Wednesday, August 11, 2010

FCCB - What?

Foreign Currency Convertible Bonds (FCCBs) are debt instruments issued in a currency different than the issuer’s domestic currency with an option to convert them into common shares of the issuer company at the option of the lender. FCCB acts
like a bond by making regular coupon and principal payments and also gives the bondholder the option to convert the bond into a pre-specified number of equity shares.

● FCCB issues have a ‘Call’ and ‘Put’ option to suit the structure of the Bond. In India, both the options are subject to RBI guidelines.
● FCCBs are of either secured or unsecured type and can be converted into Indian shares or ADRs/GDRs (Depository Receipts).

Regulatory View
● FCCBs can be raised through automatic route by all Indian corporates except by financial intermediaries such as Banks, FIs, NBFCs, etc. For the financial institutions dealing exclusively with infrastructure or export finance and banks, FCCB issues have to be approved by the RBI.
● RBI approval is not required for issues up to $500 million during the financial year and this form of financing is treated as FDI and companies have to comply with sectoral FDI regulations. The funds generated should be parked abroad until the actual requirement arises.
● FCCB proceeds should be used for investment purposes and for overseas direct investment in JVs or wholly owned subsidiaries, or acquisition of shares in divestment process etc.
● FCCB coupon rates are capped: 6 month LIBOR plus 300 bps for 3 to 5 year FCCBs; 6 month LIBOR plus 500 bps for FCCBs above 5 years.

Pricing & Buy-back
● FCCB issues are priced higher than the average of weekly high & low of the closing prices of the issuer company, subject to certain conditions for calculating the average price. The option price is fixed at a premium of around 30% to 70% to the prevailing stock price.
● The right to buyback is vested with the issuer of FCCBs. However, the actual buyback is subject to the consent of the bondholders.
● Buy back of FCCBs upto $500 million does not require RBI’s approval but the buyback value should be at a minimum discount of 15% on the book value and the buyback is to be funded by existing foreign currency funds held either in India or abroad.

● The issuer has a possibility to skip paying the interest/principal on the FCCBs if the stock price appreciates, while the lender can have an option to take advantage of any favourable movement in the stock prices, apart from earning regular interest/principal payments.
● FCCBs carry a low/zero coupon rate, providing the issuer company with low cost funding.

● If FCCBs are not converted into equity shares on account of depressed stock prices, there can be a sizeable redemption liability for issuing companies, along with regular interest expenses.
● Conversion of FCCBs can result in equity dilution for the promoter group.

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