What is a BOND?

"A Bond is simply an 'IOU' in which an

investor agrees to loan money to a
company or government in exchange
for a predetermined interest rate.
When a corporation needs funds, one way
is to arrange funds is from banks or
borrow money. But a generally less
expensive way is to issue (sell) bonds. The
organisation agrees to pay some interest
rate on the bonds and further agree to
redeem the bonds (i.e., buy them back) at
some time in the future (the redemption
date).

What is FCCB?
Foreign Currency Convertible Bond is a type of
convertible bond issued in a currency different than
the issuer's domestic currency.
It is a quasi-debt instrument which 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 any large
price appreciation in the company's stock.
Due to the equity side of the bond, which adds value,
the coupon payments on the bond are lower for the
company, thereby reducing its debt-financing costs.

ISSUE OF FCCBS
An Indian company or a body corporate,
created by an Act of Parliament may issue
FCCBs not exceeding US $ 500 million in
any one financial year to a person resident
outside India under the automatic route,
without the approval from Government or
the Reserve Bank.

 Where the amount of fund to be raised is to

be USD 20 million or less the minimum
maturity period should be not less than
three years.
If the amount to be raised is more than
USD 20 million and upto 500 million the
minimum maturity period should not be
less than 5 years.
FCCBs upto USD 20 million can also carry
a call and put option provided the option
shall not be exercised until minimum
maturity period of 3 years has expired.

 In terms of paragraph (x) of Schedule II of the

notification the issue of FCCB is required to be
reported to the Reserve Bank through the
designated branch of an authorised dealer.
Authorised dealers may forward the same to
the concerned Regional Office of the Reserve
Bank for obtaining a loan registration number.
While forwarding the offer documents to
Reserve Bank the authorised dealers shall
ensure that the FCCBs are issued strictly in
accordance with the notification.

WHY FCCBS ARE POPULAR?

Being hybrid instruments, the coupon rates
on FCCB are particularly lower than pure
debt or zero, thereby reducing the debt
financing cost.
FCCB are book value accretive on
conversion.
Saves the risk of immediate equity dilution
as in the case of public shares.

Lucrative offer for investors: Assured returns to investors on bond in the

form of fixed coupon rate payments.
Ability to take advantage of price appreciation
in the stock by means of warrants attached to
the bonds, which are activated when price of a
stock reaches a certain point.
Significant Yield to Maturity (YTM) is
guaranteed at maturity.Lower tax liability as
compare to pure debt instruments due to lower
coupon rates.

REMEDIES TAKEN BY
GOVERNMENT
Promoters or issuers of foreign currency
convertible bonds (FCCBs) may be allowed to
buy back the bonds if they go in for
prepayment.
Also, promoters are likely to be allowed to
utilise the unused portion of the foreign
currency-denominated borrowings parked
overseas. This could also be utilised to meet the
redemption pressure after the bonds mature.

CONTD..
It has now been decided to permit premature
buyback of FCCBs. For the buyback of FCCBs
out of rupee resources the RBI has fixed a
minimum discount of 25% on the book value.
The amount of the buyback is limited to US
$50 mn of the redemption value per company
wherein this window will be kept open till
March 09.
To Buyback FCCB out of Foreign Currency
minimum discount of 15% on the book value.

IS THIS ENOUGH?

FOR R-COM
Reliance Communication would most likely be the first
company to announce buy back of its Foreign Currency
Convertible Bonds (FCCBs)
R-Com had issued zero-coupon FCCBs in February 2007,
to raise USD 1 billion. The bonds are now trading at a
35% discount to the issue price, meaning, its bonds
worth has now come down to US$650 million
RCom, as it currently has over Rs.100 billion in cash
reserves, which also includes about US$ 600 million
worth of investments in mutual funds overseas
This move to buy back by Rcom is good, as it would help
the company reduce its liability and also bring down its
forex exposure.

TATA MOTORS
Tata Motors has cumulative outstanding FCCBs
worth Rs.44.87bn.
Compared to current market price of Rs.152 the
FCCBs is at a 85% discount compared to the
conversion price. Considering the large capex
program planned by the company and the downturn
in automobile industry, shut down of production
facilities, likely increase in borrowings to fund JLR,
it could face difficulties in terms of cash flow
management in near term future and is unlikely to
opt for pre-payment option for FCCBs.

 Thus many companies Like Tata Motors

which are already under high debts are
unlikely to buyback due to limited cash
flows
Examples:SUBEX,AMTEK
AUTOS,HOTEL LEELA et al.
Also $50million sum with limit of 25%
discount is only a small step for large FCCB
issues.Many companies will not be able to
meet the requirements.

CONCLUSION
Two to three years back Indian markets were on
high growth and FCCBs became popular for raising
funds from overseas market. With the fall in the
market, many FCCBs has gone down, which means
no money and more problem in the market.
Issuing companies will now have to search for
resources to repay the debt along with redemption
period whenever it matures. For this companies will
seek to fresh borrowings, with high interest rates,
which in turn would impact their
profitability.Another option, which companies have
is to reset the conversion clause, to bring it closer to
reality.