Foreign Currency Convertible Bond (FCCB)

 

FCCB

 A Foreign Currency Convertible Bond (FCCB) is a quasi debt instrument issued by any corporate entity or an international agency of any corporate entity or sovereign state to the investors around the world to raise funds.

        Foreign Currency Convertible Bonds will be like equity-linked debt security which is possible to be converted into shares or into depository receipts.

    The investors of Foreign Currency Convertible Bonds have an option to convert the bonds into equity normally in accordance with pre-determined formula and sometimes also at a pre-determined exchange rate.

ü  The investor also has the option to retain the bond.

ü  They are denominated in any freely convertible foreign currency.

ü  Euro Convertible Bonds are usually issued as unsecured obligation of the borrowers.

ü  The FCCBs by virtue of convertibility offers to issuer a privilege of lower interest cost than that of similar non convertible debt instrument.

ü  By issuing these bonds, a company can also avoid any dilution in earnings per share that a further issue of equity might cause whereas such a security still can be traded on the basis of underlying equity value.

ü  The agreement providing for the issuance of Foreign Currency Convertible Bonds normally carry less restrictive covenants as they relate to the issuer.

ü  Further, Foreign Currency Convertible Bonds can be marketed conveniently and the issuer company can expect that the number of its shares will not increase until investors see improved earnings and prices for its common stock. Same as Global Depository Receipts, Foreign Currency Convertible Bonds are can be easily traded and the issuer will have no control over the transfer mechanism and ultimate beneficiary cannot be known.

ü  The Finance Ministry vide Notification dated 20.6.1994 stated that w.e.f. this date of notification Foreign Currency Convertible Bonds will be considered as an approved instrument as medium of  accessing external commercial borrowings as an another source of finance.

ü  The terms and conditions normally applicable to commercial borrowing will be mutatis mutandis on convertible bonds.

ü  This would include restrictions on end-user who imports of capital goods and minimum maturity for bonds. Priority for accessibility to this facility will be given to firms with good foreign exchange earnings record or potential.