Overseas Bonds

Overseas bonds refer to debt securities issued by a government, corporation, or financial institution in a foreign market and denominated in a currency different from that of the issuer’s home country. They are a vital component of international finance, allowing entities to raise capital from global investors while diversifying sources of funding. For investors, these bonds provide opportunities to gain exposure to foreign markets, currencies, and interest rates.

Background

The emergence of overseas bonds dates back to the mid-20th century when global financial markets began to liberalise and cross-border capital flows increased. Traditionally, issuers raised funds domestically, but as economies globalised, borrowing in international markets became attractive for accessing larger pools of capital at potentially lower costs.
In India’s context, the concept of issuing overseas bonds gained attention as part of external borrowing policy. The Government of India and large corporations have occasionally raised funds from foreign investors through instruments such as foreign currency bonds, Eurobonds, and masala bonds.

Types of Overseas Bonds

Overseas bonds are categorised according to currency denomination, place of issue, and investor base.

• Foreign Bonds: Issued in a domestic market by a foreign borrower, denominated in the domestic currency. Examples include:
  • Yankee Bonds (issued in the United States by non-US entities).
  • Samurai Bonds (issued in Japan by non-Japanese entities).
  • Bulldog Bonds (issued in the United Kingdom by non-British entities).
• Eurobonds: Bonds issued in a currency different from that of the country in which they are issued. For example, a bond denominated in US dollars but issued in London or Singapore. Eurobonds are typically traded internationally and listed on foreign exchanges.
• Masala Bonds: Indian rupee-denominated bonds issued overseas by Indian entities. These bonds allow issuers to raise capital abroad while shielding them from foreign exchange risk, as currency risk is borne by investors.
• Global Bonds: Debt instruments issued simultaneously in multiple markets, offering international investors access through several financial centres.

Key Features

• Currency denomination: Overseas bonds may be issued in major currencies such as the US dollar, euro, yen, or the issuer’s domestic currency.
• Maturity period: Typically ranges from three to thirty years, depending on the issuer’s needs and investor appetite.
• Interest structure: Fixed or floating interest rates, with periodic coupon payments to investors.
• Credit rating: Determined by international agencies, influencing investor confidence and pricing.
• Listing and regulation: These bonds are listed on international exchanges such as the London Stock Exchange, Singapore Exchange, or Luxembourg Stock Exchange, and regulated under the financial laws of the host country.

Advantages for Issuers

• Access to global capital: Overseas bonds enable issuers to tap into large international investor bases and raise funds beyond domestic markets.
• Lower cost of borrowing: In favourable market conditions, borrowing abroad may offer lower interest rates than domestic markets.
• Diversification of funding sources: Reduces dependence on domestic financial institutions.
• Enhanced reputation: Successful issuance of overseas bonds boosts the issuer’s global credibility and investor visibility.
• Currency matching: Companies with foreign currency earnings (such as exporters) can issue foreign-currency bonds to match liabilities and revenues.

Advantages for Investors

• Portfolio diversification: Overseas bonds provide exposure to foreign markets and currencies, spreading risk across geographies.
• Attractive yields: Depending on currency movements and country risk, these bonds may offer higher returns than domestic bonds.
• Hedging opportunities: Investors can use overseas bonds to hedge against currency depreciation or inflation in their home markets.

Risks and Challenges

• Currency risk: Exchange-rate fluctuations can significantly affect returns for both issuers and investors, particularly if revenues and obligations are in different currencies.
• Interest rate risk: Global rate changes impact bond prices and yield spreads.
• Sovereign and political risk: Political instability or changes in regulatory frameworks may affect repayment ability or market confidence.
• Liquidity constraints: Some overseas bonds, especially those from emerging markets, may have limited secondary market liquidity.
• Credit risk: The issuer’s creditworthiness determines default risk; emerging market issuers often pay higher yields to compensate investors.

Indian Experience with Overseas Bonds

India has experimented with various forms of overseas bond issuance:

• Sovereign Borrowing: The Government of India has historically preferred domestic borrowing, though discussions on issuing sovereign overseas bonds have occurred, especially during fiscal consolidation phases.
• Corporate Issuance: Several Indian corporations such as NTPC, HDFC, and Axis Bank have issued foreign currency and masala bonds to raise capital internationally.
• Masala Bonds Initiative (2016): Introduced to encourage Indian companies to borrow abroad in rupees. The International Finance Corporation (IFC) issued the first masala bond in London in 2014, followed by Indian issuers.
• Infrastructure and Financial Sector Bonds: Entities like the National Highways Authority of India (NHAI) and EXIM Bank have used overseas bonds to fund long-term projects.

Regulatory Framework

Overseas bond issuance from India is governed by the Foreign Exchange Management Act (FEMA) and the External Commercial Borrowing (ECB) guidelines set by the Reserve Bank of India (RBI). Key regulatory aspects include:

• Restrictions on end use of borrowed funds.
• Caps on interest rates or spreads over benchmark rates.
• Minimum average maturity requirements.
• Reporting and compliance obligations to RBI.

Economic Significance

Overseas bonds play a crucial role in integrating national economies with the global financial system. For India, they contribute to:

• Strengthening foreign exchange reserves.
• Supporting infrastructure financing through external resources.
• Promoting the internationalisation of the Indian rupee (via masala bonds).
• Enhancing the country’s financial market reputation.

Current Trends

The global overseas bond market continues to expand, driven by international capital mobility, low global interest rates, and institutional investor demand. Emerging markets, including India, are increasingly relying on foreign capital through overseas bond issuance to meet development and investment requirements. Simultaneously, issuers are adopting risk-management tools such as currency swaps and hedging mechanisms to mitigate exposure.