Foreign Currency Convertible Bond Woes of India Inc. - What are FCCB's and the Problem therein

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Generic Information about FCCB to understand concept of FCCB - Please refer the relevant prevalent guidelines of RBI from time to time for acting on professional matters.

Foreign Currency Convertible Bonds are issued in India in accordance with the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993, as amended and supplemented from time to time.  FCCB are bonds issued by an Indian company, which are subscribed by non-residents in foreign currency and have the following features : -

• They are convertible into equity shares, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments, at the option of the Non resident investor;
• Are entitled to a low interest rate on the Bonds;

These Bonds were generally issued by the issuing companies at very high price vis a vis the existing market price of shares in 2005-2006. Now when the redemption time has arisen, the prices of the shares are well below  redemption price, because of which conversion option is  not exercised by the non resident Investors for such shares. Hence the issuing companies are suppose to redeem them at issue price and accrued interest, as applicable. However, since raising of funds has its own challenges, and one needs to keep the regulatory guidelines in mind, options are limited, but the relevant authorities are working on the matter to come up with possible solutions.

The attached Video explains the basic concept of what FCCB are and what is the problem associated with these FCCB as they come up for redemption.

FDI – Permissible Capital Instruments for Investing in India under FEMA

Under the existing FDI policy, the following Capital  Instruments for permissible for Investing in India under FEMA

·         Equity Shares

·         Fully, Compulsorily  and Mandatorily Convertible Preference Shares

·         Fully, Compulsorily  and Mandatorily Convertible Debentures

·         FCCB’s

·         Subscription to American / Global Depository Receipts of an Indian Company

Interest on Other type of Preference Shares/Debentures, would be denominated in Rupees and hence interest thereon has to be based on swap equivalent of LIBOR + permissible spread for corresponding maturity External Commercial Borrowings.

The Law is based on Consolidated FDI Policy Circular No.1 of 2012. Prepared by Mr. Arinjay Kumar Jain

Foreign Direct Investment - Permitted and Prohibited Sectors

 The Law is based on Consolidated FDI Policy Circular No.1 of 2012 

1.    Permitted Sectors – Investment in Permitted Sectors can be made under the following two routes : -

a.    Automatic Route

No  prior approval  required from the RBI or the GOI.  Only Reserve Bank of India needs to be informed within specified period. 

b.    Government Approval Route (‘FIPB’)

Proposals falling outside the prohibited Sectors and not falling under automatic route require prior approval of Foreign Investment Promotion Board (‘FIPB’) 

2.    Prohibited Sectors

Foreign investment is not permitted in companies engaged in prohibited sectors – Refer Para 6.1 of the Policy.