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SALVUS CAPITAL ADVISORS PVT. LTD.
A research report on



FOREIGN CURRENCY CONVERTIBLE BOND BY INDIAN COMPANIES

A research report on Foreign Currency Convertible Bond by Indian Companies
Page 2

TABLE OF CONTENTS
Overview ........................................................................................................................................................................................ 3
Regulations.................................................................................................................................................................................... 3
Eligible Borrowers ............................................................................................................................................................... 3
Recognized Lenders ............................................................................................................................................................ 4
Amount and Maturity ......................................................................................................................................................... 4
All-in-cost ceiling .................................................................................................................................................................. 5
End Use ...................................................................................................................................................................................... 5
Procedure ................................................................................................................................................................................. 6
Guarantees ............................................................................................................................................................................... 6
Security ...................................................................................................................................................................................... 6
Parking of FCCB proceeds overseas ............................................................................................................................ 6
Prepayment ............................................................................................................................................................................. 7
Refinance of existing FCCB .............................................................................................................................................. 7
Debt servicing ......................................................................................................................................................................... 7
Taxation on FCCB ....................................................................................................................................................................... 7
Market Analysis .......................................................................................................................................................................... 7
Amount of FCCB raised over the previous year on a monthly basis .......................................................... 7
Purpose wise distribution of FCCB during March10- februray 11 ........................................................... 8
Benefits of FCCB .................................................................................................................................................................... 8
Disadvantages of FCCB ...................................................................................................................................................... 8
Translational Lossses ......................................................................................................................................................... 8
Major Issues with FCCB .......................................................................................................................................................... 9
Major Advisors for FCCB in India ...................................................................................................................................... 9
Future Outlook ............................................................................................................................................................................ 9
REcent FCCB Issues................................................................................................................................................................ 10
Abrreviations ............................................................................................................................................................................ 10







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OVERVIEW
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, Foreign Currency Convertible Bond
(FCCB) is emerging as a preferred instrument for corporate financing with large number of
FCCBs being issued over the past few years.
A FCCB is a mix between a debt and equity instrument issued in a currency different than the
issuers domestic currency. It acts like a bond by providing regular coupon and principal
payments but at the same time gives bondholders the option to convert the bond into stock.
FCCBs are generally issued by companies having high promoter shareholding in order to
minimize the risk of losing control in case of conversion. Additionally, FCCB can be traded in
parts (debt and equity) or in full based on the holders risk profile. They can be secured or
unsecured but FCCB issues by Indian companies are generally unsecured. Also, FCCB are
usually listed to increase its liquidity.
REGULATIONS
In India, FCCBs can be accessed through automatic and approval route. Major regulators
governing the FCCBs in India are Exchange Control Department of RBI and FCCB Division in
Department of Economic Affairs at Ministry of Finance. FCCB policy aims at keeping maturities
long, costs low and encourages infrastructure and export sector financing so as to ensure
overall growth of the economy.
FCCB policy focuses on three aspects:
Eligibility criteria for accessing external markets
Total amount of borrowings to be raised and their maturity structure
End use of the funds raised
The policy for ECB is also applicable to FCCB. In addition to that, issue of FCCBs is also required
to adhere to FEMA regulations and in accordance with the scheme viz., "Issue of Foreign
Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism)
Scheme, 1993.
ELIGIBLE BORROWERS
AUTOMATIC ROUTE
1. Companies except financial intermediaries
2. Units in Special Economic Zones( SEZ)
3. NGOs engaged in micro finance activities


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APPROVAL ROUTE
1. Infrastructure or export finance companies such as IDFC, IL&FS, Power Finance
Corporation, IRCON, Power trading corporation and EXIM bank
2. Banks and financial institutions which participated in the textile or steel restructuring
package
3. NBFCs to finance import of infrastructure equipment for leasing
4. Multistate Co-operative society engaged in manufacturing activities
5. Housing Finance Companies which satisfies the following conditions:-
a. Minimum net worth of not less than Rs. 500 Crores during the past 3 years
b. Listing on the BSE or NSE
c. Minimum size of FCCB is USD 100 million
d. Applicant should submit the purpose / plan of utilization of funds
RECOGNIZED LENDERS
1. Internationally recognized sources such as international banks, international capital
markets, and multilateral financial institutions such as IFC, ADB and CDC, export credit
agencies, suppliers of equipment, foreign collaborators and foreign equity holders.
2. Overseas organizations and individuals with a certificate of due diligence from overseas
bank adhering to host country regulations (applicable only under the automatic route).
In case of foreign equity holders to be eligible as recognized lender, it would require minimum
holding of paid-up equity in the borrower company. These are:-
AUTOMATIC ROUTE
For FCCBs up to USD 5 million at least 25 percent to be held directly by the lender
For FCCBs more than USD 5 million - at least 25 percent to be held directly by the lender
and proposed FCCB should not exceed four times the direct foreign equity holding
APPROVAL ROUTE
At least 25 percent to be held directly by the lender but proposed FCCB exceeds four
times the direct foreign equity holding.
AMOUNT AND MATURITY
AUTOMATIC ROUTE
Maximum Amount of FCCB in a financial year
Companies other than those in hotel, hospital and software sectors - USD 500 million
Companies in services sector viz. hotels, hospitals and software sector - USD 100 million
NGOs engaged in micro finance activities - USD 5 million
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Minimum Maturity Period
FCCBs up to USD 20 million 3 years
FCCBs between USD 20 million and USD 500 million 5 years
APPROVAL ROUTE
Corporate can avail an additional amount of USD 250 million with average maturity of more
than 10 years over and above the existing limit of USD 500 million under the automatic route.
ALL-IN-COST CEILING
All-in-cost includes rate of interest, other fees and expenses in foreign currency except
commitment fee, pre-payment fee, withholding tax payment and fees payable in Indian Rupees.
Currently, six month LIBOR rate is 0.43050% with all-in-cost ceiling as follows:
Average Maturity Period All-in-cost Ceilings over six month LIBOR
Three to five years 300 basis points
More than five years 500 basis points

EFFECTIVE ALL IN COST CEILING OVER THE PAST 5 YEARS

END USE
Permitted for
1. Investment (such as import of capital goods, new projects, modernization/expansion of
existing production units) in industrial sector including SMEs and infrastructure sector.
2. Overseas direct investment in Joint ventures and Wholly owned subsidiaries
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
2005 2006 2007 2008 2009 2010
6 Month LIBOR
Effective Ceiling Three to five
years
Effective Ceiling More than
five years
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3. First stage acquisition of shares in the disinvestment process and in the mandatory
second stage offer under the Governments disinvestment program of PSU shares.
4. NGOs engaged in micro finance activities can utilize the proceeds for
a. lending to self-help groups
b. micro credit
c. bonafide micro finance activity including capacity building
Not permitted for
1. On-lending or investment in capital market or acquiring a company
2. Investment in real estate
3. Working capital, general corporate purpose and repayment of existing rupee loan
PROCEDURE
AUTOMATIC ROUTE
Borrower enters into a loan agreement with the lender
Submits the agreement to RBI for registration
APPROVAL ROUTE
Borrower submits the application through Authorized Dealer (AD) to RBI
GUARANTEES
Issuance of guarantee, standby letter of credit, and letter of undertaking or letter of comfort by
banks, financial institutions and NBFCs relating to FCCB is not permitted.
SECURITY
Choice of security is left to the borrower but in case of creation of charges over immovable
assets and financial securities such as shares is subjected to FEMA regulations.
PARKING OF FCCB PROCEEDS OVERSEAS
FCCB proceeds should be invested overseas until the actual requirement in India. These
investments should be liquid in nature so that they can be liquidated as and when required by
the borrower. These investments include:-
1. Deposits or Certificate of Deposit or other products offered by banks rated not less than
AA(-) by Standard and Poor/Fitch IBCA or Aa3 by Moodys
2. Deposits with overseas branch of an authorized dealer in India
3. Treasury bills and other monetary instruments of one year maturity having minimum
rating as indicated above

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PREPAYMENT
Prepayment up to USD 200 million is allowed by ADs without prior approval of RBI but
minimum average maturity period needs to be maintained. For prepayment more than USD 200
million, approval from RBI is required.
REFINANCE OF EXISTING FCCB
Refinancing of FCCBs is allowed but outstanding maturity of the original loan needs to be
maintained.
DEBT SERVICING
Designated Authorized Dealers (ADs) make remittances of installments of principal, interest
and other charges.
TAXATION ON FCCB
Interest payment on the bonds until the conversion option is exercised is subjected to
TDS
Tax on dividend on the converted portion of the bond is subjected to TDS
Conversion of FCCB does not give rise to any capital gain liability in India
Transfers of FCCB made by a non-resident investor to another non-resident investor
does not give rise to any capital gain liability in India
MARKET ANALYSIS
AMOUNT OF FCCB RAISED OVER THE PREVIOUS YEAR ON A MONTHLY BASIS


0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
U
S
S
D

M
i
l
l
i
o
n
s

2009
2010
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PURPOSE WISE DISTRIBUTION OF FCCB DURING MARCH10- FEBRURAY 11

BENEFITS OF FCCB
Issuers
o Coupon payment on bond is lower due to equity side of bond
o Conversion premium adds to the capital reserves
o Fewer covenants as compared to a syndicated loan or a debenture
Investors
o Assured returns in the form of fixed coupon rate payments
o Ability to take advantage of price appreciation in the stock by the means of
warrants attached to the bonds
o Lower tax liability as compared to pure debt instruments due to lower coupon
rate
DISADVANTAGES OF FCCB
In a falling stock market, there is no demand
When converted into equity, FCCB bring down earnings per share and dilute the
ownership
In the long run, equity is costlier than debt and hence when interest rates are falling,
FCCB are not preferred
Exchange rate risk due to conversion at a future date
TRANSLATIONAL LOSSSES
Translational losses also known as derivative losses are an important aspect of FCCB and arise
due to fluctuation in the foreign exchange. In bearish market conditions, it may happen that the
current market price may become less than the conversion price (price at which the company
agrees to issue the issue the shares on conversion). This leads to the risk of non-conversion and
if the rupee depreciates during this period. Then in such cases repayment of FCCBs will become
costlier and have to book translational losses to the extent the rupee is not hedged.
7%
29%
8%
55%
1%
Import of Capital Goods
Modernisation
Others
Overseas Acquisition
Rupee Expenditure Loc.CG
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Companies should plan for the risk of non-conversion of FCCBs and keep aside some amount of
money every quarter in case investors doesnt exercise their option to convert debt into equity.
Foreign exchange losses are associated with such risk due to fluctuation in exchange rates. But
many of the companies do not recognize or provide for forex losses with the assumption that
the FCCBs will potentially get converted into equity. Companies that were impacted by
translational losses due to FCCBs include Ranbaxy, Wockhardt, Ipca Labs and Orchid Chemicals.
On the other hand, there are also companies which considered the translational losses while
issuing FCCBs. They had agreed for fixed rate of exchange on conversion of rupee to dollar at the
time of redemption of FCCBs. For example, Aurobindo Pharma at the time of FCCB issue fixed
the exchange rate on conversion at Rs 45.15 per US dollar.
MAJOR ISSUES WITH FCCB
1. There is a lack of uniformity in the treatment of corporate financing convertible bonds.
This makes assessing their impact on issuers difficult.
2. Most companies either reduce redemption premium from their net worth or treat it as a
contingent liability. This tends to boost profitability and suppress cost of debt.
3. The current accounting and reporting norms do not allow investors to get a clear view
on the issuer's cost of servicing the debt component of FCCBs and its ability to meet the
repayment obligation if the FCCBs don't get converted into equity.
4. Unlike many other countries, India does not require issuing companies to provide
estimates of full dilution on current earning.
MAJOR ADVISORS FOR FCCB IN INDIA
1. JP Morgan
2. Citigroup
3. Barclays Capital
4. Standard Chartered Plc
5. HSBC Holdings Plc
6. Kotak Mahindra Capital
FUTURE OUTLOOK
We can expect an increase in FCCBs issues by the Indian Companies. This increase can be
attributed to huge spending planned on infrastructure project over the next few years.
Additionally, favorable expectations from stock market due to strong economic growth have
also increased the willingness of foreign investors to participate in FCCBs issues.



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RECENT FCCB ISSUES
Borrower Equivalent
Amount in
USD
Purpose Maturity
Period
(Appx)
Date
Videocon Industries Ltd. 20,00,00,000 Overseas
Acquisition
5 Years Dec-10
Gitanjali Gems Ltd. # 11,00,00,000 Others 5 Years Oct-10
Essar Shipping Ports &
Logistics Ltd. #
28,00,00,000 Overseas
Acquisition
7 Years 1
Month
Aug-10
Saamya Biotech (India) Ltd. 2,00,00,000 Overseas
Acquisition
5 Years Aug-10
Shiv-Vani Oil & Gas
Exploration Services Ltd.
9,50,00,000 Import of Capital
Goods
5 Years 1
Month
Jul-10
Essar Oil Ltd 30,00,00,000 Modernisation 18 Years 6
Months
Jun-10
Valecha Engineering Ltd. 1,50,00,000 Rupee Expenditure
Loc.CG
5 Years 1
Month
May-10
Fortis Healthcare Ltd. 10,00,00,000 Overseas
Acquisition
5 Years May-10
IOL Chemicals &
Pharmaceuticals Ltd.
1,50,00,000 Modernisation 5 Years 1
Month
May-10
Prakash Industries Ltd. 6,00,00,000 Modernisation 5 Years Apr-10
Core Projects &
Technologies Ltd.
7,50,00,000 Overseas
Acquisition
5 Years Apr-10
Kiri Dyes And Chemicals
Ltd
4,75,15,424 Overseas
Acquisition
5 Years 1
Month
Mar-10
OK Play India Ltd. 1,00,00,000 Modernisation 5 Years Dec-10
Prime Focus Ltd# 5,50,00,000 Overseas
Acquisition
5 Years Dec-10
Murli Industries Ltd. 2,30,00,000 New Project 5 Years Dec-10

ABRREVIATIONS
TDS Tax Deducted at Source
ECB External Commercial Borrowing
FCCB Foreign Currency Convertible Borrowing
AD Authorized Dealers
FEMA Foreign Exchange Management Act
RBI Reserve Bank of India
SME Small and Medium Enterprises
SEZ Special Economic Zone
NBFC Non Banking Financial Company
NGO Non Governmental Organization
PSU Public Sector Undertaking


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Vishnu Deuskar
Managing Director
E-mail: vdeuskar@salvuscapital.com

Kamlesh Thakur
Director
E-mail: kthakur@salvuscapital.com

Rahul Saxena
Associate Vice President
E-mail: rsaxena@salvuscapital.com