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MEANING AND
INTRODUCTION

A Foreign Currency Convertible Bond is a mix of debt and
equity to raise foreign capital. This bond is issued in a currency different
than the issuers domestic currency. The two options associated with FCCB’s are
to get a regular flow of income and principal and the other being to convert
the bond to equities. A company if desires to raise funds by issuing FCCB’s,
issues it through the Global Depository Receipt. This comes under two
conditions. The company should have

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i)                
ECB upto $20 million or equivalent in a
financial year with minimum average maturity of three years

ii)               
ECB UPTO $20 million and upto $750 million or equivalent
with minimum average maturity of 5 years.

 

The
companies which have a steady cash flow, FCCB is the best option for them to
raise capital

 

GOVERNMENT REGULATIONS IN INDIA

In India, Foreign Currency Convertible Bonds are regulated
by the FCCB Division in the Department of Economic Affairs at Ministry of
Finance, the Exchange Control Department of The Reserve Bank of India, some
provisions mentioned in the Foreign Exchange Management Act and the “Issue of
Foreign Currency Convertible Bonds and Ordinary Shares Scheme ’93.

Some main regulations for the issue of FCCB’s are

·       
Ceiling of $500 million in one financial year

·       
Minimum time to maturity is five years

·       
Floatation Costs (issue related expenses) should
not exceed 4% of issue size.

·       
Issue should be fully compliant with the Foreign
Direct Investment norms

·       
Funds so raised shouldn’t be utilised for investing
in stock market.

·       
Non-Banking Financial Institutions, Financial
Institutions are not supposed to provide a letter of comfort

·       
Call and put option shall not be exercisable
before five years

·       
Coupon rate should be between 0% – 5%

·       
Yield to Maturity rate should be 6% – 8%

·       
Conversion Premium to be around 20% – 30%

 

 

ADVANTAGES AND DISADVANTAGES OF FCCB’s

 

Advantages

Disadvantages

It is a financial instrument which can be moulded
according to the issuers choice

 There is need to refinance if the share price
doesn’t match with the conversion price

Equity is sold at a premium to prevailing share
price

Whenever the company makes an announcement, the share
prices fall. This can then be recovered only in the medium term.

The FCCB is distributed to non-equity investors

It becomes difficult to track these investors

HOW TO RAISE FOREIGN CURRENCY CONVERTIBLE BONDS

 

The Approval route and the Automatic route
are the two ways how FCCB’s can be accessed

 

Basis

Automatic
Route

Approval
Route

Eligible Borrowers

·       
Companies except financial intermediaries
·       
Units in Special Economic Zones

·       
NBFC’s to finance import of infrastructure
equipment for leasing
·       
Multistate Co-operative society engaged in
manufacturing activities

Recognised Lenders

·       
For $5 million, atleast 25% to be held by
lender and the proposal should not exceed 4X Direct Foreign Equity Holding

·       
Atleast 25% to be held be lender but the
proposal exceeds 4X Direct Foreign Equity Holding

Amount and Maturity

Maximum
Amount
·       
Companies other than hotel, hospitals etc. –
$500 million
·       
NGO’s in micro finance activities – $5 million
Minimum Maturity Period
·       
FCCB

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