FCCB in India —an InsightFCCB (Foreign Currency Convertible Bonds) is a bond, issued in a currency different from the issuer's domestic currency. This bond is a mix between the debt and equity instrument and provides the bondholders an option to convert the bonds into equity. This bond gives the issuers an ability to access capital available in foreign markets and make their presence felt in the international market. FCCB are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of price appreciation in the company's stock. Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 defines FCCB to mean bond issued in accordance with this scheme & subscribed by a non-resident in foreign currency & 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 the debt instrument. FEMA Notification No. 120/ RB-2004 i.e. Foreign   Exchange  Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, defines Foreign currency convertible bonds (FCCB) under Regulation 2(g) which reads as: -"Foreign Currency Convertible Bond" (FCCB) means 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" Common Features of FCCB: 

1. FCCB can be either unsecured or secured. But, in practice most of the FCCB issued in India are unsecured;

2. FCCB issues have a ‘Call' and ‘Put' option to suit the structure of the Bond. Both the    options are subject to RBI guidelines;

3. Public issue of FCCB shall be through reputed lead managers and Private placement is permitted subject to certain conditions;

4. It is also possible to issue zero coupon Foreign Currency Convertible Bonds and in this case, the holders of the bond are generally interested to convert the bonds into equity;

5. The yield to maturity of FCCB normally ranges 2-7%;6. FCCB are generally listed to stock   exchange  to increase its liquidity;7. Credit rating of bonds is not mandatory. But, rating can help better marketing of the bonds;8. FCCB Issue related expenses shall not exceed 4% of issue size and in case of private

placement, shall not exceed 2% of the issue size; Eligibility of Issuers: Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1995 provides that an Indian Company, which is not eligible to raise funds from Indian capital market including a company which has been restrained from accessing the securities market by SEBI will not be eligible to issue FCCB and Unlisted

Indian Companies issuing FCCB shall required to simultaneously list in the Indian Capital Market. Pricing Regulations: The pricing of the FCCB issues should be made at a price not less that the higher of the following two averages:(i) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months proceeding the relevant date;(ii) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the two weeks proceeding the relevant date;The relevant date means the date thirty days prior to the date on which the meeting of the general body of shareholders is held, in terms of section 81(1A) of the Companies Act,1956, to consider the proposed issue. Statutory Regulations:RBI RegulationsFCCB are treated as foreign Direct Investment by Government of India. Issues of FCCB have to be complied with sectoral cap of FDI. As per the RBI Regulations, FCCB can be made through (1) Automatic Route or (2) Approval Route. Master Circular on External Commercial Borrowings and Trade Credits issued on July 1, 2009 by RBI vide Circular No. RBI/ 2009-10/27 (Master Circular No. 07/2009-10) contained elaborate guidelines of FCCB issue. Automatic Route:Corporate including those in hotel, hospital, software sectors (registered under the Companies Act, 1956 except financial intermediaries, such as banks, financial institutions (FIs), Housing Finance Companies (HFCs) and Non-Banking Financial Companies (NBFCs) are eligible to raise FCCB.Corporate (other than hotels, hospitals & software sectors) can raise FCCB upto USD 500 million in one financial year.Corporate in hotels, hospitals & software sectors can raise FCCB upto USD 100 million in one financial year for meeting foreign currency &/or rupee capex for permissible end uses. Acquisition of land not permitted.As per Master Circular 2009 the average maturity period of FCCB is as follows:Borrowing upto USD 20 Million or its equivalent in a financial year with a minimum average maturity of 3 years;Borrowing more that USD 20 Million or its equivalent in a financial year and upto USD 500 Million with a minimum average maturity of 5 years; Borrowings upto USD 20 million Can have call/put option provided minimum average maturity norm is Complied with' Parking of Proceeds in Abroad :RBI guidelines provide that funds received through FCCB should be parked abroad till the actual requirements in India or to remit these funds to India, pending utilization for permissible end-uses. RBI has also clarified that parked funds can be invested in short term liquid assets as specified in the guidelines, so that they can be easily liquidated when need arises.

 LRN No.FCCB Issues are required to submit Form 83, in duplicate, duly certified by Company Secretary in Whole Time Practice or Chartered Accountant to the designated AD. One copy of the Form 83 should be forwarded by AD to Director, Balance of Payments Statistics Division, Department of Statistical Analysis and Computer Services (DESACS), Reserve Bank of India, Bandra-Kurla Complex, Mumbai-400051 for allotment of Loan Registration Number (LRN). Other Legal ObligationsThe borrower has to file ECB -2 return on monthly basis with RBI within 7 days of the end of the month. Disadvantages to the investors:Exchange risk is more in FCCB 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;

1. FCCB means creation of more debt and a FOREX outgo in terms of interest which is in foreign exchange;

2. 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;

3. 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;

4. It will remain as debt in the balance sheet until conversion; Conclusion:FCCB is a good source of raising funds with minimum cost. The procedural aspect is comparatively simple. The company can raise loan without creating security on assets. That is why most of the companies are opting to go for FCCB, though the exchange risk is there

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Monday, February 22, 2010

Pricing Adjustments for FCCBs

On November 27, 2008, the Ministry of Finance introduced changes to the pricing norms for FCCBs. As we had discussed then, two changes were proposed:

(i) the minimum price will be the average weekly high and low prices for the 2 weeks prior to the relevant date, instead of the previous price determined as the higher of the average for 6 months and 2 weeks;

(ii) the relevant date for price determination will the date on which the board decides to issue to securities, and not 30 days prior to the shareholders’ resolution as it earlier stood.

These changes were introduced to overcome the difficulties faced by issuers in appropriately pricing FCCBs in declining market conditions. However, since the altered requirements were applicable prospectively, it did not provide any benefits in relation to FCCBs issued prior to the date of relaxation, being November 27, 2008. In view of representations received from companies and after consultation with RBI and SEBI, the Ministry of Finance last week issued a press release whereby “it has now been decided by the Government to provide a window of 6 months under the scheme to interested companies to revise their conversion price as per new pricing norms. This will be effective from the date of the issue of this Press Note”. In other words, companies that had issued FCCBs prior to the price relaxation effected on November 27, 2008 would also be entitled to the liberalised norms.

The adjustment of conversion price is subject to certain conditions: (i) the issue of shares at revised pricing should not breach FDI limits; (ii) the issuer company should obtain the approval of the board as well as its shareholders for repricing; (iii) the issuer company should enter into a fresh agreement with FCCB holders with the renegotiated conversion price; and (iv) the revision in conversion price should be approved by the RBI.

There are, however, some ambiguities in the new pricing guidelines. While it is clear that a 2-week average will be applied in computing the minimum price, the guidelines appear to be silent as to the date from which the 2-week period will be calculated while repricing the FCCB conversion. As a Business Standard report notes:

The point of confusion is the two-week period preceding the launch of an FCCB issue, which is used to calculate the minimum conversion price based on an average of closing share prices. Bankers are not sure whether to consider the 14 days preceding the original issue or the 14 days before the reset of the conversion price, which companies have now been allowed to undertake. The latter would be much more useful, since it would more closely reflect current market prices and facilitate conversion to equity.…

However, if the original date at which the FCCBs were launched is considered, the new guidelines will bring little benefit to Indian companies, since most instruments were issued during the 2007 bull run in the stock markets.

“During a bull run, the two-week average price would be higher than the six-month average price, whereas in a bear phase it would be opposite,” said an investment banker with a foreign bank.

Corporate law firms contacted by Business Standard are of the opinion that FCCBs can be re-priced according to current market prices.While companies and advisors will have to work with the regulators to achieve a resolution of this ambiguity, it seems that repricing the FCCB conversion as per current market prices will present its own unintended consequences.

From a legal perspective, the question is whether the regulatory intent can be derived from the guideline itself. The press note states that interested companies can “revise their conversion price as per new pricing norms”. The reference to “new pricing norms” is to those introduced on November 27, 2008. These norms include not only the pricing determination but also the “relevant date”, which is the “date of the meeting in which the Board of the company or the Committee of Directors duly authorized by the Board of the company decides to open the proposed issue.” To that extent, the relevant date applies with reference to the date of board meeting for authorizing the issue of the FCCBs and not to a current date when the possible repricing decision is being made.

From a policy perspective, if companies are allowed to reprice their FCCB conversion with reference to the current market price, then companies who are the beneficiaries of the new guidelines (i.e. those who issued FCCBs prior to November 27, 2008) would obtain an additional advantage over companies who issued them thereafter. This would result in a mismatch, and it is not clear if the guidelines were designed with a view to achieve such a result.

http://indiacorplaw.blogspot.com/2010/02/pricing-adjustments-for-fccbs.html

November 2005 The Chartered Accountant 703T H EME

Foreign Currency Convertible Bonds

Foreign Currency Convertible Bonds are attractiveto both investors and issuers. The

investors receive the safety of guaranteed payments on the bond (if interest payment is involved) and are also able to take advantage of any price appreciation in the company’s stock. Bondholders take advantage of this appreciation by means of warrants attached to the bonds, which are activated when there is substantialprice appreciation of the stock. Due to the equity side of the bond, the coupon paymentson the bond are lower,thereby reducing its debt – financing costs for the issuer.FCCB are also referred as FCCN (Foreign Currency Convertible Notes) by someissuers. Bonds of foreign countries are called by various names in International markets. For example in US, overseas bond listed with SEC are called Yankee Bonds, while they are referred to as Bulldog Bonds (in U.K.) and Samurai Bonds (in Japan).Salient Featuresl FCCB is a quasi-debt instrument, which can be converted into a company’s equity shares if the investor chooses to do so, at a pre-determined strike rate.l FCCB issues have a ‘Call’ and ‘Put’ option to suitthe structure of the Bond.A call option entitles theissuer to “ Call ” the loanand make an early redemption.On the otherhand, a put option entitlesthe lender to exercisethe option to convert theFCCB into equity, boththe options are subject toRBI guidelines.l The interest componentor coupon on FCCBs isgenerally 30 per cent -40per cent less than on normaldebt paper or foreigncurrency loans or ECBs.This translates to costsaving of approx 2-3 percent p.a.l The coupon on bondscan also be zero as in caseof zero coupon Bonds(ZCB) in view of attractivenessof options attachedto them. In case ofZCB, the holder is basicallyinterested in eitherconversion of the bondsin equity or capital appreciation.l The redemption of

FCCB can be made at apremium or at par or evenat a discount dependingupon the coupon offered.The Present valueof overall remaining cashflow determines the valuationof Bonds e.g. out of3 series of FCCN issuedby Tata Motors Limited,1 per cent FCCN of 2003are redeemable on July31 2008 at 116.824 percent of Principal, whereasZero Coupon FCCN ofForeign Currency Convertible Bonds (FCCB) are debtinstruments issued in a currency different than the issuer’sdomestic currency with an option to convert them in commonshares of the issuer company. It’s a quasi debt instrumentto raise foreign currency funds at attractive rate. FCCBacts like a bond by making regular coupon and principal payments;and also gives the bondholder an option to convert thebond into stock.2004 will be due for redemptionat 95.111 percent of principal.l The Yield to Maturity(YTMs) in case of FCCBsnormally rangesfrom 2 per cent to 7 percent.l FCCB are generally issuedby Corporate, whichhave high promotershareholding and hencedo not perceive any riskof losing managementcontrol even after exerciseof conversion option.l The pricing of the FCCBoptions is generally between30 per cent - 70per cent premium overthe Current Market Pricegiving sufficient cushionto the issuer. The FCCBholder opts to convert theFCCB, in case the marketprice exceeds the optionprice or if there is anintent to make strategicinvestment by the lender

irrespective of the stockprice in market.l In many cases, the FCCBissuer as well looks forwardto exercise of optionby lender, so that there isno fund outflow on redemption.Instead the issuersreserves are inflatedby receipt of premium. Ifhowever, the FCCB hold-The author is themember of the Institute.He can be reached atsanjoy.banka@relianceinfo.com.Sanjoy Banka704 The Chartered Accountant November 2005ers do not opt for conversion,the Issuer has eitherto reissue the bonds tosame holder or scout fora new lender. This alsogives an opportunity fordebt restructuring.l The foreign holder ofFCCB can trade theFCCB in part or in full.That is to say, the holdercan sell the debt partwhile holding the Option;or vice versa. For example,if the holder is a mutualfund, interested only inequity, it may retain theconversion option andsell the Bond, with a calloption to, say, a bank whodoes not want to take equityrisk. The Bank thusbuys debt portion of theFCCB and draws a fixedincome till the bond iscalled up. The seller stillretains the benefit of equityand can call up whenstock price is substantiallyless than the conversionprice - without sacrificingthe liquidity.l The issuance of FCCBlike any incremental borrowinginvariably requiresthe approval of existingconsortium of lenders.

l FCCB can be secured aswell as unsecured. Mostof the FCCB issued byIndian Companies aregenerally unsecured.l FCCB can be subordinatedto existing debtsor they can be unsubordinatedon case to casebasis depending upon thestructure of the deal, itstiming and the presentgearing.l FCCB can be convertedinto Indian Shares orAmerican DepositoryShares (ADS). The allotteeis free to disposeof the shares so receivedupon conversion any timeafter allotment, if there isno lock in clause.l FCCB issue expensesas well as premium onredemption of FCCBare generally charged toSecurities Premium Account.l While a credit rating ofBonds is not mandatory,since Bonds are mostlyissued by top corporatehaving excellent trackrecord, rating definitelyhelps to price the Couponscompetitively.l The issuing companyneed to hedge its forexexposure arising out ofFCCB, till the time of redemptionor conversion.l The right to convert theFCCB into equity canarise any time, startingimmediately after allotmentand can vest for 2-3years.l FCCB carries fewer covenantsas compared to asyndicated loan or a debenture,hence these aremore and more convenientto raise funds.

l FCCB are generally listedto improve liquidity, generallyIndian issuer havelisted at Singapore StockExchange and in manycases also on LuxembourgStock Exchange.Statutory GuidelinesRBI regulationsFCCB have been extremelypopular with IndianCorporate for raising ForeignFunds at competitive rates.FCCB are treated as ForeignDirect Investment (FDI) byGovernment of India. TheGovernment has also liberalisedFCCB guidelines fromtime to time to give impetusto infrastructure developmentand expansion plan of CorporateIndia.The latest comprehensiveguidelines on FCCB arecontained in external commercialborrowings (ECBs)guidelines issued by RBI on1st August, 2005 vide circularno 5 A.P. (DIR Series). Thecircular is fully applicable forFCCB issuance as well.The key highlights of RBIguidelines are as follows:l ECB/FCCB can be raisedunder Automatic route( for specified Industriesonly on meeting specifiedconditions) or on RBI approval.RBI has set up anempowered committee toconsider requests for approval.l The automatic route isavailable to real sector i.e.Industrial sector, speciallyinfrastructure sector-inIndia, while all other sectorshave to take RBI approval.l The eligible borrowersunder the approval routeinclude Financial Institutionsdealing exclusively

with with infrastructureor export finance such asIDFC, IL&FS, PowerFinance Corporation,Power Trading Corporation,IRCON and EXIMBank are considered ona case by case basis. Thelist also includes Banksand financial institutionswhich had participated inthe textile or steel sectorrestructuring package asapproved by the Governmentare also permitted tothe extent of their investmentin the package andassessment by RBI basedon prudential norms. AnyECB availed for this purposeso far are deductedfrom their entitlement.l RBI has recently issueda circular no A.P.(DIRSeries) No. 15 dated 4thNovember, 2005 , wherebySpecial purpose vehicles(SPV) or any otherentity notified by RBI setup to finance infrastrucNovember2005 The Chartered Accountant 705ture companies or projectwill also be treated asFinancial Institutions forthe purpose of considerationof their applicationunder approval route.l The guidelines as statedhereunder are generallysame for approval as wellas automatic route exceptas stated.l Minimum Average Maturityof FCCB shall be3 years for borrowing upto US$ 20 million and 5years in case it exceedsUS$ 20 Million.l The maximum amountof ECB to be raised ina financial year can beUS$ 500 Million. However,there is no limit on

numbers of FCCB to beissued or the size/value ofeach instrument.l ECB/FCCB upto US$20 Million can have call/put option, provided theminimum average maturityperiod of 3 years iscomplied with.l The maximum all in allcost to be incurred onECB/FCCB can not exceedfollowing limits :v Average Maturityperiod of 3-5years- 200 bps over6 month LIBORv Average Maturityexceeding 5 years -350 bps for over 5years LIBOR.l There are strict guidelinesfor monitoring ofend use of ECB proceeds.RBI stipulates that ECBproceeds can be used for(a) investment purposeslike Import of Capitalgoods, New projects,modernisation/expansionprogrammes in Industrialand infrastructure sector(b) Overseas direct investmentin JV or whollyowned subsidiaries abroad(c) Acquisition of sharesin divestment process etc.l RBI Guidelines specificallyprohibit use of ECBproceeds for on lending,investment in capitalmarket, Company takeoveretc. RBI Guidelinesalso specifically prohibituse of ECB proceeds forReal estate Sector, howeverthis can be used fordevelopment of integratedtownships as definedby Government.l No Guarantee, Letter ofComfort, letter of Undertaking

can be issued byBanks, FIs or NBFC relatingto FCCB. RecentRBI circular dated 5thNovember, 2005 permitsbanks to issue guarantees,standby letters of credit,letters of undertaking orletters of comfort in respectof ECB by textilecompanies for modernisationor expansion oftheir textile units underapproval Route subject toprudential norms. This islikely to facilitate capacityexpansion and technologicalupgradation in theIndian textile industryafter the phasing out ofMulti-Fibre Agreement,l The issue of security isleft at the discretion of IssuerCompany, subject toother extant guidelines.In case any charge is requiredto be created onimmoveable properties oron any financial securitiesin favour of lender, thensuch charge can be createdas per provisions ofFEMA.l One of the major changesintroduced by RBI ischecking the credentialsof lender by seeking certificateof due diligenceissued by their OverseasBanker. In case of Individuallender, the Bankersverification is required.If “Know your CustomerGuidelines” are not implementedin the countryof residence of Lender,then such lenders can notfinance under FCCB.l Prepayment of FCCBis permitted upto US$200 Million subject tocompliance of minimum

average maturity period.For higher prepaymentamount, RBI approval isneeded.l RBI guidelines providethat funds receivedthrough FCCB shouldbe parked abroad till theactual requirement arisesin India. This has beennecessitated due to bloatingforex reserve of India,which has led to hugedepreciation of rupee visa vis US$. RBI has alsoclarified that the parkedfunds can be invested inshort term liquid assetsso that they can be easilyliquidated when thefunds are needed in India.The permitted mode ofinvestment are (a) Depositsor Certificate ofDeposits etc offered byBanks of approved rating(b) Deposits with overseasbranch of Indian AD.(c) Treasury bills and othermonetary instrumentsof one year.l FCCB Issuers are requiredto submit Form83, in duplicate, certifiedby the Company Secretary(CS) or CharteredAccountant (CA) to thedesignated AD. Onecopy is to be forwardedby the designated AD tothe Director, Balance ofPayments Statistics Division,Department ofStatistical Analysis andComputer Services (DESACS),Reserve Bankof India, Bandra-KurlaComplex, Mumbai – 400706 The Chartered Accountant November 2005051 for allotment of loanregistration number andthe amount can be drawnonly after obtaining the

loan registration numberfrom DESACS, RBI.l The borrower has to befile ECB – 2 return onmonthly basis with RBIwithin 7 days of end ofmonth.Major Changes in August05 guidelines of RBIRBI has introduced majorstructural changes in its ECBpolicy to promote the growthof infrastructure sector as wellthe Housing Finance Companies.The guidelines also seekto curb money laundering.l Non-banking financialcompanies (NBFCs) havebeen permitted to raiseECB/FCCB with minimumaverage maturity of5 years from multilateralfinancial institutions, reputableregional financialinstitutions, official exportcredit agencies andinternational banks tofinance import of infrastructureequipment forleasing to infrastructureprojects under ApprovalRoute;l Housing finance companieshave been permittedto raise Foreign CurrencyConvertible Bonds(FCCB) by satisfyingthe following minimumcriteria: (i) the minimumnet worth during the previousthree years shouldnot be less than Rs. 500crore, (ii) a listing on theBSE or NSE, (iii) minimumsize of FCCB is$100m (iv) the applicantshould submit the purpose/plan of utilisationof funds. The only twoHFCs which fulfill thecriteria are HDFC andLIC Housing Finance.

HDFC has been lookingto raise around $500mthrough an FCCB issue.According to bankers,the new norms will detersmaller companies fromtapping this route;l This move is likely to benefitthe country’s biggestmortgage lender HDFC- provided they have aminimum net worth ofRs. 500 crore;l The limit for prepaymentof ECB without prior approvalof RBI has beenincreased to USD 200million (as against theexisting limit up to USD100 million) subject tocompliance of applicableminimum average maturityperiod for the loan;l Currently, domestic rupeedenominated structuredobligations are permittedby the Government of Indiato be credit enhancedby international banks/international financialinstitutions/joint venturepartners. Such applicationswould henceforthbe considered by the ReserveBank under the approvalRoute;l RBI has mandated thatoverseas organisationsplanning to extend ECBswould have to furnisha certificate of due diligencefrom a bank abroad,which in turn is subject tohost-country regulationand adheres to FinancialAction Task Force(FATF) guidelines. It hasbeen widely perceivedthat promoters, havingsiphoned out money inthe past through irregularforex transactions, are

bringing back the moneythrough the ECB route.Guidelines of FinanceMinistryThe finance ministry recentlyissued amendment tothe ‘Issue of FCCBs and OrdinaryShare (through DepositoryReceipt Mechanism)Scheme 1993’ to align it withSEBI’s guidelines on domesticcapital issues. The Governmenthas barred taintedcompanies to subscribe GDRand FCCB of Indian companies. The salient features ofamendment are as follows:For listed companies(a) Eligibility of issuer: An IndianCompany, which is noteligible to raise funds fromthe Indian Capital market includinga company which hasbeen restrained from accessingthe securities market bythe SEBI will not be eligibleto issue FCCBs and ordinaryshares through GDRs;(b) Eligibility of subscriber:Erstwhile Overseas CorporateBodies (OCBs) who arenot eligible to invest inIndia through the portfolioroute and entities prohibitedto buy, sell or deal insecurities by SEBI will notbe eligible to subscribe toFCCBs and ordinary sharesthrough GDRs;(c) Pricing: The pricing ofGDR and FCCB issuesshould be made at a price notless than the higher of thefollowing two averages:(i) The average of theweekly high and lowof the closing pricesof the related sharesquoted on the stockexchange duringthe six months precedingthe relevant

date;(ii) The average of theweekly high and lowof the closing pricesof the related sharesquoted on a stockexchange during thetwo weeks precedingthe relevant date.November 2005 The Chartered Accountant 707The “relevant date” meansthe date thirty days prior tothe date on which the meetingof the general body of shareholdersis held, in terms ofsection 81 (IA) of the CompaniesAct, 1956, to considerthe proposed issue.(d) Voting rights: The votingrights shall be as per theprovisions of the CompaniesAct, 1956 and in a manner inwhich restrictions on votingrights imposed on Global DepositaryReceipt issues shallbe consistent with the CompanyLaw provisions. RBIregulations regarding votingrights in the case of bankingcompanies will continue to beapplicable to all shareholdersexercising voting rights.For unlisted companiesUnlisted companies, whichhave not yet accessed theGDR / FCCB route for raisingcapital in the internationalmarket would require prioror simultaneous listing in thedomestic market, while seekingto issue FCCB and ordinaryshares under the scheme.It is also clarified that Unlistedcompanies, which havealready issued GDRs/FCCBsin the international market,would now require to list inthe domestic market on makingprofit, beginning financialyear 2005-06 or within threeyears of such issue of GlobalDepositary Receipts / ForeignCurrency Convertible Bonds,

whichever is earlier.PitfallsAccording to RBI, sincecompanies can prepay theirFCCB loans, overseas investorscould exit as soon as thereis a downturn in economyand the interest rates in overseaseconomy increase, eventhough the maturity periodis for 5 years. This could alsolead to a spurt in the quantityof short-term debt in thecountry.Moreover, while the currentRBI Policy seeks to liberalisethe fund raising avenues,the excessive forex reserve inIndian economy is having anegative effect on the earningsof IT and export companies.Taxation on ForeignCurrency ConvertibleBondsThe pronouncements ontax treatment of Interest anddividend payments on FCCBare contained in section 115AC of the Income Tax Act,1961 and summarised as under:(1) Interest payments on thebonds, until the conversionoption is exercised,are subject to deductionof withholding Tax(TDS) @ 10 per cent.(2) Tax on dividend on theconverted portion of thebond are subject to deductionof tax at source atthe rate of 10 per cent.(3) Conversion of FCCB intoshares shall not give riseto any capital gains liableto Income- tax in India.(4) Transfers of FCCB madeoutside India by a nonresidentinvestor to anothernon-resident investorshall not give rise toany capital gains liable totax in India. It shall however

be subject to capitalGain taxation rules of thecountry of residence.The foreign resident isnot required to file any returnbefore the Indian Tax Authorities,if its Indian taxableincome contains only incomefrom other sources.FCCB Market & analysis ofFCCB issuedThe FCCB market is basicallya limited market consistingof FII, Banks, MutualFunds and HNIs. As per aStudy conducted by IndiaBrand Equity Foundation,India Inc emerged as the biggestissuer of foreign currencyconvertible bonds (FCCBs)in the Asia-Pacific region in2005. Total FCCBs issuedfrom India were to the tune of$1.4 bn, accounting for 32.7per cent share, while Taiwanesecompanies ranked secondand raised $1bn. Further, outof about 30 FCCB issues inthe Asia-Pacific region, 15were from India and 6 fromTaiwan.Indian companies thatraised FCCBs from the marketin the year 2005 includedTata Chemicals, JaiprakashAssociates, Glenmark, TataPower, Bharat Forge, AmtekAuto and Ballarpur Industries.Corporates that hit themarket in the first half of lastyear included Reliance Energy,Indian Hotels, BhartiTele, and Ashok Leyland.The FCCB issuance offollowing companies werestudied and analysed to gainan understanding of FCCBpricing, its structuring andother related matters:Tata Motors Limited hasraised over US$ 400 Millionthrough issue of FCCN

aggregating to Rs. 2215.56Crores at issue. The first issueof FCCN was made in 2003at a coupon of 1 per cent. TheNote holders have an optionto convert the same intoOrdinary shares or ADS atan initial conversion price ofRs. 250.745 at a fixed exchangerate conversion. Companyhas raised US$60mnunsubordinated unsecuredForeign Currency ConvertibleBonds (FCCBs) due in2010 to raise funds for meetingcapital expenditure andoverseas investment and toprepay existing foreign currencydebt. The bonds will beconvertible into AurobindoPharma’s ordinary shares.The five-year zero-coupon708 The Chartered Accountant November 2005bonds have a yield-to-maturityof 6.95 per cent per annumand the convertible pricehas been set at Rs. 522 or 43per cent to the weighted averageprice of the company’s ordinaryshares on the NationalStock Exchange of India Ltd.(NSE). The bonds will be issuedat par and redeemed at139.954 per cent of par onmaturity. The issuer has theright to redeem all outstandingbonds at their accretedprincipal amount on or afterFebruary 2008 if the parityof the bonds (in US Dollarterms) trades for a specifiedperiod of time at 130 per centor more of the accreted principalamount.Tata Power Company issueda $ 200 million foreigncurrency convertible bond(FCCB) in Feb. 2005. Thecompany had earlier launcheda $200 million, 5-year FCCBissue carrying a 1 per cent coupon,convertible at a 50 percent premium over the closing

share price on February 8, 2005and bearing a yield to maturity(YTM) of 3.88 per cent compoundedsemi-annually. Thesebonds are listed on the SingaporeStock Exchange.Tata Teleservices, successfullycompleted an issue ofFCCB aggregating to US $125 million in June 2004. TheFCCBs are convertible intofully paid-up equity shares ofthe company at the option ofthe FCCB holders at a conversionprice of Rs.24.96 pershare. Up to March 31, 2005FCCBs of US $ 46.96 millionhave been converted.Reliance Energy Limited,has issued two series of FCCBtill date, first being US$ 120Million, 0.5 per cent FCCBdue on 25th Sep. 2007 andother US$ 178 Million, ZCBdue on 29th March, 2009.While the former FCCB(listed on Luxembourg StockExchange) has an option toconvert into GDR anytimeafter 25th Dec 2002 representedby Equity shares at Rs.245 at fixed exchange price of1 US$ = Rs. 48.35. The latterZCB (Listed on SingaporeStock Exchange) are convertibleinto Equity sharesor GDR represented by Equityshares at a predeterminedprice of Rs. 1006.92 at a predeterminedexchange rate of1 US$ = Rs. 45.24.Aurobindo Pharma Ltd.(APL) has raised US$60 mnunsubordinated unsecuredFCCBs due in 2010 to raisefunds for meeting capital expenditureand overseas investmentand to prepay existingforeign currency debt. Thebonds will be convertible intoAurobindo Pharma’s ordinaryshares. The 5 year zero-coupon

bonds have a yield-tomaturityof 6.95 per cent perannum and the convertibleprice has been set at Rs 522or 43 per cent to the weightedaverage price of the company’sordinary shares on theNational Stock Exchange ofIndia Ltd. (NSE). The bondswill be issued at par and redeemedat 139.954 per cent ofpar on maturity. APL has theright to redeem all outstandingbonds at their accretedprincipal amount on or afterFebruary 2008 if the parityof the bonds (in US Dollarterms) trades for a specifiedperiod of time at 130 per centor more of the accreted principalamount. The Bonds arelisted on the Stock Exchangeof Singapore.Indian Hotel Limited issuedFCCB which reduced itscost of borrowings from 6.9per cent to 3.6 per cent. Similarly,conversion of FCCBand repayment of loans reducedits interest burden fromby 36.5 per cent YOY fromRs. 91 mn in Q1 FY05 toRs. 58 mn in Q1 FY06.United Phosphorous limitedmade an issue of FCCBsaggregating to US $ 75 million,on 6th October, 2004.FCCBs aggregating to US $52.20 million have been convertedinto equity shares ason 31.3.2 resulting in increasein the paid up capital of theCompany.Jubilant Organosys Ltd.,a composite pharmaceuticalsindustry player, has announcedits FCCB Schemerecently. The Company willissue FCCB for US$ 75 million(approximately Rs. 3.25billion) unsecured having Zerocoupon for 5 year tenor with

an upsizing option of US$25 million (approximatelyRs. 1.08 billion). The FCCBhas a 50 per cent conversionpremium at Rs.1365.32per share. The FCCB will belisted on the Singapore StockExchange. The FCCBs willbe convertible into Rupeestock listed on National Stockexchange (NSE) and BombayStock Exchange (BSE) orGDSs listed on LuxemburgStock Exchange at the optionof the holder.ConclusionIndia Inc has been usingthe FCCB window as a majorfinance-raising tool for meetingits capex requirementat competitive rates and thepresent regulatory regime hasfully supported the Industry’sefforts to meet its financingneeds. The quality of Indianpaper has also gained widespreadInternational acceptabilityand is expected tofurther momentum in comingyears. The Industry needsto ensure that faith and trustof Government and regulatorsare upheld particularly inview of emphasis of the Governmentto curb money laundering.r