then finance secretary Manoj Joshi asked why bonds should be issued at a higher interest rate when it is possible to raise money by issuing them at lower rates within the country.

The then chief secretary Tom Jose also intervened. He asked why the interest rate on the proposed 'Masala bonds' was so high when rates were generally lower in foreign markets. He also said that if the data on exchange rates were checked, it could be possible to find out whether lower rates are available.

However, board members Prof Sushil Khanna, JN Gupta, Salim Gangadharan and RK Nair supported the 'Masala bond' and suggested that steps be taken to issue it.

In his remarks to conclude the discussion, Minister T M Thomas Isaac said: “Even though the rates are high, this is an opportunity to enter the international market and it should be used. This step will be beneficial in the long run.”

The Chief Minister did not say anything during the discussion.

J N Gupta pointed out that the bonds should be issued when the market conditions are favourable and that there was a possibility of low interest rates on US dollar bonds.

Salim Gangadharan suggested that it would be appropriate to raise money from the international market as there is stiff competition from corporates in the domestic market.

RK Nair said that money should be raised by issuing 'Masala bonds' in the international market as soon as possible and that this would be seen as a measure of KIIFB’s excellence.

The KIIFB CEO explained at the meeting that when a bond issuance was tried in the domestic market, the interest rate was 10.15 per cent and that the Andhra Pradesh Capital Development Authority, which was similar to KIIFB, had issued a bond at 10.72 per cent.

Borrowed: Rs 2,150 crore; amount to be repaid: Rs 3,195 crore

KIIFB borrowed Rs 2,150 crore through 'Masala bonds'. The amount to be repaid, including the interest, is Rs 3,195.23 crore.

It cost about Rs 40 crore to list the bonds on the London Stock Exchange and for other related expenses. The cost of sending six officers to London for three days of training to learn about the bond market was Rs 10.24 lakh. Additional expenses were incurred for the trip of the Chief Minister and the Finance Minister to London in connection with issuing the bonds.

According to the explanation given by the government, only a maximum of Rs 1,000 crore could be borrowed as loans from banks and other institutions. That is why it issued 'Masala bonds' to raise a higher amount of Rs 2,150 crore, despite the high interest rates, it said.

What are 'Masala bonds'?

Masala bonds are bonds issued in the international market by denominating them in Indian rupees. Since the bonds are issued in Indian rupees, those raising the money will not be affected by the swings in the exchange rates.

The International Finance Corporation (IFC) named bonds issued in rupees as 'Masala bonds' as part of its efforts to promote the Indian culture and tastes in the international market.

'Masala bonds' are mainly used for investment in infrastructure development in India. Those issuing the bond will not be affected by the loss caused due to rupee’s depreciation. It will be the investors who will have to bear the loss.