oreign Currency Convertible Bonds (FCCBs) mean 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. Further, the bonds are required to be issued in accordance with the scheme viz., “Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depositary Receipt Mechanism) Scheme, 1993”, 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.The policy for ECB is also applicable to FCCBs. The issue of FCCBs is also required to adhere to the provisions of Notification FEMA No. 120/RB-2004 dated July 7, 2004, as amended from time to time.[1]

Depository Receipt means a foreign currency denominated instrument, whether listed on an international exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of eligible securities issued or transferred to that foreign depository and deposited with a domestic custodian and includes ‘global depository receipt’ as defined in the Companies Act, 2013 Conditions are: (i) Indian companies can raise foreign currency resources abroad through the issue of FCCB/DR (ADRs/GDRs), in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India there under from time to time. (ii) An Indian Company can issue ADRs / GDRs if it is eligible to issue shares to person resident outside India under the FDI Policy. However, an Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue ADRs/GDRs. Overseas Corporate Bodies (OCBs) who are not eligible to invest in India through the portfolio route and entities prohibited to buy, sell or deal in securities by SEBI will not be eligible to subscribe to (i) Foreign Currency Convertible Bonds and (ii) Ordinary Shares through Global Depositary Receipts under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993.[2]  

• What is a foreign currency convertible bond?

Foreign Currency Convertible Bonds (FCCBs) mean 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.

A convertible bond in India is a fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares. … Exercising this option leads to redemption of the bond prior tomaturity, and its replacement with equity.

• Understanding Foreign Currency Convertible Bonds (FCCB)

A bond is a debt instrument that provides income to investors in the form of regularly scheduled interest payments called coupons. At the maturity date of the bond, the investors are repaid the full face value of the bond. Some corporate entities issue a type of bond known as convertible bonds. A bondholder with a convertible bond has the option of converting the bond into a specified number of shares of the issuing company. Convertible bonds have a conversion rate at which the bonds will be converted to equity. However, if the stock price stays below the conversion price, the bond will not be converted. Thus, convertible bonds allow bondholders to participate in the appreciation of the issuer’s underlying shares. There are various types of convertible bonds, one of which is the foreign currency convertible bond. A company may choose to issue FCCBs in the currency of a country with lower interest rates or a more stable economy than the issuer’s home country.[3]

• Eligibility for issue of convertible bonds or ordinary shares of issuing company

(1) An issuing company desirous of raising foreign funds by issuing Foreign Currency Convertible Bonds or ordinary shares for equity issues through Global Depositary Receipt is required to obtain prior permission of the Department of Economic Affairs, Ministry of Finance, Government of India:

[(1) (A) An Indian company, which is not eligible to raise funds from the Indian capital market including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) will not be eligible to issue (i) Foreign Currency Convertible Bonds and (ii) Ordinary Shares through Global Depositary Receipts under the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993.

[(1) (B) Unlisted companies shall be allowed to raise capital abroad without the requirement of prior or subsequent listing in India initially for a period of two years subject to the following conditions:—

• Restructuring the Foreign Currency Convertible Bonds

Indian companies may restructure the terms of their FCCBs with the agreement of the bondholders. Obviously, this presupposes the acceptance of the bondholders. Proposals for restructuring FCCBs that do not involve a change in the conversion price will be considered by the RBI under the approval route, on a case-by-case basis. Prior approval of the RBI is required to change the conversion price. Reports estimate that approximately half of the FCCBs due to mature in the second half of 2012 will need to be restructured, as it will prove difficult for companies to refinance the FCCBs in the current debt market.

In February 2009, the Ministry of Finance permitted companies to change the conversion price of FCCBs issued prior to 27 November 2008, based on the market price prevailing on the date of the Board meeting of the company approving the price revision. Several companies availed of the opportunity to reset the conversion prices of their FCCBs falling due in 2011–2012.

• Enforcement of bondholders’ rights

In the event of a dispute between an Indian company and its bondholders in respect of redemption of FCCBs, the bond-holder may seek recourse to the contractual dispute resolution mechanism prescribed in the FCCB transaction documents – typically arbitration.

The (Indian) Companies Act, 1956 provides a statutory remedy for failure to pay an admitted debt (such as the FCCB): the creditor may file a petition seeking that the debtor company be wound up so that its assets may be liquidated, and the creditor repaid. Generally, FCCBs are unsecured and therefore rank lower in terms of repayment of debt; FCCB-holders receive their payment only after the secured creditors and statutory dues of the liquidated company are paid.

However, filing a winding-up petition currently appears to be the preferred route for bondholders. The bondholders of Wockhardt Ltd have had some success in Indian courts. They filed a petition seeking to wind up the affairs of the company so that they could be repaid. The court directed the company to repay its bondholders first, prior to the secured creditors of the company. Given the current liquidity and equity market conditions, companies have little choice but to borrow monies at high interest rates and redeem the FCCBs on the due dates. The credit squeeze in global and local markets has made it difficult for Indian companies to find willing lenders.

The Indian regulator is attempting to provide a cordial and practical approach. The RBI tried to prevent further defaults by extending the deadline for the buy-back of FCCBs from June 2011 to March 2012. Further, it imposed a minimum discount as a condition for the buy-back of FCCBs. The global economic crisis has slowed the revenue and profit growth of Indian companies, dragged down their stock prices and left them less able to service debt. However, the regulator and the courts continue to work towards creating a climate that facilitates redemption of FCCBs in India.[5]

                                                  BIBLIOGRAPHY

1. https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=5116
2. https://taxguru.in/rbi/issue-shares-indian-companies-fccb-adr-gdr.html
3. https://www.investopedia.com/terms/f/fccb.asp
4. https://www.incometaxindia.gov.in ›
5. https://www.mondaq.com/india/shareholders/208320/foreign-currency-convertible-bonds-issued-by-indian-companies

[1] (MASTER CIRCULARS RESERVE BANK of INDIA 2009)

[2] (JAIN 2019)

[3] (CHEN 2020)

[4] (Eligibility for issue of convertible bonds or ordinary shares of issuing company 2007)

[5] (nath 2012)

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