ECB & FCCB

Presented by:-
Raj Bafna (04)
Chetan Undwar (06)
Swastik Dasgupta (10)
Sumil Yadav (41)
Sujay Saxena (44)
Tony Martin (57)
ECB
 What is ECB?
 Source of funds for corporates from abroad with advantage of lower rates
of interest prevailing in the international financial markets, longer
maturity period and for financing expansion of existing capacity as well as
for fresh investment

 Defined as to include commercial loans [in the form of bank loans,

buyers’ credit, suppliers’ credit, securitised instruments (e.g. floating rate
notes and fixed rate bonds, CP)] availed from non-resident lenders with
minimum average maturity of 3 years
Modes of raising ECBs
 Commercial Bank Loans : in the form of term loans from banks outside
India
 Buyer's Credit
 Supplier's Credit
 Securitised instruments such as Floating Rate Notes (FRNs), Fixed Rate
Bonds (FRBs), Syndicated Loans etc. Syndicated Loan, CP
 Credit from official export credit agencies
 Commercial borrowings from the private sector window of multilateral
financial institutions such as International Finance Corporation
(Washington), ADB, AFIC,CDC
 Loan from foreign collaborator/equity holder, etc and
corporate/institutions with a good credit rating from internationally
recognised credit rating agency
 Lines of Credit from foreign banks and financial institutions
 Financial Leases
 Import Loans
 Foreign currency loan raised by residents from recognised lenders
Two Routes for ECB and Bases
of Comparison
 ECBs can be accessed under two routes
(i) Automatic Route and
(ii) Approval Route.

Bases of Comparison
 Eligibility criteria for accessing international financial markets.
 Total quantum limit of funds that can be raised through ECBs.
 Maturity period and the cost involved.
 End uses of the funds raised.
Criteria Automatic Route Approval Route

Procedure Agreement with lender Application submission

though dealer to RBI

Borrowers • Companies • FIs with infrastructure

• NGOs – Micro Finance or export finance
• Special Economic Zone • NBFCs – import
financial equipments
•> US $ 500 million ECB
in a year
Lenders • International Banks, Except QOI
Capital Markets
• Qualified Overseas
Organizations and
Individuals
End Use • Real Sector – SME and SME and Infrastructure
infrastructure JV, Wholly owned
• Investment in JV, subsidiary
Subsidiaries
• Lending for Micro
Finance
Why ECB is attractive?
Investor
 ECB is for specific period, which can be as short as three years
 Fixed Return, usually the rates of interest are fixed
 The interest and the borrowed amount are repatriable
 No owners risk as in case of Equity Investment

Borrower
 No dilution in ownership
 Considerably large funds can be raised as per requirements of
borrower
 Usually only a fixed rate of interest is to be paid
 Easy Availability of funds because ECB is more appealing to
Investors
Recent Developments - ECB
Minimum Average Maturity: ECB up to USD 500 million per borrower
per financial year is permitted for rupee expenditure and/ or foreign
currency expenditure for permissible end-uses under the automatic route
Parking of ECB proceeds: The borrowers have been provided with a
flexibility to either keep their ECB proceeds offshore or keep it with the
overseas branches/ subsidiaries of Indian banks abroad or to remit these
funds to India to credit to their Rupee accounts with banks in India, pending
utilization for permissible end-uses.
All-in-Cost Ceilings: ECB beyond the permissible all-in-cost ceiling can be
availed of under the Approval Route.
Definition of Infrastructure expanded to include, power,
telecommunication, mining exploration and refining
Features of Bond issue
Bonds constitute direct, unsubordinated obligations of the
Company

(a) Redemption on maturity - Unless previously redeemed or

purchased by the company, the bonds are redeemed at
par on the expiry of a pre-determined period from the
date of the allotment
(b) Put Option - When the bondholder redeems the bonds
after expiry of a certain period commencing from the
date of allotment, he is said to exercise the Put Option.
(c) Call Option - When the company purchases the bonds
from the bondholders at discount, at par or premium in
the open market or otherwise, the company is said to
exercise its Call Option.
FCCB is an instrument in the debt market
issued in a foreign currency with
option of being converted into equity an
is issued by listed Indian companies
outside of India (they typically are
registered in Luxembourg or Singapore).

FCCB
 Characteristics of FCCB
FCCBs up to US$500 million can be issued by an Indian company in each financial
year for permitted uses without RBI approval (RBI approval would be required for
an issue above US$500 million). They are deemed to be foreign direct investment in
the issuer, and need to conform to the prescribed sectoral caps under the GOI’s
foreign direct investment (FDI) policy.

FCCBs should have a minimum maturity of 5 years with no call or put option or
prepayment exercisable during this period. Buy back is subject to prior approval of
the RBI.

FCCB coupon rates are capped: 6 month LIBOR plus 300 bps (for 3 – 5 year FCCBs);
6 month LIBOR plus 500 bps (for FCCBs above 5 years).

Conversion is not mandatory and the conversion price is subject to a floor geared to
the average trading price of the issuer in India for a 2-week period prior to issuance .
•FCCBs can be issued publicly in the international capital markets or placed
privately with banks, multilateral and bilateral financial institutions, foreign
collaborators or foreign equity holders (holding a minimum of 5 percent), and
may be used for specified purposes such as import of capital goods and
investments in the infrastructure sector, but investments in stock markets and
real estate are not permitted.

•FCCBS have been popular with large corporates in recent years, particularly
for large, capital intensive projects that matched the conservative term and
tenor requirements of the RBI relative to INR borrowing prices in India. FCCBs
typically have had very low—even zero coupon—rates.
Benefit to the company
Being hybrid instrument, the coupon rate on FCCB is
particularly lower than pure debt or zero, thereby
reducing the debt financing cost.

It saves the risk of immediate equity dilution as in the

case of public issue of shares. Unlike debt, FCCB does
not require any rating or any covenant like securities,
cover and so on. It can be raised within a month while
pure debt takes longer to raise. Because the coupon is
low and usually payable at the time of redeeming the
instrument, the cost of withholding tax is also lower for
FCCBs compared with other ECB instruments
Benefits to investors
It has the advantages of both equity and debt.
It gives the investor much of the upside of
investment in equity, and the debt element
protects the downside.
Assured returns to investors on bond in the form
of fixed coupon rate payments.
Ability to take advantage of price appreciation in
the stock by means of warrants attached to the
bands, which are activated when price of a stock
reaches a certain point.
Lower tax liability as compared to pure debt
instruments due to lower coupon rate
Taxation aspects
Interest payments on the bonds, until the
conversion option is exercised, shall be subject to
deduction of tax at source.
Tax on dividend on the converted portion of the
bond shall be subject to deduction of tax at source.
Conversion of FCCB into shares shall not give rise
to any capital gains liable to income tax in India.
Transfers of FCCB made outside India by a non-
resident investor to a non-resident
Investor shall not give rise to any capital gains
liable to tax in India.
Current scenario in India
Time of raising FCCBs: bull phase (expectation
of a rise in the share prices of companies)
Time of redemption or conversion: slowdown
& the bear phase(reduction in share prices).
Factors having impact on conversion of
FCCBs to equity are :
Tight and expensive debt market
Lacklustre equity market performance
Low investors' appetite
These are making the conversion of FCCBs to
equity very unlikely.
Alternatives for issuer companies in
absence of conversions
Raising additional debt - This can be done
by plain vanilla bank funding or again an
ECB/FCCB. The demerits are high rates of
interest adding to the existing debt burden
The companies with high debt equity ratio
cannot go for it.
In these times of global turmoil it is not
conducive to raise ECBs or FCCBs over the
coming few months.
Additional Equity - In this period of weak capital
market, raising fund through equity is very difficult.
 Reset the conversion clause to bring if closer to
reality- As per the reset clause attached to the FCCBs,
the conversion price can be revised downward when
the company's share price falls bellow a
predetermined Ievel. But only a handful of
companies have included this clause
Premature buyback with the help of the government
Thank You