Foreign Currency Convertible Bonds (FCCB)

Foreign Currency Convertible Bonds (FCCB)

Foreign currency convertible bond (FCCB) is a convertible bond issued by a country in a currency different than the its own currency. This is the powerful instrument by which the country raises the money in the form of a foreign currency. The bond acts like both a debt and equity instrument. Like bonds it makes regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock.

Foreign Currency Convertible Bond Policy in India
Ministry of Finance government of India defines FCCB. According to it:
"Foreign Currency Convertible Bonds" means bonds issued in accordance with this scheme and subscribed by a non- resident in foreign currency and 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 debt instruments; "

What is the criteria for issuing FCCBs?
● Any company who wish to raise the foreign funds by issuing FCCB, require prior permission of the Department of Economic Affairs, Ministry of Finance, Government of India.
● The company issuing the FCCB should have the consistent track record for a minimum period of three years
● The Foreign Currency Convertible Bonds shall be denominated in any freely convertible foreign currency and the ordinary shares of an issuing company shall be denominated in Indian rupees
● The issuing company should deliver the ordinary shares or bonds to a Domestic Custodian Bank as per regulation. The custodian bank on the other hand instructs the Overseas Depositary Bank to issue Global Depositary Receipt or Certificate to non-resident investors against the shares or bonds held by the Domestic Custodian Bank.

The provisions of any law with regard to the issue of capital by an Indian company will also be applicable the issue of Foreign Currency Convertible Bonds or the ordinary shares of an issuing company. The company issuing FCCB, shall obtain the necessary permission or exemption from the appropriate authority under the relevant law relating to issue of capital.

Limits of foreign investment in the issuing company
The Ordinary shares and Foreign Currency Convertible Bonds (FCCB) that are issued against the Global Depository Receipts are treated as Foreign Direct Investment (FDI). However total foreign investment made either directly or indirectly shall not exceed 51% of the issued and subscribed capital of the issuing company.

Taxation on Foreign Currency Convertible Bonds
● Until the conversion option is exercised, all the interest payments on the bonds, is subject to deduction of tax at source at the rate of ten per cent
● Tax exercised on dividend on the converted portion of the bond is subject to deduction of tax at source at the rate of ten per cent
● If Foreign Currency Convertible Bonds ( FCCB ) is converted into shares it will not give rise to any capital gains liable to income- tax in India.
● If Foreign Currency Convertible Bonds (FCCB) is transferred by a non-resident investor to another non-resident investor it shall not give rise to any capital gains liable to tax in India.

News Update
In May 2007, at least 10 companies converted FCCBs into equity at a price decided when the bonds were issued to respective investors. The list includes NIIT, Bharti Airtel, Sun Pharma, Glenmark Pharma, Amtek India, Jain Irrigation Systems and Maharashtra Seamless. FCCB holders have witnessed a significant rise in value of their investments in these companies on the back of a sharp rise in share prices since allotment of the bonds.

Source: The Economic Times