Knowledge Forum

INTRODUCTION TO FOREIGN CURRENCY

CONVERTIBLE BONDS (FCCB)

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What is FCCB?

 Bonds denominated in foreign currency

 A Bond that can be converted into equity shares if

the investor prefers to do so at a pre-determined
strike rate.

 A convertible bond is a mix between a debt and

equity instrument.

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HISTORY FCCB?

 GLOBALIZATION 

 FCCB introduced way back in 1992. The scheme is called “The Issue of
Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipts
Mechanism) Scheme, 1993.

 A Bond that can be converted into equity shares if the investor

prefers to do so at a pre-determined strike rate.

 A convertible bond is a mix between a debt and equity

instrument.

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So what is FCCB?

 FCCB means a Bond issued in accordance with the scheme and

subscribed by non-resident in foreign currency and convertible
into ordinary shares of the issuing company in any manner,
either in whole, or in part, on the basis of any equity elated
warrants attached to the debt instruments.

 A Bond that can be converted into equity shares if the investor

prefers to do so at a pre-determined strike rate.

 A convertible bond is a mix between a debt and equity

instrument.

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Need to introduce FCCB?

 An attractive instrument for Indian Corporate to raise

money by tapping the overseas market.

 Attractive instrument for overseas investor to join the

India Growth story and participate in the Indian
Company.

 Promote foreign investments in Indian Companies.

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POSITIVES IN FAVOUR OF FCCB?

For Indian Corporate:

o Access to Overseas Investor market
o Cheap source of raising funds for the company
o Ability to convert debt into equity at a later date at the option of
the investor.
o Promoters of the issuing Company has no fear of immediate
dilution as in the case of a public issue of shares.
o FCCB is issued by Companies with large promoter holding and
thus the risk of losing Management control is minimum even
after the Investor exercising the conversion option at a later
date.

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POSITIVES IN FAVOUR OF FCCB?

For Investor:
o Gives and opportunity to the Investor to understand and review the
business of the issuing Indian Company before deciding to convert the
bond to equity investment in the Indian Company.
o Assured return to the investor in terms of fixed coupon rate payments.
o Significant yield to maturity (YTM) is guaranteed on maturity.
o Promoters of the issuing Company has no fear of immediate dilution as
in the case of a public issue of shares.
o Ability to convert the Bonds into equity at a predetermined strike rate
and thereby take advantage in case of significant price appreciations in
the Stock of the issuing Indian Company.

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FCCB BOOM:
Knowledge Forum

Three year back when the Indian and emerging markets were
giving higher returns and posting higher GDP growth rate, The
FCCB became a very popular instrument for raising funds from
overseas. Because of the hybrid nature of the instrument coupled
by the India growth story, many large Indian Companies went very
aggressive on the FCCB route of raising cheap funds.
Further, liberalization and regulation relaxations from RBI further
encouraged many big Indian Corporate houses to go the FCCB
route and scout for cheaper funds for further expansion and
overseas acquisition. 8
Current Scenario:
Knowledge Forum

The Indian Stock Markets have lost close to about 58% from its
peak in Jan 2008. And coupled with severe recession in the West,
the trend looks negative.
During the bull run i.e. 2003-2007, a lot of Indian Companies raised
funds through the FCCB route to fund their expansion plans and
overseas acquisition. And FCCB route was very successful then in
helping raise money cheaper and in quick time.

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Current Scenario:
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The current scenario has been a total reversal of the past and has
landed most of the FCCB issuers in a dilemma.
The bearish market has pulled down most of the stocks to < 75%
since their peak in Jan 2008.
The conversion price of the FCCBs have gone several times higher
than their current market price.
This will result into redemption of Bonds.
India Inc, has issued FCCBs in excess of $20 billion in the past few
years.
Serious redemption pressure on the Indian Companies on failure to
convert into equity share.
Companies to raise fresh debt at high cost to redeem the bonds.
Impact on depreciation of rupee and volatility in Forex Market.
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FCCB REGULATIONS IN INDIA:

FCCB are treated as Foreign Direct Investment (FDI) by the GOI.

FCCB can be raised under the Automatic Route (for Specified Industries) or
after seeking RBI approval)
Minimum average maturity of FCCB is 3 years for borrowing upto USD 20
million and 5 years in case borrowing exceeds USD 20 million.
End use of Funds : Import of Capital goods, new projects, expansion
program in Industrial & infrastructure sector. Overseas direct investment in
JV or WOS.
Prepayment of FCCB is permitted upto USD 200Million subject to
compliance of minimum average maturity period. Approval from RBI
required for higher sum.
Funds received from FCCB should be parked outside india till the actual
requirement arises in India. And can be invested in short term liquid assets
and other prescribed investments.
FCCB issuer are required to apply to RBI for allotment of a Loan
registration Number before they can bring money into India.
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FCCB REGULATIONS IN INDIA:

FCCB are treated as Foreign Direct Investment (FDI) by the GOI.

FCCB can be raised under the Automatic Route (for Specified Industries) or
after seeking RBI approval)
Minimum average maturity of FCCB is 3 years for borrowing upto USD 20
million and 5 years in case borrowing exceeds USD 20 million.
End use of Funds : Import of Capital goods, new projects, expansion
program in Industrial & infrastructure sector. Overseas direct investment in
JV or WOS.
Prepayment of FCCB is permitted upto USD 200Million subject to
compliance of minimum average maturity period. Approval from RBI
required for higher sum.
Funds received from FCCB should be parked outside India till the actual
requirement arises in India. And can be invested in short term liquid assets
and other prescribed investments.
FCCB issuer are required to apply to RBI for allotment of a Loan
registration Number before they can bring money into India.
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ACCOUNTING:

Financial Statements of India Company- Not transparent ???

International accounting practices requires companies to charge the
redemption premiums to the profit and Loss Account over the instruments
life.
In India however, due to lack of uniform accounting norm for treatment of
redemption premium, Indian Corporate have its own ways of treating the
redemption premium.
Most companies charge the redemption premium to the Security Premium
Account. (Both a Balance Sheet Item and thus does not impact the P&L
A/c)
Some Companies, treat redemption premium as Contingent liability
reasoning that the redemption premium is contingent on the outcome of a
future event (i.e. redemption may or may out happen)
Both the above approach is aimed at protecting the Profit and Loss
Account and to mislead the investor on the Profitability of the company.
As a prudent measure and a better corporate governance measure, it is
adviceable to recognise the redemption premium in the Profit and Loss13A/c
as and when they accrue.
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TAXABILITY:

The provision relating to treatment of Interest and Dividend payments on

FCCB are detailed in Sec 115AC of the Income Tax Act, 1961.
 Interest payments on the bonds, until the conversion option is exercised
is subject to TDS @ 10%.
 Tax on dividend on the converted portion of the bond are subject to TDS
@ 10%
 CAPITAL GAINS:
I. Conversion of FCCB into shares of the issuing company shall
not give rise to Capital gain liable to income tax in India.
II. Transfer of FCCB by non-resident investor to another non-
resident investor shall not give rise to any capital gain liable to
income tax in India subject however to taxation rules of the
subject Country.
 Return of Income: The foreign resident is not required to file any return
of income under the Act, if its income taxable in India comprise of only
Income from other sources. 14
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RESOURCES:

Issue of Foreign Currency Convertible Bonds and Ordinary Shares

(Through Depository Receipt Mechanism) Scheme, 1993 dated
12.11.1993
Foreign Currency Convertible Bonds and Ordinary Shares (Through
Depository receipt Mechanism) (Amendment) Scheme, 2005.
F.No.15/4/2004-NRI-Ministry of Finance dated 31.08.2005
Sec 115AC of Income Tax Act, 1961.
Sec 80 of the Companies Act, 1956.

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Any Questions ?

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THANK YOU

Viswanath

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