Foreign Currency Convertible Bonds

Foreign Currency Convertible Bonds

Disadvantages Of FCCB

Benefits of FCCB to the Investor

FCCB issue proceeds need to conform with the

‘End-Use’ conditions as prescribed by RBI in the above-mentioned ECB Master circular:

Benefits of FCCB to the Issuer

Eligibility of the Subscriber:

Eligibility of the Issuer:

TAXATION

• Exchange rate risk due to conversion at a future date.

WHAT ARE FCCBs?

Permitted End Use

Prohibited End Use

• When converted into equity, FCCB brings down EPS.

• Guaranteed payments
• Redeemable
• Marketable
• Investor benefits.

i. International Capital markets.

ii. International banks.

iii. Multilateral Financial Institutions.

iv. Export credit agencies.

v. Suppliers of equipment.

vi. Foreign collaborator.

vii. Foreign equity holder, subject to

Ø minimum holding of equity of 25% in the borrower’s company for raising ECB up to USD 5 million;

Ø minimum holding of equity of 25% in the borrower’s company and a debt equity ratio of not more than 4:1, for raising ECB above USD 5 million.

viii Overseas organizations & individuals (lend to NGO’s in micro-finance activities).

i. Indian Corporates except financial intermediaries such as banks, FIs, NBFCs.

ii. NGOs engaged in micro finance activities.

iii. Individuals, Non Profit making organizations and trusts are not eligible.

• Stability
• Foreign Capital
• Expansion
• Dual Instrument
• Lower Cost

• A foreign currency convertible bond (FCCB) is a type of corporate bond issued by an Indian listed company in an overseas market and hence, in a currency different from that of the issuer.
• FCCBs pay interest at a nominal rate. Starting out as bonds, FCCBs usually carry clauses which allow the issuer or bondholder the option to convert the bonds into shares mid-way during its term, at a pre-agreed price.
• FCCBs are quasi-debt instruments and tradable on the stock exchange. Investors are foreign nationals.

Ø Investment in ‘real-industrial’ sector including SMEs and infrastructure sector through expansion, modernization, import of capital goods, new projects etc.

Ø Overseas Direct Investment in joint ventures/wholly owned subsidiaries.

Ø 25 % of the FCCB proceeds can be used for general corporate restructuring.

Ø Investment in real estate excluding integrated townships.

Ø On-lending.

Ø Investment in capital markets.

Ø Acquisitions.

Ø As working capital.

Ø For general corporate purposes.

Ø For Repayment of Rupee Loans.

• In a falling stock market there is no demand for conversion to equity.

Role of SEBI – Pre-issue and Post-issue requirements & Conditions to be fulfilled by the Issuer Company:

Why is it important?

The Scheme further provides the eligibility conditions for issue of Convertible Bonds or Ordinary Shares of Issuing Company

Requirements as prescribed by the several provisions of the company law.

Why understanding FCCB is Important.

Law Governing the FCCB issue through the ADR/GDR Mechanism:

1. An application for listing of the Bonds has to be made to the stock exchange of the country where the FCCBs are to be issued and traded i.e. international stock exchange.

2. ‘In-principal’ approval has to be obtained from the Indian Stock exchange to list the shares issued upon conversion of bonds, when the bondholder exercises the convertibility option.

3. Filing the Offer Document(Offering Circular) with Securities Exchange Board of India, Reserve Bank of India and stock exchanges prior to FCCB issue.

RBI’s Regulatory Framework:

• Foreign investors bought FCCBs because, apart from earning a fixed interest, they got an option to convert those bonds into shares at a fixed price, pocketing a quick gain as a result.
• For companies, FCCBs gave them access to funds at cheaper rates, given the fact that many of these were zero coupon bonds with a yield-to-maturity structure , meaning the company would have to make large-scale payments only when the bonds were redeemed.

ADR - American Depository Receipts

A. Prior intimation to be given to the Stock Exchange by the issuer company listed at the Stock Exchange.

B. Board of Directors of the issuer company are obligated to pass a Board resolution pertaining to the issue of FCCB's.

C. Converting a General Shareholders Meeting for procuring the shareholders consent.

D. It is mandatory upon the companies intending to make public issue of FCCBs, to constitute a Trust Deed for the bonds.

a) Obtain prior permission of the Department of Economic Affairs, Ministry of Finance, Government of India.

b) Issue ADRs/GDRs, if company is eligible to issue shares to persons resident outside India under the FDI Scheme.

c) Indian listed company not eligible to raise funds from the Indian Capital Market including a company restrained from accessing the securities market by (SEBI) will not be eligible to issue ADRs/GDRs.

d) Unlisted companies would require prior or simultaneous listing in the domestic market, on issuance of ADR/GDRs.

e) Unlisted companies already issued ADRs/GDRs have to list in the domestic market on making profit or within three years of such issue whichever is earlier.

f) GDR/ADR/FCCBs issue is likely to exceed the percentage limits under the automatic route, or implementing a project falling under approval route, issuing company required to obtain prior FIPB[55] and Ministry of Finance Approval.

1. The ECB Master Circular lays down that borrowing funds through FCCB issue can be accessed under two routes, viz., (i) FCCBs Issue upto US $ 500 million under the Automatic Route (ii) FCCBs Issue beyond US $ 500 million with the specific approval of the Reserve Bank i.e. under the Approval Route.

2. The Circular makes available the Eligibility criteria on the numerous kinds of entities & individuals for borrowing and lending during the FCCB issue under the Automatic Route.

GDR - Global Depository Receipts