What is FCCB?

Foreign Currency Convertible Bond is a type of convertible

bond issued in a currency different than the issuer's domestic
currency.

It is a quasi-debt instrument which are attractive to both

investors and issuers. The investors receive the safety of
guaranteed payments on the bond and are also able to take
advantage of any large price appreciation in the company's
stock.

Due to the equity side of the bond, which adds value, the

coupon payments on the bond are lower for the
company, thereby reducing its debt-financing costs.
  
Features

 A debt instrument which can be converted into a company’s equity

shares if the investor chooses to do so, at a pre-determined strike rate.

FCCB issues have a ‘Call’ and ‘Put’ option to suit the structure of the
bond, both the options are subject to RBI guidelines.

The interest on FCCBs is generally 30% -40% less than on normal debt
paper or foreign currency loans or ECBs. This translates to cost saving of
approx 2-3 percent p.a.
  
Features....contd

 FCCB can be secured as well as unsecured. Most of the FCCB issued by

Indian Companies are generally unsecured.

FCCB can be converted into Indian Shares or American Depository

Receipts (ADR)

FCCB are generally listed to improve liquidity, generally Indian issuer

have listed at Singapore Stock Exchange and in many cases also on
Luxembourg Stock Exchange.
 Statutory & RBI regulations
1. Automatic Route

The automatic route is available to real sector i.e. Industrial sector,

specially infrastructure sector-in India
 
2. Approved Route

Financial Institutions dealing exclusively with infrastructure or export

finance such as IDFC, IL&FS, Power Finance Corporation, Power Trading
Corporation, IRCON and EXIM Bank
Banks and financial institutions which had participated in the textile or
steel sector restructuring package as approved by the Government are
also permitted to the extent of their investment in the package and
assessment by RBI based on prudential norms. Any ECB availed for this
purpose so far are deducted from their entitlement.
 Regulation
An Indian company or a body corporate, created by an Act of Parliament may
issue FCCBs not exceeding US $ 500 million in any one financial year to a person
resident outside India under the automatic route, without the approval from
Government or the Reserve Bank.
Where the amount of fund to be raised is to be USD 20 million or less the
minimum maturity period should be not less than three years.
 If the amount to be raised is more than USD 20 million and up to 500 million
the minimum maturity period should not be less than 5 years.
FCCBs up to USD 20 million can also carry a call and put option provided the
option shall not be exercised until minimum maturity period of 3 years has
expired.
 Regulation....contd
In terms of paragraph (x) of Schedule II of the notification the issue of
FCCB is required to be reported to the Reserve Bank through the
designated branch of an authorized dealer.
Authorized dealers may forward the same to the concerned Regional
Office of the Reserve Bank for obtaining a loan registration number.
While forwarding the offer documents to Reserve Bank the authorized
dealers shall ensure that the FCCBs are issued strictly in accordance with
the notification.
 Buyback of FCCB

 The buyback value of the FCCB shall be at a minimum discount of 25%

on the book value.

The funds used for the buyback shall be out of internal accruals, to be
evidenced by Statutory Auditor and designated AD Category – I bank's
certificate.

The total amount of buyback shall not exceed USD 50 million of the
redemption value, per company.