KOCHI: The Kerala High Court has stayed the Enforcement Directorate’s (ED) move seeking explanations on the proceeds of KIIFB’s 2019 masala bond issue, pausing enforcement action related to the state-backed infrastructure funding vehicle.
With the legal proceedings on hold, attention has once again turned to the offshore borrowing itself – less on whether the interest rate was high or optimal at the time, and more on how the masala bonds were sold and priced.
KIIFB raised Rs2,150 crore in 2019 through a rupee-denominated masala bond issue carrying a coupon of 9.73 per cent. The bonds have since been redeemed, but the issue continues to attract scrutiny, particularly because KIIFB, backed by a state government guarantee, could have accessed domestic funding at lower rates.
businessbenchmark.news does not seek to enter the debate on whether the pricing was appropriate under prevailing market conditions.
Isaac’s version on bond sale
In response to questions around pricing, former finance minister Thomas Isaac has on several occasions stated that the bonds were “sold through the London Stock Exchange (LSE)”, presenting the exchange route as evidence of transparency and open price discovery.
Market participants say this description does not reflect how masala bonds are typically issued.
Masala bonds – rupee-denominated bonds issued overseas – are placed with institutional investors by arrangers or investment banks through a book-built process. During this process, bids submitted by investors, including the yields they are willing to accept, are not disclosed to other participants, and there is no real-time visibility of competing bids.
Based on the order book, the issuer, in consultation with the arrangers, determines the final coupon and allocation. While allocations generally follow demand, the issuer retains limited discretion to accept, scale back, or reject bids in line with market practice, meaning the primary sale does not involve an open, exchange-style bidding process where prices and participants are visible to all.
Only after this process is completed are the bonds listed on an exchange such as the London Stock Exchange (LSE), mainly to meet disclosure requirements and to enable any secondary trading.
In practice, trading in such bonds tends to be limited, as they are usually bought and held by institutional investors.
On several occasions, Isaac has maintained that since the masala bonds were sold at the exchange through a bidding process, buyers had access to pricing information and the ability to participate.
Market experts note that the process followed for masala bonds in London is comparable to equity issuances in India.
In equity markets, shares are not sold through a stock exchange in the primary market. They are listed on the exchange only after allotment is completed. In both cases, the exchange facilitates post-issue trading rather than primary sale or price discovery.
This distinction assumes relevance because the debate around KIIFB’s masala bond has focused less on whether the coupon reflected global market conditions in 2019, and more on whether an offshore borrowing route was necessary when potentially lower-cost domestic options were available.
Market participants note that while masala bonds are rupee-denominated and therefore shift currency risk to the investor, they can carry higher coupons than domestic borrowings. This reflects investors seeking compensation for rupee volatility, liquidity constraints and offshore market risks, rather than any foreign-exchange exposure borne by the issuer.
The broader policy question, however, is whether KIIFB needed to opt for an international structure at all.
Opposition claims regarding investor selection, including allegations that a particular investor—Canada’s Caisse de dépôt et placement du Québec (CDPQ) – was favoured, do not align with the mechanics of a Regulation S book-built placement, where allocations are driven by bid size and demand rather than issuer discretion.
As legal scrutiny resumes following the ED’s appeal, clarity on the mechanics of how the bonds were sold and priced may help sharpen the discussion around KIIFB’s funding choices, separate from the wider political debate.
As the High Court stay pauses enforcement action for now, the manner in which the transaction has been described publicly continues to shape the debate – less as a question of legality, and more as one of funding choice and pricing discipline.
