Ways To Raise Debt In Foreign Currency

Ways To Raise Debt In Foreign CurrencyWhat is Debt ???Debt is that which is owed usually assets owed, but the term can also cover moral obligations and other interactions not requiring money. In finance, debt is a means of using anticipated future purchasing power in the present before it has actually been earned.A debt is created when a creditor agrees to lend a sum of assets to a debtor. In modern society, debt is usually granted with expected repayment; in most cases, plus interest.

Debt InstrumentsBondsDebenturesCommercial PapersCertificates of DepositGovernment SecuritiesNotes CertificatesMortgages , leases andother agreements between a lender and a borrower.

Instruments for raising Debt in Foreign CurrencyFCCB (foreign currency convertible bonds)

FCEB (foreign currency exchangeable bonds)

ECB (external commercial borrowings) Commercial bank loansBuyers' creditSuppliers' creditSecuritized instruments such as Floating Rate Notes and Fixed Rate Bonds

FCCBA Foreign Currency Convertible Bond (FCCB) is a type of convertible bond issued in a currency different than the issuers domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. It gives two options. One is, to get the regular interest and principal and the other is to convert the bond in to equities. It is a hybrid between bond and stock.

Why do Companies Issue FCCBsIt may appear to be more stable and predictable than their domestic currency.Gives issuers the ability to access investment capital available in foreign markets.Companies can use the process to break into foreign marketsThe bond acts like both a debt and equity instrument. Like bonds it makes regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stockIt is a low cost debt as the interest rates given to FCC Bonds are normally 30-50 percent lower than the market rate because of its equity componentConversion of bonds into stocks takes place at a premium price to market price. Conversion price is fixed when the bond is issued. So, lower dilution of the company stocks.

Why do Investors Buy FCCBsSafety of guaranteed payments on the bondCan take advantage of any large price appreciation in the companys stockRedeemable at maturity if not convertedEasily marketable as investors enjoys option of conversion in to equity if resulting to capital appreciation

Disadvantages of FCCBsFor Companies and Investors :Exchange risk is more in FCCBs as interest on bond would be payable in foreign currency. Thus companies with low debt equity ratios, large forex earnings potential only opted for FCCBs.FCCBs means creation of more debt and a FOREX outgo in terms of interest which is in foreign exchange.In case of convertible bond the interest rate is low (around 3 to 4%) but there is exchange risk on interest as well as principal if the bonds are not converted into equity.If the stock price plummets, investors will not go for conversion but redemption. So, companies have to refinance to fulfil the redemption promise which can hit earnings.It will remain as debt in the balance sheet until conversion.

Taxation on FCCBsUntil the conversion option is exercised, all the interest payments on the bonds, is subject to deduction of tax at source at the rate of 10%Tax exercised on dividend on the converted portion of the bond is subject to deduction of tax at source at the rate of 10%If Foreign Currency Convertible Bonds ( FCCB ) is converted into shares it will not give rise to any capital gains liable to income-tax in India

Maximum Amount allowed to be raised and Maturity Period:

An eligible company can raise funds upto USD 500 million in a single financial year. USD 20 million or less the minimum maturity period should be not less than three years.More than USD 20 million and upto 500 million the minimum maturity period should not be less than 5 years. FCCBs upto USD 20 million can also carry a call and put option provided the option shall not be exercised until minimum maturity period of 3 yeas has expired.

End-Use of FCCBsInvestment in the real sector - industrial sector including small and medium enterprises (SME) and infrastructure sector - in India.

Overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad.

The first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Governments disinvestment programme of PSU shares.

For refinancing of the existing FCCB subject to the condition that the fresh FCCB is raised at a lower all-in-cost and the outstanding maturity of the original FCCB is maintained.

FCCBs not permitted for the followingFor on-lending or investment in capital market or acquiring a company (or a part thereof) in India except banks and financial institutions eligible under approval routeUtilisation of funds in real estate sectorFor working capital, general corporate purpose and repayment of existing Rupee loans.

All-in-cost ceilings

All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost. The current ceilings are as below:

All-in-cost Ceilings over 6 month LIBOR

Maturity period Interest rateThree years and up to five years 6 month LIBOR + 200 basis points

More than five years 6 month LIBOR + 350 basis points

FCEBFCEB has been defined in the Scheme as a "bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed to by a person who is a resident outside India in foreign currency and exchangeable into equity share of another company, to be called the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments".

Eligibility Criteria of the Players

Issuing Company

A Company should be incorporated and registered in India in accordance with the (Indian) Companies Act, 1956.Form part of the Promoter Group of the Offered Company .At the time of issuance of the FCEBs and until redemption or exchange should hold the shares of the Offered Company into which the FCEBs are exchangeable.Be eligible to raise funds in the Indian securities market and should not have been restrained by the Securities and Exchange Board of India ("SEBI") from accessing the securities markets.

Eligibility Criteria of the Players Offered Company

A listed Company engaged in a sector eligible to receive foreign direct investment.

Eligible to issue or avail of FCCBs or ECBs.

Eligibility Criteria of the Players

Subscribers of FCEBs

The Scheme provides that only "person residents outside India" can subscribe to FCEBs subject to compliance with the FDI Policy at the time of issuance of FCEBs and sectoral caps provided therein and entities prohibited by SEBI from buying, selling or dealing in securities are not eligible to subscribe to FCEBs.

Approvals Required

RBI Approval: Prior approval of the RBI is required to be obtained by the Issuing Company for any issuances of FCEBs.

FIPB Approval: Prior approval of the Foreign Investment Promotion Board ("FIPB") should be obtained by the Subscriber, if the activities of the Offered Company do not fall under the automatic route for foreign direct investment Pricing and Maturity AmountMaturity periodUpto $20 million3 yearsMore then $20 million5 yearsRedemption

FCEBs may be exchanged, in part or full, into equity shares of the Offered Company any time prior to redemption. Upon exercise of the option to exchange, the Issuing Company is required to deliver the shares of the Offered Company to the subscribers i.e. cash (net) settlements are not permitted.

All-in-Cost Ceiling Maturity period Interest rateThree years and up to five years 6 month LIBOR + 200 basis points

More than five years 6 month LIBOR + 350 basis points

PricingThe exchange price of the listed shares of the Offered Company at the time of issuance of the FCEBs must not be less than the higher of the two prices, given below, of the shares of the Offered Company on the stock exchange:(a) the average of the weekly high and low closing prices for the 6 months preceding the relevant date; and(b) the average of the weekly high and low closing prices for the 2 weeks preceding the relevant date.

Utilization of FCEB Proceeds

The proceeds of the FCEBs may be invested by the Issuing Company as follows:

By way of direct investments, including in joint ventures or wholly owned subsidiaries abroad in accordance with the existing guidelines on investments in joint ventures or wholly owned subsidiaries abroad.

Utilization of FCEB ProceedsThe proceeds of the FCEBs may be invested by the promoter group Companies as follows: Investment, e.g., import of capital goods, by new or existing production units, in real sector -industrial sector, including small and medium enterprises, and in the infrastructure sector which is defined as power, telecommunications, railways, roads including bridges, sea ports and airports, industrial parks and urban infrastructure (water supply, sanitation and sewage projects).Retention and/or deployment of FCEB proceeds is to be in accordance with applicable ECB guidelines.The utilisation of FCEB proceeds for investments in the capital markets or in the real estate sector in India has been expressly prohibited under the Scheme.

Tax Implications on FCEBsInterest payments on the FCEBs, until the exchange option is exercised, are subject to deduction of tax at source as per the provisions of Sub-section (1) of section 115 AC of the Income Tax Act, 1961.Tax on dividend on the exchanged portion of the FCEBs shall be in accordance with the provisions of Sub-section (1) of section 115 AC of the Income Tax Act, 1961.Exchange of FCEBs into shares will not give rise to any income tax on capital gains in India. Transfers of FCEBs between non-residents will not give rise to any income tax on capital gains in India.

Mandatory RequirementsThe Issuing Company and the Offered Company are required to comply, inter alia, with the provisions of :The (Indian) Companies Act, 1956, with respect to authorisations required and The SEBI Act, 1992, and the rules, regulations and guidelines issued thereunder, with respect to disclosure of the Issuing Company's shareholding in the Offered Company.

The Issuing Company is prohibited from transferring, mortgaging, offering as collateral, trading in, or creating any encumbrance on, the shares of the Offered Company which are exchangeable for the FCEBs.

ECBThe foreign currency borrowings raised by the Indian corporates from outside India are called "External Commercial Borrowings"(ECBs). ECBs occupy a very important position as a source of funds for Corporates .Need for ECBsIt provides the foreign currency funds which may not be available India. The cost of funds at times works out to be cheaper as compared to the cost of rupee funds.The availability of the funds form the International market is huge as compared to domestic market and corporate can raise large amount of funds at competitive prices depending on the risk perception of the International market.

Routes for obtaining ECBsAutomatic Route andApproval Route.Automatic Route for ECBsECB under Automatic Route do not require approval of Government of India / RBI.

Automatic Route for ECBsEligible borrowers Corporates [registered under the Companies Act except financial intermediaries (such as banks, financial institutions (FIs), housing finance companies and NBFCs)] are eligible to raise ECB.Non-Government Organizations (NGOs) subject to satisfaction of certain conditions laid by RBI.Units in Special Economic Zones (SEZ) are allowed to raise ECB for their own requirement.

Automatic Route for ECBsAmount and Maturity The maximum amount of ECB, which can be raised by a corporate, is USD 500 million or equivalent during a financial year. Maturity period Interest rateThree years and up to five years 6 month LIBOR + 300 basis points

More than five years 6 month LIBOR + 500 basis points

Approval Route for ECBsEligible borrowers

Financial institutions dealing exclusively with infrastructure or export finance are considered on a case by case basis. Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government.ECB with minimum average maturity of 5 years by Non-Banking Financial Companies (NBFCs) . Foreign Currency Convertible Bonds (FCCB) by housing finance companies. Multi-State Co-operative Societies engaged in manufacturing activity.Cases falling outside the purview of the automatic route limits and maturity period.Other types of ECBsCommercial bank loansBuyers creditSuppliers creditSecuritized instruments such as Floating Rate Notes and Fixed Rate Bonds etc.Overview of total borrowingWith the six months benchmark London Inter-Bank Offered Rate hovering around 0.50 per cent, a blue-chip Indian corporate could raise resources from the overseas market at about 3.50 per cent.As per the latest Reserve Bank of India data, in January 2011 Indian companies mobilised $2.709 billion ($1.319 billion in January 2010).The total fund (debt) raising by India Inc in January-December 2010 was $23.82 billion, against 16.73 billion in the calendar year 2009.