FCCB in India —an Insight

FCCB (Foreign Currency Convertible Bonds) is a bond, issued in a currency different from

the issuer's domestic currency. This bond is a mix between the debt and equity instrument
and provides the bondholders an option to convert the bonds into equity. This bond gives
the issuers an ability to access capital available in foreign markets and make their presence
felt in the international market.
 
FCCB 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 price appreciation
in the company's stock.
 
Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository
Receipt Mechanism) Scheme, 1993 defines FCCB to mean bond issued in accordance with
this scheme & subscribed by a non-resident in foreign currency & 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 the debt instrument.
 
FEMA Notification No. 120/ RB-2004 i.e. Foreign Exchange Management (Transfer or Issue
of Any Foreign Security) Regulations, 2004, defines Foreign currency convertible bonds
(FCCB) under Regulation 2(g) which reads as: -
"Foreign Currency Convertible Bond" (FCCB) means a bond issued by an Indian company
expressed in foreign currency, and the principal and interest in respect of which is payable
in foreign currency"
 
Common Features of FCCB:
 
1. FCCB can be either unsecured or secured. But, in practice most of the FCCB issued in
India are unsecured;
2. FCCB issues have a ‘Call' and ‘Put' option to suit the structure of the Bond. Both the   
options are subject to RBI guidelines;
3. Public issue of FCCB shall be through reputed lead managers and Private placement
is permitted subject to certain conditions;
4. It is also possible to issue zero coupon Foreign Currency Convertible Bonds and in
this case, the holders of the bond are generally interested to convert the bonds into equity;
5. The yield to maturity of FCCB normally ranges 2-7%;
6. FCCB are generally listed to stock exchange to increase its liquidity;
7. Credit rating of bonds is not mandatory. But, rating can help better marketing of the
bonds;
8. FCCB Issue related expenses shall not exceed 4% of issue size and in case of private
placement, shall not exceed 2% of the issue size;
 
Eligibility of Issuers:
 
Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository
Receipt Mechanism) Scheme, 1995 provides that an Indian Company, which is not eligible
to raise funds from Indian capital market including a company which has been restrained
from accessing the securities market by SEBI will not be eligible to issue FCCB and Unlisted
Indian Companies issuing FCCB shall required to simultaneously list in the Indian Capital
Market.
 
Pricing Regulations:
 
The pricing of the FCCB issues should be made at a price not less that the higher of the
following two averages:
(i) The average of the weekly high and low of the closing prices of the related shares quoted
on the stock exchange during the six months proceeding the relevant date;
(ii) The average of the weekly high and low of the closing prices of the related shares
quoted on the stock exchange during the two weeks proceeding the relevant date;
The relevant date means the date thirty days prior to the date on which the meeting of the
general body of shareholders is held, in terms of section 81(1A) of the Companies Act,1956,
to consider the proposed issue.
 
Statutory Regulations:
RBI Regulations
FCCB are treated as foreign Direct Investment by Government of India. Issues of FCCB have
to be complied with sectoral cap of FDI. As per the RBI Regulations, FCCB can be made
through (1) Automatic Route or (2) Approval Route. Master Circular on External
Commercial Borrowings and Trade Credits issued on July 1, 2009 by RBI vide Circular No.
RBI/ 2009-10/27 (Master Circular No. 07/2009-10) contained elaborate guidelines of
FCCB issue.
 
Automatic Route:
Corporate including those in hotel, hospital, software sectors (registered under the
Companies Act, 1956 except financial intermediaries, such as banks, financial institutions
(FIs), Housing Finance Companies (HFCs) and Non-Banking Financial Companies (NBFCs)
are eligible to raise FCCB.Corporate (other than hotels, hospitals & software sectors) can
raise FCCB upto USD 500 million in one financial year.Corporate in hotels, hospitals &
software sectors can raise FCCB upto USD 100 million in one financial year for meeting
foreign currency &/or rupee capex for permissible end uses. Acquisition of land not
permitted.As per Master Circular 2009 the average maturity period of FCCB is as follows:
Borrowing upto USD 20 Million or its equivalent in a financial year with a minimum
average maturity of 3 years;Borrowing more that USD 20 Million or its equivalent in a
financial year and upto USD 500 Million with a minimum average maturity of 5 years;
 
Borrowings upto USD 20 million Can have call/put option provided minimum average
maturity norm is Complied with'
 
Parking of Proceeds in Abroad :
RBI guidelines provide that funds received through FCCB should be parked abroad till the
actual requirements in India or to remit these funds to India, pending utilization for
permissible end-uses. RBI has also clarified that parked funds can be invested in short term
 liquid assets as specified in the guidelines, so that they can be easily liquidated when need
arises.
 
LRN No.
FCCB Issues are required to submit Form 83, in duplicate, duly certified by Company
Secretary in Whole Time Practice or Chartered Accountant to the designated AD. One copy
of the Form 83 should be forwarded by AD to Director, Balance of Payments Statistics
Division, Department of Statistical Analysis and Computer Services (DESACS), Reserve
Bank of India, Bandra-Kurla Complex, Mumbai-400051 for allotment of Loan Registration
Number (LRN).
 
Other Legal Obligations
The borrower has to file ECB -2 return on monthly basis with RBI within 7 days of the end
of the month.
 
Disadvantages to the investors:
Exchange risk is more in FCCB 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;
1. FCCB means creation of more debt and a FOREX outgo in terms of interest which is
in foreign exchange;
2. 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 in to equity;
3. 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;
4. It will remain as debt in the balance sheet until conversion;
 
Conclusion:
FCCB is a good source of raising funds with minimum cost. The procedural aspect is
comparatively simple. The company can raise loan without creating security on assets. That
is why most of the companies are opting to go for FCCB, though the exchange risk is there

Read more: http://www.articlesbase.com/regulatory-compliance-articles/foreign-
currency-convertible-bonds-in-india-2678834.html#ixzz18fV96FcE 
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Monday, February 22, 2010
Pricing Adjustments for FCCBs

On November 27, 2008, the Ministry of Finance introduced changes to the pricing norms for
FCCBs. As we had discussed then, two changes were proposed:

(i) the minimum price will be the average weekly high and low prices for the 2 weeks prior to the
relevant date, instead of the previous price determined as the higher of the average for 6 months and 2
weeks;

(ii) the relevant date for price determination will the date on which the board decides to issue to
securities, and not 30 days prior to the shareholders’ resolution as it earlier stood.

These changes were introduced to overcome the difficulties faced by issuers in appropriately pricing
FCCBs in declining market conditions. However, since the altered requirements were applicable
prospectively, it did not provide any benefits in relation to FCCBs issued prior to the date of relaxation,
being November 27, 2008. In view of representations received from companies and after consultation
with RBI and SEBI, the Ministry of Finance last week issued a press release whereby “it has now been
decided by the Government to provide a window of 6 months under the scheme to interested
companies to revise their conversion price as per new pricing norms. This will be effective from the date
of the issue of this Press Note”. In other words, companies that had issued FCCBs prior to the price
relaxation effected on November 27, 2008 would also be entitled to the liberalised norms.

The adjustment of conversion price is subject to certain conditions: (i) the issue of shares at revised
pricing should not breach FDI limits; (ii) the issuer company should obtain the approval of the board as
well as its shareholders for repricing; (iii) the issuer company should enter into a fresh agreement with
FCCB holders with the renegotiated conversion price; and (iv) the revision in conversion price should be
approved by the RBI.

There are, however, some ambiguities in the new pricing guidelines. While it is clear that a 2-week
average will be applied in computing the minimum price, the guidelines appear to be silent as to the
date from which the 2-week period will be calculated while repricing the FCCB conversion. As a Business
Standard report notes:

The point of confusion is the two-week period preceding the launch of an FCCB issue, which is used to
calculate the minimum conversion price based on an average of closing share prices. Bankers are not
sure whether to consider the 14 days preceding the original issue or the 14 days before the reset of the
conversion price, which companies have now been allowed to undertake. The latter would be much
more useful, since it would more closely reflect current market prices and facilitate conversion to equity.
…
However, if the original date at which the FCCBs were launched is considered, the new guidelines will
bring little benefit to Indian companies, since most instruments were issued during the 2007 bull run in
the stock markets.

“During a bull run, the two-week average price would be higher than the six-month average price,
whereas in a bear phase it would be opposite,” said an investment banker with a foreign bank.

Corporate law firms contacted by Business Standard are of the opinion that FCCBs can be re-priced
according to current market prices.
While companies and advisors will have to work with the regulators to achieve a resolution of this
ambiguity, it seems that repricing the FCCB conversion as per current market prices will present its own
unintended consequences.

From a legal perspective, the question is whether the regulatory intent can be derived from the
guideline itself. The press note states that interested companies can “revise their conversion price as per
new pricing norms”. The reference to “new pricing norms” is to those introduced on November 27,
2008. These norms include not only the pricing determination but also the “relevant date”, which is the
“date of the meeting in which the Board of the company or the Committee of Directors duly authorized
by the Board of the company decides to open the proposed issue.” To that extent, the relevant date
applies with reference to the date of board meeting for authorizing the issue of the FCCBs and not to a
current date when the possible repricing decision is being made.

From a policy perspective, if companies are allowed to reprice their FCCB conversion with
reference to the current market price, then companies who are the beneficiaries of the new
guidelines (i.e. those who issued FCCBs prior to November 27, 2008) would obtain an additional
advantage over companies who issued them thereafter. This would result in a mismatch, and it is
not clear if the guidelines were designed with a view to achieve such a result.

http://indiacorplaw.blogspot.com/2010/02/pricing-adjustments-for-fccbs.html
November 2005 The Chartered Accountant 703
T H EME

Foreign Currency Convertible Bonds

F oreign Currency Convertible Bonds are attractiveto both investors and issuers. The investors receive the
safety of guaranteed payments on the bond (if interest payment is involved) and are also able to take advantage
of any price appreciation in the company’s stock. Bondholders take advantage of this appreciation by means of
warrants attached to the bonds, which are activated when there is substantialprice appreciation of the stock.
Due to the equity side of the bond, the coupon paymentson the bond are lower,thereby reducing its debt –
financing costs for the issuer.FCCB are also referred as FCCN (Foreign Currency Convertible Notes) by some
issuers. Bonds of foreign countries are called by various names in International markets. For example in US,
overseas bond listed with SEC are called Yankee Bonds, while they are referred to as Bulldog Bonds (in U.K.)
and Samurai Bonds (in Japan).
Salient Features
l FCCB is a quasi-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.
l FCCB issues have a ‘Call’ and ‘Put’ option to suit
the structure of the Bond.
A call option entitles the
issuer to “ Call ” the loan
and make an early redemption.
On the other
hand, a put option entitles
the lender to exercise
the option to convert the
FCCB into equity, both
the options are subject to
RBI guidelines.
l The interest component
or coupon on FCCBs is
generally 30 per cent -40
per cent less than on normal
debt paper or foreign
currency loans or ECBs.
This translates to cost
saving of approx 2-3 per
cent p.a.
l The coupon on bonds
can also be zero as in case
of zero coupon Bonds
(ZCB) in view of attractiveness
of options attached
to them. In case of
ZCB, the holder is basically
interested in either
conversion of the bonds
in equity or capital appreciation.
l The redemption of
FCCB can be made at a
premium or at par or even
at a discount depending
upon the coupon offered.
The Present value
of overall remaining cash
flow determines the valuation
of Bonds e.g. out of
3 series of FCCN issued
by Tata Motors Limited,
1 per cent FCCN of 2003
are redeemable on July
31 2008 at 116.824 per
cent of Principal, whereas
Zero Coupon FCCN of
Foreign Currency Convertible Bonds (FCCB) are debt
instruments issued in a currency different than the issuer’s
domestic currency with an option to convert them in common
shares of the issuer company. It’s a quasi debt instrument
to raise foreign currency funds at attractive rate. FCCB
acts like a bond by making regular coupon and principal payments;
and also gives the bondholder an option to convert the
bond into stock.
2004 will be due for redemption
at 95.111 per
cent of principal.
l The Yield to Maturity
(YTMs) in case of FCCBs
normally ranges
from 2 per cent to 7 per
cent.
l FCCB are generally issued
by Corporate, which
have high promoter
shareholding and hence
do not perceive any risk
of losing management
control even after exercise
of conversion option.
l The pricing of the FCCB
options is generally between
30 per cent - 70
per cent premium over
the Current Market Price
giving sufficient cushion
to the issuer. The FCCB
holder opts to convert the
FCCB, in case the market
price exceeds the option
price or if there is an
intent to make strategic
investment by the lender
irrespective of the stock
price in market.
l In many cases, the FCCB
issuer as well looks forward
to exercise of option
by lender, so that there is
no fund outflow on redemption.
Instead the issuers
reserves are inflated
by receipt of premium. If
however, the FCCB hold-
The author is the
member of the Institute.
He can be reached at
sanjoy.banka@relianceinfo.
com.
Sanjoy Banka
704 The Chartered Accountant November 2005
ers do not opt for conversion,
the Issuer has either
to reissue the bonds to
same holder or scout for
a new lender. This also
gives an opportunity for
debt restructuring.
l The foreign holder of
FCCB can trade the
FCCB in part or in full.
That is to say, the holder
can sell the debt part
while holding the Option;
or vice versa. For example,
if the holder is a mutual
fund, interested only in
equity, it may retain the
conversion option and
sell the Bond, with a call
option to, say, a bank who
does not want to take equity
risk. The Bank thus
buys debt portion of the
FCCB and draws a fixed
income till the bond is
called up. The seller still
retains the benefit of equity
and can call up when
stock price is substantially
less than the conversion
price - without sacrificing
the liquidity.
l The issuance of FCCB
like any incremental borrowing
invariably requires
the approval of existing
consortium of lenders.
l FCCB can be secured as
well as unsecured. Most
of the FCCB issued by
Indian Companies are
generally unsecured.
l FCCB can be subordinated
to existing debts
or they can be unsubordinated
on case to case
basis depending upon the
structure of the deal, its
timing and the present
gearing.
l FCCB can be converted
into Indian Shares or
American Depository
Shares (ADS). The allottee
is free to dispose
of the shares so received
upon conversion any time
after allotment, if there is
no lock in clause.
l FCCB issue expenses
as well as premium on
redemption of FCCB
are generally charged to
Securities Premium Account.
l While a credit rating of
Bonds is not mandatory,
since Bonds are mostly
issued by top corporate
having excellent track
record, rating definitely
helps to price the Coupons
competitively.
l The issuing company
need to hedge its forex
exposure arising out of
FCCB, till the time of redemption
or conversion.
l The right to convert the
FCCB into equity can
arise any time, starting
immediately after allotment
and can vest for 2-3
years.
l FCCB carries fewer covenants
as compared to a
syndicated loan or a debenture,
hence these are
more and more convenient
to raise funds.
l 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 Guidelines
RBI regulations
FCCB have been extremely
popular with Indian
Corporate for raising Foreign
Funds at competitive rates.
FCCB are treated as Foreign
Direct Investment (FDI) by
Government of India. The
Government has also liberalised
FCCB guidelines from
time to time to give impetus
to infrastructure development
and expansion plan of Corporate
India.
The latest comprehensive
guidelines on FCCB are
contained in external commercial
borrowings (ECBs)
guidelines issued by RBI on
1st August, 2005 vide circular
no 5 A.P. (DIR Series). The
circular is fully applicable for
FCCB issuance as well.
The key highlights of RBI
guidelines are as follows:
l ECB/FCCB can be raised
under Automatic route
( for specified Industries
only on meeting specified
conditions) or on RBI approval.
RBI has set up an
empowered committee to
consider requests for approval.
l The automatic route is
available to real sector i.e.
Industrial sector, specially
infrastructure sector-in
India, while all other sectors
have to take RBI approval
.
l The eligible borrowers
under the approval route
include Financial Institutions
dealing exclusively
with with infrastructure
or export finance such as
IDFC, IL&FS, Power
Finance Corporation,
Power Trading Corporation,
IRCON and EXIM
Bank are considered on
a case by case basis. The
list also includes 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.
l RBI has recently issued
a circular no A.P.(DIR
Series) No. 15 dated 4th
November, 2005 , whereby
Special purpose vehicles
(SPV) or any other
entity notified by RBI set
up to finance infrastrucNovember
2005 The Chartered Accountant 705
ture companies or project
will also be treated as
Financial Institutions for
the purpose of consideration
of their application
under approval route.
l The guidelines as stated
hereunder are generally
same for approval as well
as automatic route except
as stated.
l Minimum Average Maturity
of FCCB shall be
3 years for borrowing up
to US$ 20 million and 5
years in case it exceeds
US$ 20 Million.
l The maximum amount
of ECB to be raised in
a financial year can be
US$ 500 Million. However,
there is no limit on
numbers of FCCB to be
issued or the size/value of
each instrument.
l ECB/FCCB upto US$
20 Million can have call/
put option, provided the
minimum average maturity
period of 3 years is
complied with.
l The maximum all in all
cost to be incurred on
ECB/FCCB can not exceed
following limits :
v Average Maturity
period of 3-5
years- 200 bps over
6 month LIBOR
v Average Maturity
exceeding 5 years -
350 bps for over 5
years LIBOR.
l There are strict guidelines
for monitoring of
end use of ECB proceeds.
RBI stipulates that ECB
proceeds can be used for
(a) investment purposes
like Import of Capital
goods, New projects,
modernisation/expansion
programmes in Industrial
and infrastructure sector
(b) Overseas direct investment
in JV or wholly
owned subsidiaries abroad
(c) Acquisition of shares
in divestment process etc.
l RBI Guidelines specifically
prohibit use of ECB
proceeds for on lending,
investment in capital
market, Company takeover
etc. RBI Guidelines
also specifically prohibit
use of ECB proceeds for
Real estate Sector, however
this can be used for
development of integrated
townships as defined
by Government.
l No Guarantee, Letter of
Comfort, letter of Undertaking
can be issued by
Banks, FIs or NBFC relating
to FCCB. Recent
RBI circular dated 5th
November, 2005 permits
banks to issue guarantees,
standby letters of credit,
letters of undertaking or
letters of comfort in respect
of ECB by textile
companies for modernisation
or expansion of
their textile units under
approval Route subject to
prudential norms. This is
likely to facilitate capacity
expansion and technological
upgradation in the
Indian textile industry
after the phasing out of
Multi-Fibre Agreement,
l The issue of security is
left at the discretion of Issuer
Company, subject to
other extant guidelines.
In case any charge is required
to be created on
immoveable properties or
on any financial securities
in favour of lender, then
such charge can be created
as per provisions of
FEMA.
l One of the major changes
introduced by RBI is
checking the credentials
of lender by seeking certificate
of due diligence
issued by their Overseas
Banker. In case of Individual
lender, the Bankers
verification is required.
If “Know your Customer
Guidelines” are not implemented
in the country
of residence of Lender,
then such lenders can not
finance under FCCB.
l Prepayment of FCCB
is permitted upto US$
200 Million subject to
compliance of minimum
average maturity period.
For higher prepayment
amount, RBI approval is
needed.
l RBI guidelines provide
that funds received
through FCCB should
be parked abroad till the
actual requirement arises
in India. This has been
necessitated due to bloating
forex reserve of India,
which has led to huge
depreciation of rupee vis
a vis US$. RBI has also
clarified that the parked
funds can be invested in
short term liquid assets
so that they can be easily
liquidated when the
funds are needed in India.
The permitted mode of
investment are (a) Deposits
or Certificate of
Deposits etc offered by
Banks of approved rating
(b) Deposits with overseas
branch of Indian AD.
(c) Treasury bills and other
monetary instruments
of one year.
l FCCB Issuers are required
to submit Form
83, in duplicate, certified
by the Company Secretary
(CS) or Chartered
Accountant (CA) to the
designated AD. One
copy is to be forwarded
by the designated AD to
the Director, Balance of
Payments Statistics Division,
Department of
Statistical Analysis and
Computer Services (DESACS),
Reserve Bank
of India, Bandra-Kurla
Complex, Mumbai – 400
706 The Chartered Accountant November 2005
051 for allotment of loan
registration number and
the amount can be drawn
only after obtaining the
loan registration number
from DESACS, RBI.
l The borrower has to be
file ECB – 2 return on
monthly basis with RBI
within 7 days of end of
month.
Major Changes in August
05 guidelines of RBI
RBI has introduced major
structural changes in its ECB
policy to promote the growth
of infrastructure sector as well
the Housing Finance Companies.
The guidelines also seek
to curb money laundering.
l Non-banking financial
companies (NBFCs) have
been permitted to raise
ECB/FCCB with minimum
average maturity of
5 years from multilateral
financial institutions, reputable
regional financial
institutions, official export
credit agencies and
international banks to
finance import of infrastructure
equipment for
leasing to infrastructure
projects under Approval
Route;
l Housing finance companies
have been permitted
to raise Foreign Currency
Convertible Bonds
(FCCB) by satisfying
the following minimum
criteria: (i) the minimum
net worth during the previous
three years should
not be less than Rs. 500
crore, (ii) a listing on the
BSE or NSE, (iii) minimum
size of FCCB is
$100m (iv) the applicant
should submit the purpose/
plan of utilisation
of funds. The only two
HFCs which fulfill the
criteria are HDFC and
LIC Housing Finance.
HDFC has been looking
to raise around $500m
through an FCCB issue.
According to bankers,
the new norms will deter
smaller companies from
tapping this route;
l This move is likely to benefit
the country’s biggest
mortgage lender HDFC
- provided they have a
minimum net worth of
Rs. 500 crore;
l The limit for prepayment
of ECB without prior approval
of RBI has been
increased to USD 200
million (as against the
existing limit up to USD
100 million) subject to
compliance of applicable
minimum average maturity
period for the loan;
l Currently, domestic rupee
denominated structured
obligations are permitted
by the Government of India
to be credit enhanced
by international banks/
international financial
institutions/joint venture
partners. Such applications
would henceforth
be considered by the Reserve
Bank under the approval
Route;
l RBI has mandated that
overseas organisations
planning to extend ECBs
would have to furnish
a certificate of due diligence
from a bank abroad,
which in turn is subject to
host-country regulation
and adheres to Financial
Action Task Force
(FATF) guidelines. It has
been widely perceived
that promoters, having
siphoned out money in
the past through irregular
forex transactions, are
bringing back the money
through the ECB route.
Guidelines of Finance
Ministry
The finance ministry recently
issued amendment to
the ‘Issue of FCCBs and Ordinary
Share (through Depository
Receipt Mechanism)
Scheme 1993’ to align it with
SEBI’s guidelines on domestic
capital issues. The Government
has barred tainted
companies to subscribe GDR
and FCCB of Indian companies
. The salient features of
amendment are as follows:
For listed companies
(a) Eligibility of issuer: An Indian
Company, which is not
eligible to raise funds from
the Indian Capital market including
a company which has
been restrained from accessing
the securities market by
the SEBI will not be eligible
to issue FCCBs and ordinary
shares through GDRs;
(b) Eligibility of subscriber:
Erstwhile Overseas Corporate
Bodies (OCBs) who are
not eligible to invest in
India through the portfolio
route and entities prohibited
to buy, sell or deal in
securities by SEBI will not
be eligible to subscribe to
FCCBs and ordinary shares
through GDRs;
(c) Pricing: The pricing of
GDR and FCCB issues
should be made at a price not
less than the higher of the
following two averages:
(i) The average of the
weekly high and low
of the closing prices
of the related shares
quoted on the stock
exchange during
the six months preceding
the relevant
date;
(ii) The average of the
weekly high and low
of the closing prices
of the related shares
quoted on a stock
exchange during the
two weeks preceding
the relevant date.
November 2005 The Chartered Accountant 707
The “relevant date” means
the date thirty days prior to
the date on which the meeting
of the general body of shareholders
is held, in terms of
section 81 (IA) of the Companies
Act, 1956, to consider
the proposed issue.
(d) Voting rights: The voting
rights shall be as per the
provisions of the Companies
Act, 1956 and in a manner in
which restrictions on voting
rights imposed on Global Depositary
Receipt issues shall
be consistent with the Company
Law provisions. RBI
regulations regarding voting
rights in the case of banking
companies will continue to be
applicable to all shareholders
exercising voting rights.
For unlisted companies
Unlisted companies, which
have not yet accessed the
GDR / FCCB route for raising
capital in the international
market would require prior
or simultaneous listing in the
domestic market, while seeking
to issue FCCB and ordinary
shares under the scheme.
It is also clarified that Unlisted
companies, which have
already issued GDRs/FCCBs
in the international market,
would now require to list in
the domestic market on making
profit, beginning financial
year 2005-06 or within three
years of such issue of Global
Depositary Receipts / Foreign
Currency Convertible Bonds,
whichever is earlier.
Pitfalls
According to RBI, since
companies can prepay their
FCCB loans, overseas investors
could exit as soon as there
is a downturn in economy
and the interest rates in overseas
economy increase, even
though the maturity period
is for 5 years. This could also
lead to a spurt in the quantity
of short-term debt in the
country.
Moreover, while the current
RBI Policy seeks to liberalise
the fund raising avenues,
the excessive forex reserve in
Indian economy is having a
negative effect on the earnings
of IT and export companies.
Taxation on Foreign
Currency Convertible
Bonds
The pronouncements on
tax treatment of Interest and
dividend payments on FCCB
are contained in section 115
AC of the Income Tax Act,
1961 and summarised as under:
(1) Interest payments on the
bonds, until the conversion
option is exercised,
are subject to deduction
of withholding Tax
(TDS) @ 10 per cent.
(2) Tax on dividend on the
converted portion of the
bond are subject to deduction
of tax at source at
the rate of 10 per cent.
(3) Conversion of FCCB into
shares shall not give rise
to any capital gains liable
to Income- tax in India.
(4) Transfers of FCCB made
outside India by a nonresident
investor to another
non-resident investor
shall not give rise to
any capital gains liable to
tax in India. It shall however
be subject to capital
Gain taxation rules of the
country of residence.
The foreign resident is
not required to file any return
before the Indian Tax Authorities,
if its Indian taxable
income contains only income
from other sources.
FCCB Market & analysis of
FCCB issued
The FCCB market is basically
a limited market consisting
of FII, Banks, Mutual
Funds and HNIs. As per a
Study conducted by India
Brand Equity Foundation,
India Inc emerged as the biggest
issuer of foreign currency
convertible bonds (FCCBs)
in the Asia-Pacific region in
2005. Total FCCBs issued
from India were to the tune of
$1.4 bn, accounting for 32.7
per cent share, while Taiwanese
companies ranked second
and raised $1bn. Further, out
of about 30 FCCB issues in
the Asia-Pacific region, 15
were from India and 6 from
Taiwan.
Indian companies that
raised FCCBs from the market
in the year 2005 included
Tata Chemicals, Jaiprakash
Associates, Glenmark, Tata
Power, Bharat Forge, Amtek
Auto and Ballarpur Industries.
Corporates that hit the
market in the first half of last
year included Reliance Energy,
Indian Hotels, Bharti
Tele, and Ashok Leyland.
The FCCB issuance of
following companies were
studied and analysed to gain
an understanding of FCCB
pricing, its structuring and
other related matters:
Tata Motors Limited has
raised over US$ 400 Million
through issue of FCCN
aggregating to Rs. 2215.56
Crores at issue. The first issue
of FCCN was made in 2003
at a coupon of 1 per cent. The
Note holders have an option
to convert the same into
Ordinary shares or ADS at
an initial conversion price of
Rs. 250.745 at a fixed exchange
rate conversion. Company
has raised US$60mn
unsubordinated unsecured
Foreign Currency Convertible
Bonds (FCCBs) due in
2010 to raise funds for meeting
capital expenditure and
overseas investment and to
prepay existing foreign currency
debt. The bonds will be
convertible into Aurobindo
Pharma’s ordinary shares.
The five-year zero-coupon
708 The Chartered Accountant November 2005
bonds have a yield-to-maturity
of 6.95 per cent per annum
and the convertible price
has been set at Rs. 522 or 43
per cent to the weighted average
price of the company’s ordinary
shares on the National
Stock Exchange of India Ltd.
(NSE). The bonds will be issued
at par and redeemed at
139.954 per cent of par on
maturity. The issuer has the
right to redeem all outstanding
bonds at their accreted
principal amount on or after
February 2008 if the parity
of the bonds (in US Dollar
terms) trades for a specified
period of time at 130 per cent
or more of the accreted principal
amount.
Tata Power Company issued
a $ 200 million foreign
currency convertible bond
(FCCB) in Feb. 2005. The
company had earlier launched
a $200 million, 5-year FCCB
issue carrying a 1 per cent coupon,
convertible at a 50 per
cent premium over the closing
share price on February 8, 2005
and bearing a yield to maturity
(YTM) of 3.88 per cent compounded
semi-annually. These
bonds are listed on the Singapore
Stock Exchange.
Tata Teleservices, successfully
completed an issue of
FCCB aggregating to US $
125 million in June 2004. The
FCCBs are convertible into
fully paid-up equity shares of
the company at the option of
the FCCB holders at a conversion
price of Rs.24.96 per
share. Up to March 31, 2005
FCCBs of US $ 46.96 million
have been converted.
Reliance Energy Limited,
has issued two series of FCCB
till date, first being US$ 120
Million, 0.5 per cent FCCB
due on 25th Sep. 2007 and
other US$ 178 Million, ZCB
due on 29th March, 2009.
While the former FCCB
(listed on Luxembourg Stock
Exchange) has an option to
convert into GDR anytime
after 25th Dec 2002 represented
by Equity shares at Rs.
245 at fixed exchange price of
1 US$ = Rs. 48.35. The latter
ZCB (Listed on Singapore
Stock Exchange) are convertible
into Equity shares
or GDR represented by Equity
shares at a predetermined
price of Rs. 1006.92 at a predetermined
exchange rate of
1 US$ = Rs. 45.24.
Aurobindo Pharma Ltd.
(APL) has raised US$60 mn
unsubordinated unsecured
FCCBs due in 2010 to raise
funds for meeting capital expenditure
and overseas investment
and to prepay existing
foreign currency debt. The
bonds will be convertible into
Aurobindo Pharma’s ordinary
shares. The 5 year zero-coupon
bonds have a yield-tomaturity
of 6.95 per cent per
annum and the convertible
price has been set at Rs 522
or 43 per cent to the weighted
average price of the company’s
ordinary shares on the
National Stock Exchange of
India Ltd. (NSE). The bonds
will be issued at par and redeemed
at 139.954 per cent of
par on maturity. APL has the
right to redeem all outstanding
bonds at their accreted
principal amount on or after
February 2008 if the parity
of the bonds (in US Dollar
terms) trades for a specified
period of time at 130 per cent
or more of the accreted principal
amount. The Bonds are
listed on the Stock Exchange
of Singapore.
Indian Hotel Limited issued
FCCB which reduced its
cost of borrowings from 6.9
per cent to 3.6 per cent. Similarly,
conversion of FCCB
and repayment of loans reduced
its interest burden from
by 36.5 per cent YOY from
Rs. 91 mn in Q1 FY05 to
Rs. 58 mn in Q1 FY06.
United Phosphorous limited
made an issue of FCCBs
aggregating to US $ 75 million,
on 6th October, 2004.
FCCBs aggregating to US $
52.20 million have been converted
into equity shares as
on 31.3.2 resulting in increase
in the paid up capital of the
Company.
Jubilant Organosys Ltd.,
a composite pharmaceuticals
industry player, has announced
its FCCB Scheme
recently. The Company will
issue FCCB for US$ 75 million
(approximately Rs. 3.25
billion) unsecured having Zero
coupon for 5 year tenor with
an upsizing option of US$
25 million (approximately
Rs. 1.08 billion). The FCCB
has a 50 per cent conversion
premium at Rs.1365.32
per share. The FCCB will be
listed on the Singapore Stock
Exchange. The FCCBs will
be convertible into Rupee
stock listed on National Stock
exchange (NSE) and Bombay
Stock Exchange (BSE) or
GDSs listed on Luxemburg
Stock Exchange at the option
of the holder.
Conclusion
India Inc has been using
the FCCB window as a major
finance-raising tool for meeting
its capex requirement
at competitive rates and the
present regulatory regime has
fully supported the Industry’s
efforts to meet its financing
needs. The quality of Indian
paper has also gained widespread
International acceptability
and is expected to
further momentum in coming
years. The Industry needs
to ensure that faith and trust
of Government and regulators
are upheld particularly in
view of emphasis of the Government
to curb money laundering.
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