Foreign currency convertible bond (fccb)

Objective: to find the impact of fccb issue on Indian companies.

Introduction:

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 (listed 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. This bond gives the issuers ability to access capital available in
international market and make their presence felt in international market.

Salient Features of FCCBs

 FCCB can be secured as well as unsecured.

 Issuer Company must have a minimum experience of 3 years consistent

track record of good performance

 FCCBs are generally issued by the Corporate(listed companies) in which the

promoters holdings is at the highest level.

 Amount raised through the mechanism of FCCB should be parked abroad

till the actual requirement raised in India.

Why it’s different?

• Equity
 • Immediate equity dilution

• Dividend distribution

• Debt

• High interest rates in borrowing

• High coupon in Bonds

• ECB limited to Capital goods, capacity augmentation, overseas

acquisitions.

• FCCB

• Low coupon/interest compared to debt

• No immediate dilution of equity

• No cash payment in good market conditions

• All transactions in foreign currency

Benefits to the Company:

 Coupon payment on the bonds are on lower side;

 Reduction in debt financing cost;

 Global presence.

 The issuer company collects the issue proceeds in foreign currency.

Benefit of an investor:
  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

Disadvantages to the investors and companies:

FCCBs 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

RBI’s recent guidelines:

 In December 2008, RBI relaxed guidelines of FCCBs to companies by

allowing premature buy-back of FCCBs through rupee resources

 On March 1st RBI’s recent guidelines

 3, 2009, RBI further liberalised the norms by extending the deadline for
companies to complete the buyback by nine months from March 31, 2009 to
December 31, 2009
  In April 2009, Under approval route, RBI relaxed amount of buy back from
$50 Mn of the redemption value per company to $100 Mn

 The FCCBs bought back/repurchased from the holders must be cancelled

and should not be re-issued or re-sold

Introduction of FCCB Buyback

In 15th nov. 2008 Introduces Buy-back / Pre-payment of Foreign Currency
Convertible Bonds (FCCBs)

There are two routes:

1) Automatic Route:

 Buy back value of FCCBs should be at a minimum discount of 15% on the

BV

 Funds to be used for this purpose will be either existing foreign currency
funds held or out of fresh ECBs

2) Approval Route

 Buy back value of FCCBs should be at a minimum discount of 25% on the

BV

 Funds to be used for this purpose shall be internal accruals; and

 Total amount of buy back shall not exceed US$ 50 Mn

Some case studies:

TATA Chemicals,

TATA telecommunication,
Reliance communication,

ICICI bank