8/7/2019 What is a Foreign Currency Convertible Bond FCCB

http://slidepdf.com/reader/full/what-is-a-foreign-currency-convertible-bond-fccb 1/9

What is a Foreign Currency Convertible Bond (FCCB)?

A Foreign Currency Convertible Bond (FCCB) is a type of convertible bondissued in a currency different than the issuer’s domestic currency. In other words,the money being raised by the issuing company is in the form of a foreigncurrency. It gives two options. One is, to get the regular interest and principal andthe other is to convert the bond in to equities. It is a hybrid between bond andstock.

How does it help companies?

Some companies, banks, governments, and other sovereign entities may decide

to issue bonds in foreign currencies because:

• It 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 markets

• The 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 stock 

• It 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 component

• Conversion 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 thecompany stocks

How does it benefit an investor?

It’s not just companies who are benefited with FCCB. Investors too enjoy itsbenefits. Here are some:

• Safety of guaranteed payments on the bond

• Can take advantage of any large price appreciation in the company’s stock • Redeemable at maturity if not converted

•

Easily marketable as investors enjoys option of conversion in to equity if resultingto capital appreciation

Are there any disadvantages to the investors and companies?

Yes. Like any financial instruments, FCCBs also have there disadvantages.Some of these are:

8/7/2019 What is a Foreign Currency Convertible Bond FCCB

http://slidepdf.com/reader/full/what-is-a-foreign-currency-convertible-bond-fccb 2/9

• 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 isexchange risk on interest as well as principal if the bonds are not converted in to

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

How is taxation done on FCCBs?

Taxation is computed in the following way:

• Until 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

• If Foreign Currency Convertible Bonds (FCCB) is transferred by a non-residentinvestor to another non-resident investor it shall not give rise to any capital gains

liable to tax in India

arsen & Toubro (L&T), the engineering and construction behemoth, has raised$600 million (approximately Rs 2,780 crore) through qualified institutionalplacements (QIPs) and issue of foreign currency convertible bonds (FCCBs).

The $400 million share sale to qualified institutional buyers at Rs 1,659.30 hasbeen completed at a 1.1 per cent discount to Wednesday’s closing price of Rs1,677.25. The $200 million bonds, with a coupon rate of 3.5 per cent, have beenissued at Rs 1,659.30, a 15 per cent premium to the base price of Rs 1,660. Itwill be mature in 2014.

“The proceeds of the issues will be utilised for growth capital. There areopportunities coming up in power, hydrocarbon, railways, road, port, airport,water management technology and urban infrastructure. The funds will helpstrengthen the company’s financial position and allow it to bid for large upcomingprojects. The fund will be utilitsed within 12-24 months,” said L&T executivepresident (finance) R Shankar Raman.

8/7/2019 What is a Foreign Currency Convertible Bond FCCB

http://slidepdf.com/reader/full/what-is-a-foreign-currency-convertible-bond-fccb 3/9

L&T has benefited from a construction boom in recent years as India revamps itsairports, roads and adds industrial capacity, and currently holds an order backlogof around Rs 80,000 crore.

A month before, Chairman A M Naik told shareholders the company expects to

win fresh orders worth $2 billion in the next few weeks. The company had earlier expected a 25 per cent growth in order book for the financial year 2009-10.

The QIP allotment would be completed by October 21. The fund raising will diluteL&T’s equity capital by 1.9 per cent. Citi is the lead book runner for both thedeals.

Shares of the company, which the market values at $21 billion, fell as much as2.8 per cent in a choppy Mumbai market after the announcement. It closed at Rs1,649.80, down 1.65 per cent.

Moody’s Investors Service said L&T’s rating was unaffected by the $600 millionfund-raising. “While a step in the right direction, the announced equity and FCCBissues will only have a limited impact on L&T’s consolidated credit metrics, giventhat the company will require additional funding to support its large expansionplan over the medium term. Therefore, this fund raising exercise has noimmediate impact on its rating or rating outlook,” said Ivan Palacios, Moody’sanalyst.

L&T’s consolidated debt stood at Rs 18,400 crore as of March 2009. Althoughthe equity and FCCB issuance would partly fund the company’s expansion plan,Moody’s expects the group’s consolidated debt to increase over the medium term

as it enters new ventures, and expands its activities in financial services andinfrastructure development sectors.

The company had a cash reserve of Rs 4,000 crore in March this year. Later, itreceived Rs 1,200 crore from the sale of 11.5 per cent UltraTech shares toGrasim Industries, an Aditya Birla Group firm. The company has capitalexpenditure plan of Rs 1,500-2,000 crore this financial year.

Foreign Currency Convertible Bonds (FCCB) Posted by foster Labels: Investment Policies 

Foreign Currency Convertible Bonds (FCCB)

Foreign currency convertible bond (FCCB) is a convertible bond issuedby a country in a currency different than the its own currency. This is

the powerful instrument by which the country raises the money in theform of a foreign currency. The bond acts like both a debt and equity

8/7/2019 What is a Foreign Currency Convertible Bond FCCB

http://slidepdf.com/reader/full/what-is-a-foreign-currency-convertible-bond-fccb 4/9

instrument. Like bonds it makes regular coupon and principalpayments, but these bonds also give the bondholder the option to

convert the bond into stock.

Foreign Currency Convertible Bond Policy in India

Ministry of Finance government of India defines FCCB. According to it:"Foreign Currency Convertible Bonds" means bonds issued in

accordance with this scheme and subscribed by a non- resident inforeign 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 related warrants attached to debt instruments; "

What is the criteria for issuing FCCBs?● Any company who wish to raise the foreign funds by issuing FCCB,

require prior permission of the Department of Economic Affairs,

Ministry of Finance, Government of India.● The company issuing the FCCB should have the consistent track

record for a minimum period of three years● The Foreign Currency Convertible Bonds shall be denominated in any

freely convertible foreign currency and the ordinary shares of anissuing company shall be denominated in Indian rupees

● The issuing company should deliver the ordinary shares or bonds to

a Domestic Custodian Bank as per regulation. The custodian bank onthe other hand instructs the Overseas Depositary Bank to issue Global

Depositary Receipt or Certificate to non-resident investors against theshares or bonds held by the Domestic Custodian Bank.

The provisions of any law with regard to the issue of capital by anIndian company will also be applicable the issue of Foreign Currency

Convertible Bonds or the ordinary shares of an issuing company. Thecompany issuing FCCB, shall obtain the necessary permission or

exemption from the appropriate authority under the relevant law

relating to issue of capital.

Limits of foreign investment in the issuing companyThe Ordinary shares and Foreign Currency Convertible Bonds (FCCB)

that are issued against the Global Depository Receipts are treated asForeign Direct Investment (FDI). However total foreign investmentmade either directly or indirectly shall not exceed 51% of the issued

and subscribed capital of the issuing company.

Taxation on Foreign Currency Convertible Bonds● Until the conversion option is exercised, all the interest payments on

the bonds, is subject to deduction of tax at source at the rate of ten

8/7/2019 What is a Foreign Currency Convertible Bond FCCB

http://slidepdf.com/reader/full/what-is-a-foreign-currency-convertible-bond-fccb 5/9

per cent● Tax exercised on dividend on the converted portion of the bond is

subject to deduction of tax at source at the rate of ten per cent● 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.● If Foreign Currency Convertible Bonds (FCCB) is transferred by a

non-resident investor to another non-resident investor it shall not giverise to any capital gains liable to tax in India.

News UpdateIn May 2007, at least 10 companies converted FCCBs into equity at a

price decided when the bonds were issued to respective investors. Thelist includes NIIT, Bharti Airtel, Sun Pharma, Glenmark Pharma, Amtek

India, Jain Irrigation Systems and Maharashtra Seamless. FCCB

holders have witnessed a significant rise in value of their investmentsin these companies on the back of a sharp rise in share prices since

allotment of the bonds.

Abstract:

Efficient capital markets are a critical component for any developed economy and Indian capitalmarkets today are amongst the best regulated markets wherein the regulatory framework haskept pace with the significant growth in the securities markets. The story of Indian capital marketreveals an efficient trading and settlement infrastructure, high levels of disclosure and fosteringan environment of innovation. In this back drop it is seen that a new trend of corporate financingis gaining ground. The sale of Foreign Currency Convertible Bonds by domestic companies andbanks has surged over the last couple of years. Thus, this article in the first part seeks to examinesome fundamental concepts related to Foreign Currency Convertible Bonds, viz, its nature,regulatory mechanism, tax treatment, advantages and disadvantages. The second part analyseswhether Foreign Currency Convertible Bonds can be considered as a 'Golden instrument' for raising funds in all market scenario wherein it is concluded that Foreign Currency ConvertibleBonds can be advantageous only in a booming market and cannot be the buzzword in a bearishmarket, which the Indian markets did experience a little while back. In a bearish market, listedcompanies may resort to Qualified Institutional Placements that have been introduced by SEBIvide guidelines dated May 8, 2006. Lastly, the article also examines the concerns arising out of sudden increase in access to foreign currency convertible bonds by Indian companies. In thisregard it is concluded that Press Note released by the Finance Ministry on November 17, 2005relaxing the pricing guidelines is indeed a step in the right direction.

Source: The Economic Times

0 comments

8/7/2019 What is a Foreign Currency Convertible Bond FCCB

http://slidepdf.com/reader/full/what-is-a-foreign-currency-convertible-bond-fccb 6/9

Post a Comment 

Newer Post Older Post Home 

Subscribe to: Post Comments (Atom) 

Search

Business and Economic News• Infrastructure - Growth of 3.4%

• I Phone Coming to India

• Problems of Gmail Users

Banking in India• HSBC Bank• American Express Bank of India

• ABN AMRO Bank

• Axis Bank

• IcIcI Bank

• Union Bank of India

• HDFC Bank

•

Foreign Currency Convertible Bonds (FCCB) 

Companies raise money in many different ways and one of the modern methods is issuing

Foreign Currency Convertible Bonds (FCCB). All the money raising methods have someadvantages and disadvantages and FCCB is not an exception. Though FCCB method has

 been in practice for a long time, it came in to prominence in India only in recent decades.

Let’s discuss in detail about the FCCB and its advantages and limitations.

þÿ

8/7/2019 What is a Foreign Currency Convertible Bond FCCB

http://slidepdf.com/reader/full/what-is-a-foreign-currency-convertible-bond-fccb 7/9

What is Foreign Currency Convertible Bond (FCCB)?

Most part of the answer exists in the name itself. Let’s build an explanation from the

name.

We will start with Bond. In general Bond is an agreement between two parties. In

finance, it’s an agreement (Debt Security) between the issuer (Company) and investors.

What is the agreement? Company raises money by issuing bonds to the investors and inreturn, the company agrees to pay interest / coupon in periodic intervals along with the principal or the whole amount at a maturity date listed in the agreement.

A convertible bond simply means that investors have the option to convert their bondsinto common stocks at a previously fixed price (Price is fixed when the bond is issued).

Foreign Currency Convertible Bond is just a convertible bond that is issued in ForeignCurrency. So, we can define the FCCB as the following.

FCCB is a quasi-debt instrument that is issued in a currency different than the issuer’s

domestic currency with options to either redeem it at maturity or convert it into issuingcompany’s stock. 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 FCCB’s when they are several methods around to raise

money?

Companies have following advantages if they raise the money by issuing FCCB.

8/7/2019 What is a Foreign Currency Convertible Bond FCCB

http://slidepdf.com/reader/full/what-is-a-foreign-currency-convertible-bond-fccb 8/9

1) It 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 component.

2) Conversion 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 companystocks.

3) Simple regulatory process

4) Investors are mostly non-residents or hedge fund arbitrators.

5) Mostly FCCB’s are issued to suit the company needs.

If the benefits exist only for the company, then of course the term FCCB would not even

have existed by now. There are benefits for the investors as well and here are few.

What is in it for Investors?

1) Like any other debt instrument, capital protection by guaranteed payments to the bond.

2) Greater return potential if the stock price appreciates more than the previously fixed

conversion price.

3) Redeemable at maturity if not converted.

Even though both issuers and investors have advantages, there are some disadvantages as

well in raising money through FCCB. What are they?

Limitations

1) FCC Bonds are ideal for the bull market scenario as the conversion occurs at a

 premium price lowering the dilution. But if the stock price plummet like what we are

witnessing right now due to the economic downturn, then investors will not go for 

conversion and they go for redemption at maturity value. So, companies have torefinance to fulfill the redemption promise and refinancing is not that easy particularly in

times like this with lot of credit crunch. Earnings will get hit because of the redemptions.

2) If the investors do not go for conversion, then companies will be forced to lower the

conversion price (Previously Fixed) to entice the investors to go for conversion which

will lead to higher dilution.

3) It will remain as debt in the balance sheet until conversion.

8/7/2019 What is a Foreign Currency Convertible Bond FCCB

http://slidepdf.com/reader/full/what-is-a-foreign-currency-convertible-bond-fccb 9/9

4) If the exchange rate goes up, then the issuer has to pay more to the investors. So,

foreign exchange plays a role too.

5) If the stock price goes below the conversion price, then the issuer loses an opportunity

to dilute at a higher price.

Example : Companies that have issued FCCB

Aurobindo PharmaHotel Leela

Orchid Chemicals

Tata Motors

Bharat ForgeSuzlon Energy

Amtek Auto

Ranbaxy and many more….

Link: There is a related article in "thehindubusinessline" dated May 10, 2009 and here isthe link to get to know about FCCB buybacks.

http://businesstoday.intoday.in/index.php?option=com_content&task=view&id=6585