International Joint Ventures and Merger & Acquisitions

Foreign Currency Convertible Bonds

September 12, 2016

The FCCB’s, which are a special category of bond instruments, have played an important role in...

The FCCB’s, which are a special category of bond instruments, have played an important role in fueling the growth and internationalization of the Indian multi-nationals. Whether it is funding modernization or a foreign acquisition, or facilitating import of capital goods or onward lending, FCCB’s have been a crucial tool used by Indian companies for pursuing their strategic growth initiatives, especially in the last decade.

By the multi-pronged facets in its character – being a quasi-debt instrument providing competitively-priced funds in a foreign currency yet providing liquidity on the stock exchange – the Foreign Currency Convertible Bonds are a very good option for an emerging Indian company which has a ‘global’ outlook and is constantly dealing in foreign currencies.

Since FCCB’s are required to be issued in accordance with the guidelines of the RBI and SEBI, keeping in view the ECB and FDI norms and the various schemes & regulations with respect to Issue of Securities, the issuance of FCCB’s requires a careful analysis of the business growth needs, corporate finance structure, and the financial market sentiments.

FCCB’s Explained

A foreign currency convertible bond (FCCB) is a quasi-debt instrument with a dual character. It acts like a bond having regular interest and principal payments, but these bonds can be converted into stock (equity shares) at the option of the bondholder. The investor / bondholder can convert the bonds into equity shares either immediately after issue, or upon maturity, or during a set period, at a pre- determined price.

The issue of FCCB is governed by Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (the "Regulations").

  • 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
The Regulations define FCCB as:

  • FCCBs are required to be issued in accordance with the:
  • Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through depository receipt mechanism) Scheme, 1993 (“Scheme”),
  • Master Circular on External Commercial Borrowing (“ECB”), issued by the Reserve Bank of India (RBI),
  • Foreign Direct Investment (“FDI”) Master Circular and Sectoral Caps,
  • FEM (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000
  • FEM (Transfer or Issue of any Foreign Security) Regulations, 2000

FCCB Participants

The main participants during the issuance of FCCB are:

  • Issuer
  • Local legal advisor
  • Local accountants
  • Local custodian
  • Lead Manager
  • Depository bank
  • Overseas legal advisor
  • Escrow bank

Eligibility to issue FCCB

In order to bring the Scheme in alignment with Securities and Exchange Board of India (“SEBI”) guidelines on domestic capital issues, the Ministry of Finance, Government of India amended the same in August 2005 to include the following provisions:

  • 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 Securities and Exchange Board of India (SEBI) will not be eligible to issue Foreign Currency Convertible Bonds under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993.
  • Unlisted Indian Companies issuing Foreign Currency Convertible Bonds shall be required to simultaneously list in the Indian Stock Exchange.
The FCCBs to be issued will have to conform to the Foreign Direct Investment Policy (including Sectoral Cap and Sectors where FDI is permissible) of the Government of India as announced from time to time and the Reserve Bank’s Regulations issued from time to time.

Issues of FCCBs were earlier not within the scope of the automatic route and required the prior approval of the Ministry of Finance. Now, FCCB can be accessed through two modes: (1) automatic route and (2) approval route. Under the automatic route, no approval is required from RBI. Indian companies are eligible to raise an aggregate principal amount of upto US$ 750 million under the automatic route. Minimum average maturity for FCCBs upto US$ 20 million should be three years and for FCCBs between US$ 20 million and US$ 750 million, five years.

Utilization of Proceeds from FCCB’s

The proceeds from the issue of FCCBs are permitted to be utilized only for the following end uses:

  • for investment such as import of capital goods,
  • for new projects, modernization/expansion of existing production units] in real sector - industrial sector including small and medium enterprises (SME), infrastructure sector and specified service sectors, namely, hotel, hospital, software in India.
  • for overseas direct investment in Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/ WOS abroad.
  • for utilization of ECB proceeds is permitted for first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares.
  • for Interest During Construction (IDC) for Indian companies which are in the infrastructure sector, where “infrastructure” is defined as per the extant ECB guidelines, subject to IDC being capitalized and forming part of the project cost.
  • for lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building by NGOs engaged in micro finance activities.
  • for payment for Spectrum Allocation.
  • for Infrastructure Finance Companies (IFCs) i.e. Non Banking Financial Companies (NBFCs) categorized as IFCs by the Reserve Bank, are permitted to avail of ECBs, including the outstanding ECBs, up to 50 per cent of their owned funds, for on-lending to the infrastructure sector as defined under the ECB policy.

Favourable Opportunities available through FCCB’s

When FCCB’s are issued, the principal and the coupon interest rate accrues over the tenor of the bond period, and at the end of the tenor the investor / bondholder has the option of either converting some or all of the bonds, with accrued interest, into equity shares at a predefined “conversion” price, or demand the principal plus interest, in the denominated foreign currency.

With capital markets showing signs of cautious recovery and with the rupee trading at all-time-low figures against the foreign currencies, the FCCB might prove to be a prudent mode of corporate financing for growing Indian companies, in the coming years.

ILO Consulting is well placed to facilitate placement of Foreign Currency Convertible Bonds, through its international partner network in over 30 countries, with tie-ups with Foreign Investments Banks, Law Firms and Corporate Finance Boutiques, wherever necessary.

We can provide turnkey assistance to Indian companies in structuring the transaction and advice on the terms of issuance, complying with local regulatory requirements, and timing of the FCCB issue.

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