What is a Foreign Currency Convertible Bond (FCCB)?

A Foreign Currency Convertible Bond (FCCB) is a type of convertible bond

issued 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 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.

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 the
company stocks

How does it benefit an investor?

It’s not just companies who are benefited with FCCB. Investors too enjoy its
benefits. 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 resulting
to 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:
 • 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 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-resident
investor 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 institutional
placements (QIPs) and issue of foreign currency convertible bonds (FCCBs).

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

“The proceeds of the issues will be utilised for growth capital. There are
opportunities coming up in power, hydrocarbon, railways, road, port, airport,
water management technology and urban infrastructure. The funds will help
strengthen the company’s financial position and allow it to bid for large upcoming
projects. The fund will be utilitsed within 12-24 months,” said L&T executive
president (finance) R Shankar Raman.
L&T has benefited from a construction boom in recent years as India revamps its
airports, roads and adds industrial capacity, and currently holds an order backlog
of 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 dilute
L&T’s equity capital by 1.9 per cent. Citi is the lead book runner for both the
deals.

Shares of the company, which the market values at $21 billion, fell as much as
2.8 per cent in a choppy Mumbai market after the announcement. It closed at Rs
1,649.80, down 1.65 per cent.

Moody’s Investors Service said L&T’s rating was unaffected by the $600 million
fund-raising. “While a step in the right direction, the announced equity and FCCB
issues will only have a limited impact on L&T’s consolidated credit metrics, given
that the company will require additional funding to support its large expansion
plan over the medium term. Therefore, this fund raising exercise has no
immediate impact on its rating or rating outlook,” said Ivan Palacios, Moody’s
analyst.

L&T’s consolidated debt stood at Rs 18,400 crore as of March 2009. Although

the 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 and
infrastructure development sectors.

The company had a cash reserve of Rs 4,000 crore in March this year. Later, it
received Rs 1,200 crore from the sale of 11.5 per cent UltraTech shares to
Grasim Industries, an Aditya Birla Group firm. The company has capital
expenditure 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 issued

by a country in a currency different than the its own currency. This is
the powerful instrument by which the country raises the money in the
form of a foreign currency. 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.

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 in
foreign 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 an
issuing 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 on
the other hand instructs the Overseas Depositary Bank to issue Global
Depositary Receipt or Certificate to non-resident investors against the
shares or bonds held by the Domestic Custodian Bank.

The provisions of any law with regard to the issue of capital by an

Indian company will also be applicable the issue of Foreign Currency
Convertible Bonds or the ordinary shares of an issuing company. The
company 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 company

The Ordinary shares and Foreign Currency Convertible Bonds (FCCB)
that are issued against the Global Depository Receipts are treated as
Foreign Direct Investment (FDI). However total foreign investment
made 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
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 give
rise to any capital gains liable to tax in India.

News Update
In May 2007, at least 10 companies converted FCCBs into equity at a
price decided when the bonds were issued to respective investors. The
list 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 investments
in 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 capital
markets today are amongst the best regulated markets wherein the regulatory framework has
kept pace with the significant growth in the securities markets. The story of Indian capital market
reveals an efficient trading and settlement infrastructure, high levels of disclosure and fostering
an environment of innovation. In this back drop it is seen that a new trend of corporate financing
is gaining ground. The sale of Foreign Currency Convertible Bonds by domestic companies and
banks has surged over the last couple of years. Thus, this article in the first part seeks to examine
some fundamental concepts related to Foreign Currency Convertible Bonds, viz, its nature,
regulatory mechanism, tax treatment, advantages and disadvantages. The second part analyses
whether 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 Convertible
Bonds can be advantageous only in a booming market and cannot be the buzzword in a bearish
market, which the Indian markets did experience a little while back. In a bearish market, listed
companies may resort to Qualified Institutional Placements that have been introduced by SEBI
vide 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 this
regard it is concluded that Press Note released by the Finance Ministry on November 17, 2005
relaxing the pricing guidelines is indeed a step in the right direction.

Source: The Economic Times

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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 some
advantages 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.
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 in
return, 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 bonds
into 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 Foreign
Currency. 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 issuing
company’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.
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 company
stocks.

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 to
refinance 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.

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 Pharma
Hotel Leela
Orchid Chemicals
Tata Motors
Bharat Forge
Suzlon Energy
Amtek Auto
Ranbaxy and many more….

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

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