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CS Professional · Strategic Management and Corporate Finance · Foreign Funding - Instruments, Laws and Procedures

A Mumbai-based NBFC wants to raise rupee-denominated debt from overseas investors, so that the exchange-rate risk of repayment falls on the investors and not on the issuer. Which instrument is designed for this purpose?

The Masala Bond is the right instrument. It is issued outside India but denominated in Indian rupees, so the overseas investor bears the exchange-rate risk. FCCBs and dollar-denominated ECBs leave currency risk with the issuer, and ADRs are equity-linked receipts, not rupee debt.

  1. AForeign Currency Convertible Bond
  2. BMasala BondCorrect
  3. CExternal Commercial Borrowing denominated in US dollars
  4. DAmerican Depository Receipt

Explanation

Masala Bonds are bonds issued outside India but denominated in Indian rupees. Because the principal and interest are payable in rupees, the currency risk is borne by the overseas investor. FCCBs and dollar ECBs are foreign-currency denominated, so the issuer carries the currency risk, and ADRs are equity-linked depository receipts rather than debt.

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