FOREIGN CURRENCY

CONVERTIBLE BOND
PRESENTED BY:Poonam Achraya
Ayushi Agrawal
Deepashikha Godbole
Apeksha Narula
Vidhi Agarwal

A010
A014
A029
AO42
A073

INTRODUCTION
Foreign currency convertible bonds (FCCBs) are a special
category of bonds.
These bonds assume great importance for multinational
corporations and in the current business scenario
of globalisation, where companies are constantly dealing in
foreign currencies.
FCCBs are quasi-debt instruments and tradable on the stock
exchange. Investors are hedge-fund arbitrators or foreign
nationals.
FCCBs appear on the liabilities side of the issuing
company's balance sheet.

 External Commercial Borrowing (ECB)

Guidelines:
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.

Issue of Foreign Currency Convertible

Bonds and Ordinary Shares (Through
Depository Receipt Mechanism) Scheme,
1993:
FCCB means a 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.

ISSUANCE OF FCCB :
Through Depositary Receipt Mechanism Scheme,
1993.
GUIDELINES FOR ISSUE :
a. FCCBs are hybrid instruments standing between debt
and equity
b. Issued by a Indian Company in foreign currency
c. Gives its holders the right to convert for a fixed no of
shares at a pre-determined price
d. Convertible into Equity at the option of the holder;
normally at a premium of 20% to 30% over prevailing
market price at the time of issue
e. Cash redemption value

REGULATIONS APPLICABLE FOR

ISSUE :
Issue to conform to Foreign Direct Investment policy (incl.
sectors and sectoral caps)
Ceiling of USD 500 million in one FY (automatic route)
Public issue only through reputed lead managers in intl. capital
market
Maturity not less than 5 years
Call / put option shall not be exercisable before 5 years
Issue with attached warrants not permitted
Issue related expenses not to exceed 4% of issue size 2% in
case of private placement.

 All in cost ceiling as per ECB guidelines

Proceeds not to be utilized for investment in stock markets as
per FCCB
Corporate investments in industrial sector, esp. infra sector
Financial intermediaries shall not be allowed to access FCCBs
(exceptions noted)
Banks, Fis, NBFCs shall not provide guarantee / letter of
comfort
Reporting within 30 days of date of completion of issue

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 OFFERS 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.

FCCB-Advantages and Disadvantages

ADVANTAGES
Low cost debt
Option value allows issuer to achieve longterm financing at sub-market interest rate
Minimizes dilution
Contingent Sale Of Equity At A Premium
Equity sold at a premium to prevailing share
price
Rapid Issuance
Post regulatory approvals accelerated book
building process reducing market exposure
Distinct Investor Base
Distributed to a distinct non-equity specialist
investor base
Flexibility
Versatile product can be tailored to issuers
needs

DISADVANTAGES
Debt Or Equity
Debt on balance sheet until conversion Issuer
does not control conversion
Cost ultimately dependent on share price
development

Equity Impact
Under lying share price may fall upon
announcement
Usually recovers in the medium term

Investors
FIIs and long-only institutional investors do not
invest in CB issuances
Most often, company is unable to track Investors

Turbulent Markets
If the share price does not reach the conversion
price the company will need to refinance
Lost the chance to dilute at a higher price

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$650 million
R-Com, as it currently has over Rs.100 billion in cash reserves,
which also includes about US$ 600 million worth of
investments in mutual funds overseas
This move to buy back by R-com 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
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.

I n

C o n v e r s i o n
I n v e s t o r s

A
S e a r c h

R e s e t

t h e

p r i c e

A
b i t t e r
P i l l
t o d a y s
fi
n a n c i a l
d o w n t u r n

o f
F C C B s
h a s
g o n e
s e v e r a l
t i m e s
h i g h e r
t h a n
t h e i r
c u r r e n t
m a r k e t
p r i c e

i n
c o n v e r t i n g
t h e i r
b o n d s
i n t o
e q u i t y

l o w ,
h i g h
I N R
p a y m e n t
a w a i t i n g
t o
s w a l l o w
f o r
i s s u i n g
c o m p a n i e s

t o
r e p a y
t h e
d e b t
w i t h
f r e s h
e x p e n s i v e
b o r r o w i n g

c l a u s e ,
t o
b r i n g
i t
c l o s e r
t o
r e a l i t y
P o t e n t i a l
d i l u t i o n
o f
s h a r e
h o l d i n g s
1 0

d i s i n t e r e s t e d
R u p e e
a t
b i t t e r
p i l l

f o r

r e s o u r c e s

c o n v e r s i o n

W o c k h a r d t s

C a s e

It is a pharmaceutical and biotechnology company

headquartered in Mumbai, India.
Given the precarious debt position that it was in,
in April 2009, Wockhardt approached the domestic
lenders for corporate debt restructuring (CDR) led
by ICICI Bank. The lenders included domestic
lenders, FCCB (foreign currency convertible
bonds) holders, and other foreign lenders.
FCCB hold an option to convert into shares or
redeem the bonds
FCCB holders filed winding up petition.

FCCB GOVERNED THROUGH RBI

FCCB Guidelines were issued in 1993 by Ministry of Finance
under the issue of Foreign Currency Convertible Bonds and
Ordinary Shares (Through Depository Receipt Mechanism)
Scheme, 1993.
The RBI issues guidelines for External Commercial
Borrowing(ECB) which is applicable to FCCBs.

TERMS AND CONDITIONS OF FCCB

Initial Conversion Price: Min Conversion Price plus Conversion
Premium
Minimum Conversion Price
Conversion Premium: Normally 20% - 30%
Maturity Date: To meet the ECB guidelines of Average Maturity
depending
on the amount raised
Current Coupon: 0% - 5%
Yield to Maturity (YTM): Currently 6% - 8%
Redemption Price: In case the Bonds are not previously converted,
they are redeemed on the Maturity Date at principal plus YTM

 Fixed Exchange Rate: Generally fixed at the time of issuance

of Bonds.
Conversion Rights: Holder of Bonds have the right to exercise
the option of conversion into Equity Share anytime before the
Redemption Date.
Conversion Price Reset: Normally linked to the market price of
the Equity Shares or on every defined period; Cannot go
below the Minimum Conversion Price.
Tax Gross Up: All payments made are generally Grossed Up.

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.

THANK YOU!