D EFINITION OF 'F OREIGN C URRENCY C ONVERTIBLE B OND - FCCB':A
type of convertible bond issued in a currency different than the
issuer's domestic currency. In other words, the money being raised
by the issuing company is in the form of a foreign currency. A
convertible bond is a mix between a debt and equity instrument. It
acts like a bond by making regular coupon and principal payments,
but these bonds also give the bondholder the option to convert the
bond into stock.
I NVESTOPEDIA EXPLAINS 'F OREIGN C URRENCY C ONVERTIBLE B OND -
FCCB':These types of bonds 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. (Bondholders take advantage of
this appreciation by means warrants attached to the bonds, which
are activated when the price of the stock reaches a certain point.)
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.
C ONVERTIBLE B ONDS : A N I NTRODUCTION :INVESTOPEDIA
STAFFContact | Author Bio
New players to the investing game often ask what convertible
bonds are, and whether they are bonds or stocks. Essentially, they
are corporate bonds that can be converted by the holder into the
common stock of the issuing company. In this article, we'll cover
the basics of these chameleon-like securities as well as their
upsides and downsides. What Is a Convertible Bond? As the name
implies, convertible bonds, or converts, give the holder the option
to exchange the bond for a predetermined number of shares in the
issuing company. When first issued, they act just like regular
corporate bonds, albeit with a slightly lowerinterest rate. Because
convertibles can be changed into stock and thus benefit from a rise
in the price of the underlying stock, companies offer lower yields
on convertibles. If the stock performs poorly there is no
conversion and an investor is stuck with the bonds sub-par return
(below what a non-convertible corporate bond would get). As always,
there is a tradeoff between risk and return. (For more insight,
read G E T A C Q U A I N T E D W I T H T H E B O N D P R I C E - Y
I E L D D U O .) Conversion Ratio The conversion ratio (also called
the conversion premium) determines how many shares can be converted
from each bond. This can be expressed as a ratio or as the
conversion price, and is specified in the indenture along with
other provisions.
E XAMPLE :A conversion ratio of 45:1 means one bond (with a
$1,000 par value) can be exchanged for 45 shares of stock. Or it
could be specified at a 50% premium, meaning that if the investor
chooses to convert the shares, he or she will have to pay the price
of the common stock at the time of issuance plus 50%. Basically,
these are the same thing said two different ways.
This chart shows the performance of a convertible bond as the
stock price rises. Notice that the price of the bond begins to rise
as the stock price approaches the conversion price. At this point
your convertible performs similarly to a stock option. As the stock
price moves up or becomes extremely volatile, so does your
bond.
It is important to remember that convertible bonds closely
follow the underlying's price. The exception occurs when the share
price goes down substantially. In this case, at the time of the
bond's maturity, bond holders would receive no less than the par
value. Forced Conversion One downside of convertible bonds is that
the issuing company has the right to call the bonds. In other
words, the company has the right to forcibly convert them. Forced
conversion usually occurs when the price of the stock is higher
than the amount it would be if the bond were redeemed, or this may
occur at the bond's call date. This attribute caps the capital
appreciation potential of a convertible bond. The sky is N O T the
limit with converts as it is with common stock. (To learn more
about callable bonds, read B O N D C A L L F E A T U R E S : D O N
' T G E T C A U G H T O F F G U A R D .)
The Numbers As we mentioned earlier, convertible bonds are
rather complex securities for a few reasons. First, they have the
characteristics of both bonds and stocks, confusing investors right
off the bat. Then you have to weigh in the factors affecting the
price of these securities; these factors are a mixture of what is
happening in the interest-rate climate (which affects bond pricing)
and the market for the underlying stock (which affects the price of
the stock). Then theres the fact that these bonds can be called by
the issuer at a certain price that insulates the issuer from any
dramatic spike in share price. All of these factors are
important when pricing convertibles.
EXAMPLE
Suppose that TSJ Sports issues $10 million in three-year
convertible bonds with a 5% yield and a 25% premium. This means
that TSJ will have to pay $500,000 in interest annually, or a total
$1.5 million over the life of the converts.
If TSJs stock was trading at $40 at the time of the convertible
bonds issue, investors would have the option of converting those
bonds for shares at a price of $50 ($40 x 1.25 = $50). Therefore if
the stock was trading at say $55 by the bond's expiration date,
that $5 difference per share is profit for the investor. However
there is usually a cap on the amount the stock can appreciate
through the issuers callable provision.
For instance, TSJ executives wont allow the share price to surge
to $100 without calling their bonds - and capping investors'
profits. Alternatively, if the stock price tanks to $25 the convert
holders would still be paid the face value of the $1,000 bond at
maturity. This means that while convertible bonds limit risk if the
stock price plummets, they also limit exposure to upside price
movement if the common stock soars.
Conclusion Getting caught up in all the details and intricacies
of convertible bonds can make them appear more complex then they
really are. At their most basic, convertibles provide a sort of
security blanket for investors wishing to participate in the growth
of a particular company theyre unsure of. By investing in converts
you are limiting your downside risk at the expense of limiting your
upside potential.
C ONVERTIBLE B ONDS : P ROS AND C ONS FOR C OMPANIES AND I
NVESTORS
RICHARD CLOUTIERContact | Author Bio
There are pros and cons to the use of convertible bonds as a
means of financing by corporations. One of several advantages of
this delayed method of equity financing is a delayed dilution of
common stock and earnings per share (EPS). Another is that the
company is able to offer the bond at a lower coupon rate - less
than it would have to pay on a straight bond. The rule usually is
that the more valuable the conversion feature, the lower the yield
that must be offered to sell the issue; the conversion feature is a
sweetener. Read on to find out how corporations take advantage of
convertible bonds and what this means for the investors who buy
them. (For background reading, see C O N V E R T I B L E B O N D S
: A N I N T R O D U C T I O N .)
Advantages of Debt Financing Regardless of how profitable the
company is, convertible bondholders receive only a fixed, limited
income until conversion. This is an advantage for the company
because more of the operating income is available for the common
stockholders. The company only has to share operating income with
the newly converted shareholders if it does well. Typically,
bondholders are not entitled to vote for directors; voting control
is in the hands of the common stockholders. Thus, when a company is
considering alternative means of financing, if the existing
management group is concerned about losing voting control of the
business, then selling convertible bonds will provide an advantage,
although perhaps only temporarily, over financing with common
stock. In addition, bond interest is a deductible expense for the
issuing company, so for a company in the 30% tax bracket, the
federal government in effect pays 30% of the interest charges on
debt. Thus, bonds have advantages over common and preferred stock
to a corporation planning to raise new capital.
What Bond Investors Should Look For
Companies with poor credit ratings often issue convertibles in
order to lower the yield necessary to sell their debt securities.
The investor should be aware that some financially weak companies
will issue convertibles just to reduce their costs of financing,
with no intention of the issue ever being converted. As a general
rule, the stronger the company, the lower the preferred yield
relative to its bond yield. There are also corporations with weak
credit ratings that also have great potential for growth. Such
companies will be able to sell convertible debt issues at a
near-normal cost, not because of the quality of the bond but
because of the attractiveness of the conversion feature for this
"growth" stock. When money is tight and stock prices are growing,
even very credit-worthy companies will issue convertible securities
in an effort to reduce their cost of obtaining scarce capital. Most
issuers hope that if the price of their stocks rise, the bonds will
be converted to common stock at a price that is higher than the
current common stock price. By this logic, the convertible bond
allows the issuer to sell common stock indirectly at a price higher
than the current price. From the buyer's perspective, the
convertible bond is attractive because it offers the opportunity to
obtain the potentially large return associated with stocks, but
with the safety of a bond.
The Disadvantages of Convertible Bonds
There are some disadvantages for convertible bond issuers, too.
One is that financing with convertible securities runs the risk of
diluting not only the EPS of the company's common stock, but also
the control of the company. If a large part of the issue is
purchased by one buyer, typically an investment banker or insurance
company, conversion may shift the voting control of the company
away from its original owners and toward the converters. This
potential is not a significant problem for large companies with
millions of stockholders, but it is a very real consideration for
smaller companies, or those that have just gone public. Many of the
other disadvantages are similar to the disadvantages of using
straight debt in general. To the corporation, convertible bonds
entail significantly more risk of bankruptcy than preferred or
common stocks. Furthermore, the shorter the maturity, the greater
the risk. Finally, note that the use of fixed-income securities
magnifies losses to the common stockholders whenever sales and
earnings decline; this is the unfavorable aspect of financial
leverage. The indenture provisions (restrictive covenants) on a
convertible bond are generally much more stringent than they are
either in a short-term credit agreement or for common or preferred
stock. Hence, the company may be subject to much more disturbing
and crippling restrictions under a long-term debt arrangement than
would be the case if it had borrowed on a short-term basis, or if
it had issued common or preferred stock. Finally, heavy use of debt
will adversely affect a company's ability to finance operations in
times of economic stress. As a company's fortunes deteriorate, it
will experience great difficulties in raising capital. Furthermore,
in such times investors are increasingly concerned with the
security of their investments, and they may refuse to advance funds
to the company except on the basis of well-secured loans. A company
that finances with convertible debt during good times to the point
where its debt/assets ratio is at the upper limits for its industry
simply may not be able to get financing at all during times of
stress. Thus, corporate treasurers like to maintain some "reserve
borrowing capacity". This restrains their use of debt financing
during normal times.
Why Companies Issue Convertible Debt
The decision to issue new equity, convertible and fixed-income
securities to raise capital funds is governed by a number of
factors. One is the availability of internally generated funds
relative to total financing needs. Such availability, in turn, is a
function of a company's profitability and dividend policy. Another
key factor is the current market price of the company's stock,
which determines the cost of equity financing. Further, the cost of
alternative external sources of funds (i.e., interest rates) is of
critical importance. The cost of borrowed funds, relative to equity
funds, is significantly lowered by the deductibility of interest
payments (but not of dividends) for federal income tax purposes. In
addition, different investors have different risk-return tradeoff
preferences. In order to appeal to the broadest possible market,
corporations must offer securities that interest as many different
investors as possible. Also, different types of securities are most
appropriate at different points in time. Conclusion Used wisely, a
policy of selling differentiated securities (including convertible
bonds) to take advantage of market conditions can lower a company's
overall cost of capital below what it would be if it issued only
one class of debt and common stock. However, there are pros and
cons to the use of convertible bonds for financing; investors
should consider what the issue means from a corporate standpoint
before buying in.
FCCB
FOREIGN CURRENCY CONVERTIBLE BONDSFrom Wikipedia, the free
encyclopedia :
Foreign Currency Convertible Bonds commonly referred to as
FCCB's are a special category of bonds. FCCB's are issued in
currencies different from the issuing company's domestic currency.
Corporates issue FCCB's to raise money in foreign currencies. These
bonds retain all features of a convertible bond making them very
attractive to both the investors and the issuers. These bonds
assume great importance for multi-nationals and in the current
business scenario of globalisation where companies are constantly
dealing in foreign currencies. FCCB's are quasi-debt instruments
and tradable on the stock exchange. Investors are hedge-fund
arbitrators or foreign nationals. FCCB's appear on the liabilities
side of the issuing company's balance-sheet Under IFRS provisions,
a company must mark-to-market the amount of its outstanding bonds
The relevant provisions for FCCB accounting are International
Accounting Standards: IAS 39, IAS 32 and IFRS 7.
R ELIANCE C OMMUNICATIONS TO REPAY FCCB LENDERS :Reliance
Communications Ltd.BSE
RAISES
$1.8
BILLION
96.30
0.10 (0.10%)Vol:2247674 shares traded
NSE
96.35
0.15 (0.16%)Vol:7931405 shares traded
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MUMBAI: Anil Ambani-owned telecom operatorReliance
Communications has raised $1.18 billion ( 6125 crore) from Chinese
banks to repay lenders of its overseas convertible bonds the
company had issued in 2007. The company will have to repay the
amount in seven years to a consortium of lenders led by Industrial
andCommercial Bank of China, China Development Bankand Export
Import Bank of China. Reliance Communications' overseas bondholders
have the option of converting the loan into shares at 661 apiece.
On Tuesday, RCOM stock rose nearly 3% to close at 88.85 on the
Bombay Stock Exchange. The company has been attempting to sell
stake in its telecom tower arm, Reliance Infratel, through which it
is expected to redeem the bonds. There were reports that the
company had reached a deal with private equity firm Blackstone,
though executives involved in the talks said a final deal was at
least two months away. Should Reliance Communications conclude the
deal, analysts said it should repay the current debt early.
Although the company said interest rate on the current borrowing is
merely 5%, the weak rupee could play spoilsport on the total fund
costs. "It (Reliance Infratel) has attracted many buyers, but
Reliance never agrees to a reasonable price," said a person
involved in a deal negotiation with the company. The best deal it
was offered was worth 30,000 crore during talks with GTL
Infrastructure. Analysts say Reliance Communications doesn't have
sufficient cash flows as it has to pay interest on its over
30,000-crore debt prior to this borrowing, and meet operational
expenses and capital expenditure to expand its 3G footprint.
Two years ago, the firm paid around 8,585 crore for 3G spectrum
and ended up taking a $1.9-billion loan from China Development Bank
to repay this and purchase 3G equipment. In April this year, the
firm paid out about $500 million to redeem FCCBs issued in 2006.
There have been talks of private equity firms looking to pick up an
equity stake in Infratel but nothing has materialised yet. There
are talks of elder brother Mukesh Ambani's Reliance Industries
either picking up a strategic stake in Infratel or at least signing
a longterm lease agreement for the company's telecom towers.
R. Com. to repay $1.8-bn FCCB via Chinese loan:Reliance
Communications (RCom), the flagship company of Anil Ambani-led
Reliance Group has arranged loan for refinancing its $1.18-billion
Foreign Currency Convertible Bonds (FCCBs) due on March 1, 2012 via
Chinese lenders. The countrys second largest mobile company,
grappling with huge debt-redemption pressure has tied-up with the
Chinese financiers to lower its refinancing costs. The funds would
be arranged by China Development Bank, Industrial and Commercial
Bank of China, Exim Bank and others at a rate of five per cent to
repay the last lot of outstanding foreign currency convertible
bonds of the firm, the largest refinancing deals in the country
till now. The Chinese loan would allow easy access to funds in a
scenario of dollar liquidity crunch. The tenor of the loan is seven
years. A shift in the strategy of Indian corporates can be seen
with respect to repayment of their overseas debt obligations. More
and more companies are preferring to raise funds from China as
there is excess liquidity there, consequently, raising money
becomes easier, said Jagannathan Thunuguntla, head equity, SMC
Capital. Earlier, they would look to raise money from Europe and
the US, he added. Uncertainty in the global markets has led to risk
aversion among investors and hence, shortage of dollars. Most of
the Indian firms had tapped the overseas funds via FCCBs in 2007.
The instrument allows lenders to choose between conversion of bonds
into equities incase the share price goes up or get the bonds
redeemed on maturity date. Reliance Communications had raised money
through FCCBs in 2007 at a conversion price of 30 per cent premium
over the share price prevailing that time. However, after collapse
of Lehman Brother which was followed by the global crisis of
2008-2009, its share price fell sharply from Rs 508 per share.
Consequently, the firm had to bear the redemption pressure as the
first option of conversion into equity was knocked off. Some
experts also said that if Reliance Communications finds a buyer for
its tower business the refinancing pressure on the firm can come
off substantially. It raised about $6 billion for expansion and
payment for bandwidth and licences for third generation services.
RComs stock went up by as much as 5.6 per cent in intra-day trade,
and closed higher by 2.7 per cent at Rs 88.8, as per dat available
on the Bombay Stock Exchange.
Features of the Bond issue[9]: Status- Bonds constitute direct,
unsubordinated obligations of the company and rank pari-passu inter
se with all other existing debts and borrowings of the company as
regards repayment of principal and payment of interest by the bonds
issuing company. Redemption- (a) Redemption on maturity Unless
previously redeemed or purchased by the company, the bonds are
redeemed at par on the expiry of a pre-determined period from the
date of the allotment. (b) Put Option[10]- When the Bondholder
redeems the bonds after expiry of a certain period commencing from
the date of allotment, he is said to exercise the Put Option. (c)
Call Option[11]- When the company purchases the bonds from the
bondholders at discount, par or premium in the open market or
otherwise, the company is said to exercise its Call Option. Keeping
in pace with the latest economic-financial trends, Indian
Corporates have started issuing these convertible bonds in
international markets commonly known as Foreign Currency
Convertible Bonds[12]. FEMA Notification No. 120/ RB-2004 i.e.
Foreign Exchange Management (Transfer or Issue of Any Foreign
Security) Regulations, 2004, defines Foreign currency convertible
bonds (FCCBs) under Regulation 2(g) which reads as: Foreign
Currency Convertible Bond (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[13]
When these bonds are issued in a currency different than the
issuers domestic currency with an option to convert them in the
equity of the issuer company, such quasi- debt instruments are
called foreign currency convertible bonds (FCCB). The author will
elucidate another statutory definition given by the "Issue of
Foreign Currency Convertible Bonds and Ordinary Shares (Through
Depositary Receipt Mechanism) Scheme, 1993 which will be discussed
later in detail. The FCCBs are exceedingly popular with the
Corporate India for raising funds that are usually utilized for
debt restructuring, infrastructure development and expansion plan
of the Company. Generally, the investors on account of two main
reasons favour such types of bonds: Firstly, receipt of fixed
payments on these bonds i.e. the principal and the interest
accruing on these bonds which are payable in foreign currency and
secondly that these investors can avail the benefit of converting
their bonds into equity during the value appreciation of the issuer
companys shares. Following are some common features of the Foreign
Currency Convertible Bonds: FCCB can be secured as well as
unsecured.[14] Mostly the FCCB issued by the Indian Companies are
unsecured. Credit rating[15] of Bonds is not mandatory, since
corporations having excellent track record mostly issue such Bonds.
However, rating done by the Credit Rating Agency[16] certainly adds
value to the bonds issued. Indian Companies, eligible to issue
shares to persons residents outside India[17] under the Foreign
Direct Investment Scheme[18] (including Sectoral Cap and Sectors
where FDI is permissible) can raise foreign currency resources
aboard through the issue of American Depository Receipts[19] (ADRs)
or Global Depository Receipts[20] (GDRs). The bond to equity
convertible option attached to the FCCBs is subject to the Reserve
bank of India guidelines[21]. Such FCCBs can be converted by
exercising the Call option[22] and Put option[23] to suit the
structure of the Bond. FCCBs are generally listed on the national
and regional stock exchanges to improve liquidity.
Public issue[24] of FCCBs shall be only through reputed lead
managers in international capital market. In case of private
placement, the placement shall be with banks, or with multilateral
and bilateral financial institutions, or foreign collaborators, or
foreign equity holder having a minimum holding of 5% of the paid up
equity capital of the issuing company. Private placement with
unrecognized sources is prohibited.[25] FCCB Issue related expenses
shall not exceed 4% of issue size and in case of private placement,
shall not exceed 2% of the issue size.[26] FCCB issue by the Indian
Companies need to conform with various regulatory requirements:
Before the Foreign Currency Convertible Bonds (FCCB) hit the
international markets innumerable compliances and conditions have
to be adhered to by the company desiring to raise finances by
facilitating the issue of FCCBs. Trying to ride the bull phase,
corporate sector is leaner and meaner now, with the focus on cost
control, and the restructuring of operations over the recent past
adding a few crucial percentage points to operating profit margins.
The inevitability of the regulatory policies provides flexibility
in borrowings by the Indian Corporates, which are crucial for the
overall growth of the economy, and at the same time maintains
prudent limits for these total external borrowings that are
acquired by scores of sources one of them being the FCCB Issue.
Requirements as prescribed by the several provisions of the Company
Law[27]: FCCBs are bonds issued by an Indian company or any body
corporate expressed in foreign currency to non-resident investors,
which fall within purview of the definition of Debentures[28], and
therefore the process for issue of debentures shall be applicable
to the issue of FCCBs. A. Prior intimation to be given to the Stock
Exchange by the issuer company listed at the Stock Exchange,
atleast 7 days before the date of Board meeting in which the FCCB
issue is to be considered.[29]
B. Power to issue FCCBs vests with the Board of Directors of the
issuer Company who are obligated to pass a Board resolution
pertaining to the issue of FCCBs.[30] C. Convening a General
Shareholders Meeting for procuring the shareholders consent with
regard to the enhancement of borrowing powers of the Board,[31]
acquiring authorisation for creating mortgage in case of issue of
secured FCCBs[32] or obtaining shareholders approval on the further
issue of the capital by way of FCCB issue, without making an offer
to the existing shareholders of the company by a Special
Resolution[33]. D. It is mandatory upon the companies intending to
make public issue of FCCBs, to constitute a Trust Deed[34] for the
bonds, to appoint a Trustee[35] for the bondholders and to create a
redemption reserve account[36] respectively as the Company issues
these Bonds to the foreign investors in accordance with the
provisions of the Trust Deed Role of SEBI Pre-issue and Post-issue
requirements & Conditions to be fulfilled by the Issuer
Company: An application for listing of the Bonds has to be made to
the stock exchange of the country where the FCCBs are to be issued
and traded i.e. international stock exchange. In-principal approval
has to be obtained from the Indian Stock exchange to list the
shares issued upon conversion of bonds, when the bondholder
exercises the convertibility option. Filing the Offer
Document[37](Offering Circular) with Securities Exchange Board of
India, Reserve Bank of India and stock exchanges prior to FCCB
issue[38]. RBIs[39] Regulatory Framework: The Government of India
considers the funds raised through the FCCB issue as Foreign Direct
Investment (FDI).[40] The latest comprehensive RBI guidelines on
FCCB are contained in the July 1st, 2008 Master Circular[41] on
External Commercial Borrowings and Trade Credits that provides the
Scheme and Policy to be followed by the issuers of FCCBs as the
circular itself very distinctly provides that the Policy laid down
for the External Commercial Borrowings[42] are likewise applicable
to the issue of FCCBs.
1. The ECB Master Circular lays down that borrowing funds
through FCCB issue can be accessed under two routes, viz., (i)
FCCBs Issue upto US $ 500 million under the Automatic Route (ii)
FCCBs Issue beyond US $ 500 million with the specific approval of
the Reserve Bank i.e. under the Approval Route.[43] 2. The
Circular[44] makes available the Eligibility criteria on the
numerous kinds of entities & individuals for borrowing and
lending during the FCCB issue under the Automatic Route.
Eligibility of the Issuer: i. Indian Corporates except financial
intermediaries such as banks, FIs, NBFCs. ii. NGOs engaged in micro
finance activities. iii. Individuals, Non Profit making
organizations and trusts are not eligible. Eligibility of the
Subscriber: i. International Capital markets. ii. International
banks. iii. Multilateral Financial Institutions. iv. Export credit
agencies. v. Suppliers of equipment. vi. Foreign collaborator. vii.
Foreign equity holder, subject to minimum holding of equity of 25%
in the borrowers company for raising ECB up to USD 5 million;
minimum holding of equity of 25% in the borrowers company and a
debt equity ratio of not more than 4:1, for raising ECB above USD 5
million. viii Overseas organizations & individuals (lend to
NGOs in micro-finance activities). 3. FCCB issue proceeds need to
conform with the EndUse[45] conditions as prescribed by RBI in the
abovementioned ECB Master circular: Permitted End Use:
Investment in real-industrial sector including SMEs[46] and
infrastructure sector through expansion, modernization, import of
capital goods, new projects etc. Overseas Direct Investment in
joint ventures/wholly owned subsidiaries. First stage acquisition
of shares in the disinvestment process and also in the mandatory
second stage offer to the public under the Governments
disinvestment programme of PSUs[47]. 25 % of the FCCB proceeds can
be used for general corporate restructuring. Prohibited End Use:
Investment in real estate excluding integrated townships.
On-lending. Investment in capital markets. Acquisitions. As working
capital. For general corporate purposes. For Repayment of Rupee
Loans. Law Governing the FCCB issue through the ADR/GDR Mechanism:
In the recent past, some Corporates have raised funds through issue
American Depository Receipts and/or Global Depository Receipts.
Under such a mechanism, the companies issue shares to the
depositories who in turn issue these ADRs/GDRs to the ultimate
investors functioning in the international markets. For this
purpose the entities issuing the ADRs/GDRs enter into an agreement
with the depository to the effect that the depository would not
exercise voting rights in respect of shares held by them or they
would exercise voting rights as directed by the managerial
authorities of the issuer companies.[48]
It may be further noted that the Indian Companies are permitted
to issue Foreign Currency Convertible Bonds and Ordinary Shares
through Global Depository Mechanism[49]. The aforesaid
circular[50] further lays down that these foreign currency
convertible 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.[51]
The following diagram depicts the mechanism of FCCB issue
through the depository receipts (ADRs/GDRs):[52]Indian Company Ordi
nary Shar es Domestic Depository Bank Overseas Depository Bank
Depository Receipts Inv estor s F C CB
The Scheme defines Foreign Currency Convertible Bonds as
"Foreign Currency Convertible Bonds" means bonds issued in
accordance with this scheme 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.[53] The Scheme further provides the eligibility
conditions for issue of Convertible Bonds or Ordinary Shares of
Issuing Company[54]:
a) Obtain prior permission of the Department of Economic
Affairs, Ministry of Finance, Government of India. b) Issue
ADRs/GDRs, if company is eligible to issue shares to persons
resident outside India under the FDI Scheme. c) Indian listed
company not eligible to raise funds from the Indian Capital Market
including a company restrained from accessing the securities market
by (SEBI) will not be eligible to issue ADRs/GDRs. d) Unlisted
companies would require prior or simultaneous listing in the
domestic market, on issuance of ADR/GDRs. e) Unlisted companies
already issued ADRs/GDRs have to list in the domestic market on
making profit or within three years of such issue whichever is
earlier. f) GDR/ADR/FCCBs issue is likely to exceed the percentage
limits under the automatic route, or implementing a project falling
under approval route, issuing company required to obtain prior
FIPB[55] and Ministry of Finance Approval. Current Scenario: Having
discussed in length the entire procedure for the FCCB issue, the
author would like to excerpt a FCCB issue deal, in progress,
between the low-cost carrier SpiceJet and an American PE firm WL
Ross & Co. promoted by billionaire Wilbur Ross who is known for
restructuring failed companies.[56] Sluggish demand in the domestic
market, current economic slowdown and mounting ATF (aviation
turbine fuel) prices have led to a mammoth down turn in the
aviation industry, resulting into mergers, acquisitions and
borrowings by the airline companies that were running into massive
losses. The low cost airline SpiceJet, currently facing turbulence
due to soaring fuel prices is expected to raise funds by issuing
the foreign currency convertible bonds to the ace investor Wilbur
Ross, who has agreed to pump in Rs.354 Crores ($80milion) to tide
over this financial crunch. The conversion price of FCCBs is pegged
at Rs. 56 per share and this convertibility option may be exercised
anytime till 2010. The proposed fund infusion would meet the
working capital requirements including the losses of the company
thereby maintaining the carriers productivity until the crude oil
prices eventually stabilize. Hence, the FCCBs have yet again proved
to be an economicfinancial rescue means by propping up the budget
airline especially as the markets sloth adds to its undesirable and
downbeat performance. Conclusion: In view of the above, monies
raised by the FCCB issues, amounting to foreign investments in
India, prove to be a boon as they are affirmatively utilized for
corporate development and expansion plans. In the Indian context,
the FCCB route, a financial instrument operated by the non-resident
investors, has provided a new way of investing in the Indian
markets. However, there is a constant watch on such corporate
actions as these steps are an open invitation to either Foreign
Investments or what the regulatory authorities term it to be
Foreign Intervention. Despite the bright prospects, the Indian
stock markets have been known for severe manipulations and it is
suspected that the recent boom has come in handy for several
unscrupulous elements to take advantage of such market gyrations.
To sum up, its the primary responsibility of the government to
ensure that the Indian Corporates exploiting such avenues are duly
complying with the instructions and the finances thus borrowed, are
in conformity with the prescribed guidelines and any contravention
are to be viewed seriously attracting penal action.
-------------------------------------------------------------------------------[1]
D.T Khilnani -FEMA Ready Reckoner (Vol.1, 15th edition, July 2008)
[2] Foreign Exchange Management Act, 1999 came into force on the
1st day of June, 2000 thereby repealing the Foreign Exchange
Regulation Act, 1973. [3] As defined in 1.2.1 (xi) of the
Securities and Exchange Board of India (disclosure and investor
protection) Guidelines, 2000. [4] Debenture as defined under
section 2 (12) of The Companies Act, 1956 includes debenture stock,
bonds and any other securities of a company whether constituting a
charge on the assets of the company or not.
[5] Bond is an obligation to pay a fixed sum of money, at a
definite time and with a stated interest. Therefore bond is
generally a long-term debt security. Blacks law Dictionary. [6]
OECD Glossary of Statistical Terms
(http://stats.oecd.org/glossary). [7] 128(3ed. 1991) [8] Debt
securities cover all tradable securities, except those classified
as equity securities. Debt securities include bonds, debentures,
notes, etc., money market or negotiable debt instruments as defined
by OECD Glossary of Statistical Terms
(http://stats.oecd.org/glossary). [9] SEBI Capital Issue Debentures
& Listing by K Sekhar (3ed. Volume 1) [10] A Put Option gives
the bondholder the right but not an obligation to sell a fixed
number of equity shares of a company at a specified price at any
time on or before the maturity date. [11] A Call Option is a
contract giving its owner the right to buy a specified number of
equity shares of a company at a specified exercise price at any
time on or before the fixed maturity date. [12]In US such bonds
listed with SEC are called Yankee Bonds, while they are referred to
as Bulldog Bonds (in U.K.) and Samurai Bonds (in Japan). [13]
Foreign Exchange Management Act, 1999 defines foreign currency
under section 2 (m) as foreign currency means any currency other
than the Indian currency. [14] FCCBs issued by companies are either
security backed FCCBs i.e which create a charge on the assets of
the body corporate or unsecured depending upon the issue
requirements. [15] Rating means an opinion regarding securities,
expressed in the form of standard symbols or any other standardized
manner, assigned by a credit rating agency and used by the issuer
of such securities, to comply with the requirement specified under
the Securities Board of India (Credit Rating Agencies) Regulations,
1999. [16] Credit Rating Agency means a body corporate which is
engaged in, or proposes to be engaged in the business of rating of
securities offered by way of public or rights issue as defined
under 2(h) of the Securities Board of India (Credit Rating
Agencies) Regulations, 1999.
[17] Foreign Exchange Management Act, 1999 under section 2 (w)
states that a person resident outside India means a person who is
not resident in India [18]"Issue of Foreign Currency Convertible
Bonds and Ordinary Shares (Through Depositary Receipt Mechanism)
Scheme, 1993 [19] American Depository Receipts means a security
issued by a Bank or a depository in United States of America
against underlying rupee shares of a company incorporated in India.
[20] Global Depository Receipts means a security issued by a bank
or a depository outside India against underlying rupee shares of a
company incorporated in India. [21] Reserve Bank of India has
issued master circulars, regulations and guidelines which regulate
the issue of FCCB by Indian players in the international corporate
market [22] See supra note.5 [23] See supra note.4 [24] Public
Issue means an invitation by a company to public to subscribe to
the securities offered through a prospectus as defined in SEBI
(Issue and Listing of Debt Securities) Regulations, 2008 [25]
Schedule I- Automatic Route for Issue of Foreign Currency
Convertible Bonds (FCCBs) of The Foreign Exchange Management
(Transfer or Issue of Any Foreign Security) Regulations, 2004 [26]
ibid. [27] The Companies Act, 1956 [28] Section 2(12) of the
Companies Act, 1956 -- Debenture includes debenture stock, bonds
and any other securities of a company, whether constituting a
charge on the assets of the company or not. [29] Clause 19 (a) of
the Listing Agreement [30] Section 292 of the Companies Act, 1956
[31] Section 293(1)(d) of the Companies Act, 1956 [32] Section
293(1)(a) of the Companies Act, 1956 [33] Section 81 (1 A) of the
Companies Act, 1956. [34] Section 117A of the Companies Act, 1956
[35] Section 117B of the Companies Act, 1956 [36] Section 117C of
the Companies Act, 1956 [37] Offer Document means Prospectus in
case of a public issue or offer for sale and Letter of Offer in
case of a rights issue which is any document inviting deposits from
the public or inviting offers from public for the subscription or
purchase of any shares
in, or debentures, bonds of any body corporate and includes any
notice, circular and advertisements. This definition is taken from
the Securities and Exchange Board of India (disclosure and investor
protection) guidelines, 2000 and The Companies Act, 1956. [38]
Filing of information with the RBI within 30 days from the issue
date including total amount of the Bonds issued, names of the
investors resident outside India and the amount repatriated to
India supported by Foreign Inward Remittance Certificates as
provided by Notification FEMA No. 120 i.e. The Foreign Exchange
Management (Transfer or Issue of Any Foreign Security) Regulations,
2004, under Part III - Investments in Foreign Securities other than
by way of Direct Investment. [39] Reserve Bank of India. [40]
International Monetary Fund (IMF) explains that foreign direct
investment is the category of international investment that
reflects the objective of obtaining a lasting interest by a
resident entity in one economy in an enterprise resident in another
economy. The lasting interest implies the existence of a long-term
relationship between the direct investor and the enterprise and a
significant degree of influence by the investor on the management
of the enterprise. [41] RBI/Master Circular No. /07 /2008-09 --
Master Circular on External Commercial Borrowings and Trade
Credits. [42] ECB [43] Also stated in the FEMA 120- The Foreign
Exchange Management (Transfer or Issue of Any Foreign Security)
Regulations, 2004. [44] See supra note.40 [45] Emphasis suppliedthe
ultimate application of the funds raised by the body corporate
through the FCCB issue. [46] Small and Medium enterprises. [47]
Public Sector Undertakings [48] Issue of American Depository
Receipts (ADRs)/ Global Depository Receipts (GDRs) Deopsitory
Agreement. [49] Global Depository Receipts Mechanism is wherein an
instrument in the form of a depository receipt or certificate
created by Overseas Depository bank outside India and issued to
nonresident investors against the issue of ordinary shares or the
foreign currency convertible bonds of the issuing company. [50] See
supra note. 43
[51] Hereinafter to be referred as the Scheme [52] Guide on
foreign Collaboration by Rajiv Jain, (9th ed) [53] Section 2 (b) of
the Scheme. [54] Law governing the ADR/GDR Scheme. [55] Foreign
Investment Promotion Board. [56] Wilbur Ross boards SpiceJet with
$80m The Economic Times, Mumbai edition- July 16, 2008
ISSUE OF FCCBs FOR RAISING FUNDS BY AN
INDIANCOMPANY-----continuedPricing:
The pricing of Foreign Currency Convertible Bond issues should
be made at a price not less than the higher of the following two
averages:
(i)
The average of the weekly high and low of the closing prices of
the related shares quoted on the stock exchange during the six
months preceding the relevant date;
(ii)
The average of the weekly high and low of the closing prices of
the related shares quoted on a stock exchange during the two weeks
preceding the relevant date. The relevant date means the date
thirty days prior to the date on which the meeting of the general
body of shareholders is held, in terms of section 81 (IA) of the
Companies Act, 1956, to consider the proposed issue.
Maximum Amount allowed to be raised and Maturity Period:
An eligible company can raise funds upto USD 500 million in a
single financial year. 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 yeas has expired.
End Use Permitted:
The funds raised through FCCBs can be used only for the
following purposes
1. Investment in the real sector - industrial sector including
small and medium enterprises (SME) and infrastructure sector - in
India. 2. Overseas direct investment in Joint Ventures (JV)/Wholly
Owned Subsidiaries (WOS) subject to the existing guidelines on
Indian Direct Investment in JV/WOS abroad. 3. The first stage
acquisition of shares in the disinvestment process and also in the
mandatory second stage offer to the public under the Governments
disinvestment programme of PSU shares. 4. For refinancing of the
existing FCCB subject to the condition that the fresh FCCB is
raised at a lower all-in-cost and the outstanding maturity of the
original FCCB is maintained.
However a company is not allowed to use the funds in following
activities
1. for on-lending or investment in capital market or acquiring a
company (or a part thereof) in India except banks and financial
institutions eligible under approval route 2. utilisation of funds
in real estate sector 3. for working capital, general corporate
purpose and repayment of existing Rupee loans.
All-in-cost ceilings:
All-in-cost includes rate of interest, other fees and expenses
in foreign currency except commitment fee, pre-payment fee, and
fees payable in Indian Rupees. The payment of withholding tax in
Indian Rupees is excluded for calculating the all-in-cost. The
current ceilings are as below: Average Period Maturity All-in-cost
Ceilings over 6 month LIBOR* Three years and up to five years More
years than five 200 basis points
350 basis points
* for the respective currency of borrowing or applicable
benchmark.
Some other important points :
1. FCCBs issued have to be in confirmations with the FDI Policy
including Sectoral caps and sectors permitted. 2. FCCBs issue can
not be utilised for the purpose of investment in stock market. 3.
Funds raised are required to be parked abroad unless they are de
facto required by the company. For the time being the funds can be
invested in short term liquid assets expressly specified by the
RBI. 4. Issue of FCCB with attached warrant is not permitted. 5.
There is no maximum limit on the number or value / size of the FCCB
instrument. 6. Banks, FIs, NBFCs are not permitted to issue letter
of comfort / guarantee / letter of undertaking etc for the FCCB
issue. 7. Issuing entity is required to furnish a report to the RBI
within 30 days from the date of issue giving the details and
documents as under: a) Total amount for which FCCBs have been
issued,
b) Names of the investors resident outside India and number of
FCCBs issued to each of them.c) The amount repatriated to India
through normal banking channels and/or the amount received by debit
to NRE/FCNR accounts in India of the investors (duly supported by
bank certificate). 8. There is no requirement in regard to security
underlying FCCB and it has been left to the discretion of the
issuing company to decide the type of such security subject to any
other extant rules and regulations. Unlisted companies, which have
not yet accessed the Global Depositary Receipt / Foreign Currency
Convertible Bond route for raising capital in the international
market would require prior or simultaneous listing in the domestic
market, while seeking to issue Foreign Currency Convertible Bonds
in accordance with Foreign Currency Convertible Bonds and Ordinary
Shares (Through Depositary Receipt Mechanism) Scheme, 1993.
All about FCCB Foreign Currency Convertible Bondby
BankBazaar.com Desk on 8, October, 2009 0 | A Foreign Currency
Convertible Bond (FCCB) is a type of convertible bond issued in a
currency different than the issuers domestic currency. In other
words, the money being raised by the issuing company is in the form
of a foreign currency. It gives two options. One is, to get the
regular interest and principal and the other is to convert the bond
in to equities. It is a hybrid between bond and stock.
A newcomer to the business and finance sector can get numbed
with the plethora of types of stocks, bonds, funds etc. along with
its associated terms. An average individual has to understand a
mountain of information to understand to make sound financial
decisions. In a bid to make things simpler, lets take a look at a
bond which we most probably would run into while going through
financial information Foreign Currency Convertible Bond (FCCB).
What is a Foreign Currency Convertible Bond (FCCB)? A Foreign
Currency Convertible Bond (FCCB) is a type of convertible bond
issued in a currency different than the issuers domestic currency.
In other words, the money being raised by the issuing company is in
the form of a foreign currency. It gives two options. One is, to
get the regular interest and principal and the other is to convert
the bond in to equities. It is a hybrid between bond and stock. How
does it help companies? Some companies, banks, governments, and
other sovereign entities may decide to issue bonds in foreign
currencies because:
It may appear to be more stable and predictable than their
domestic currency Gives issuers the ability to access investment
capital available in foreign markets Companies can use the process
to break into foreign markets The bond acts like both a debt and
equity instrument. Like bonds it makes regular coupon and principal
payments, but these bonds also give the bondholder the option to
convert the bond into stock
It is a low cost debt as the interest rates given to FCC Bonds
are normally 30-50 percent lower than the market rate because of
its equity component Conversion of bonds into stocks takes place at
a premium price to market price. Conversion price is fixed when the
bond is issued. So, lower dilution of the company stocks How does
it benefit an investor? Its not just companies who are benefited
with FCCB. Investors too enjoy its benefits. Here are some:
Safety of guaranteed payments on the bond Can take advantage of
any large price appreciation in the companys stock Redeemable at
maturity if not converted Easily marketable as investors enjoys
option of conversion in to equity if resulting to capital
appreciation Are there any disadvantages to the investors and
companies? Yes. Like any financial instruments, FCCBs also have
there disadvantages. Some of these are:
Exchange risk is more in FCCBs as interest on bond would be
payable in foreign currency. Thus companies with low debt equity
ratios, large forex earnings potential only opted for FCCBs FCCBs
means creation of more debt and a FOREX outgo in terms of interest
which is in foreign exchange In case of convertible bond the
interest rate is low (around 3 to 4%) but there is exchange risk on
interest as well as principal if the bonds are not converted in to
equity If the stock price plummets, investors will not go for
conversion but redemption. So, companies have to refinance to
fulfil the redemption promise which can hit earnings It will remain
as debt in the balance sheet until conversion
How is taxation done on FCCBs? Taxation is computed in the
following way:
Until the conversion option is exercised, all the interest
payments on the bonds, is subject to deduction of tax at source at
the rate of 10% Tax exercised on dividend on the converted portion
of the bond is subject to deduction of tax at source at the rate of
10% If Foreign Currency Convertible Bonds ( FCCB ) is converted
into shares it will not give rise to any capital gains liable to
income-tax in India If Foreign Currency Convertible Bonds (FCCB) is
transferred by a non-resident investor to another non-resident
investor it shall not give rise to any capital gains liable to tax
in India.
S TATE B ANK OF I NDIA TO GAIN R S 242 FROM W OCKHARDT ' S FCCB
DEAL
CRORE
Story Comments
Read more on Sun Pharma|State Bank Of India|ICICI bank|Bank of
India
Sun Pharmaceutical Industries Ltd.BSE
500.40
2.25 (0.45%)Vol:3471 shares traded
NSE
500.10
0.15 (0.03%)Vol:24816 shares traded
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MUMBAI: State Bank of India grabbed itself a new year gift from
the troubled drug-maker Wockhardt that could lead to a near-term
gain of as much as Rs 242 crore in a case relating to the company
defaulting on foreign currency convertible bonds (FCCB), said a
person familiar with the matter. State Bank, which had agreed to
convert half of its $40 million bond holdings into equity shares in
2015 and redeem the remaining at a premium in 2018, has now
enforced a clause in the settlement that says it should get the
same treatment as other bondholders. After Wockhardt defaulted on
its FCCB payments, bondholders, such as a fund QVT and Sun Pharma,
dragged the company to court. The company lost the two-year-long
battle as the court directed it to pay the bondholders. The company
has now decided to pay SBI the same way as other bondholders
despite the bank having agreed to wait for payments. Workhardt did
not respond to an email sent by ET regarding this development.
Hundreds of crores in soured derivatives deals forced Wockhardt to
default on its payments when they came up for repayments in 2009.
Its plans to sell assets and repay some lenders also backfired with
courts blocking such sales without paying the bondholders.
After many attempts, the company is slowly making headway in
returning to normal operations. It has also applied to leave the
so-called corporate debt restructuring (CDR) programme. The exit
will help it focus on business instead of dealing with multiple
lenders. It has appointed ICICI Bank to work out the recompense
amount -the settlement amount it would pay lenders to get out of
the CDR programme.
I NDIA I NC Story Comments (1)
FINDS DOLLAR FUND ING GROW S SCARCE , EXPENSIVE
Read more on Yen Capital Advisors|Vijay Mallya|United
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Inc|Hindustan Petroleum Corp Ltd|Funding|Era Group|dollar|Debt
Financing|DBS Bank|Amtek India
United Spirits Ltd.BSE
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MUMBAI: Indian companies can no longer count ondollar credit as
a cheap funding alternative to expensive domestic borrowings. While
surging interest rates at home had prompted many Indian companies
to look offshore to raise dollars this year, risk-aversion among
banks has pushed up the cost of offshore debt and made it scarce
for all but the highest-rated borrowers. As a result, small or
mid-sized firms with repayments looming face the risk of default,
while those in urgent need of cash may have little choice but
expensiverupee debt, adding to their interest burden. "Prices are
higher, credit spreads are higher, so it is tougher to get dollars.
Banks have an issue about liquidity," said Harinder Singh, head of
global markets for South Asia at UK-based Standard Chartered Bank.
The Still, squeeze Singh is most acute "everyone for is firms in
looking to refinance to existing raise debt. dollars."
said,
discussions
While globally companies are finding it harder to raise funds as
investors sit on the sidelines and banks are in
capital-preservation mode due to the European debt crisis, the
dollar funding squeeze is especially painful for Indian companies
given the high cost of local funding. An Indian bluechip now pays
about 9-11 percent interest on a dollar loan, still better than the
12-14 percent it would cost to borrow in rupees, but far more
expensive than the 7-8 percent it would have cost a month or so
ago. "We are not in the market for long-term loans, but we are
finding it difficult to raise even short-term funds for working
capital," said M.V.S Seshagiri Rao, joint managing director of JSW
Steel, India's No.3 steel producer. Rao said that while the cost
advantage of dollar borrowing has waned significantly, the company
still prefers dollar loans as a hedge against its imports. In
October, state-run Hindustan Petroleum Corp Ltd raised $465 million
for plant modernisation and paid 165 basis points over LIBOR, said
a senior executive who did not wish to be identified. Rates for a
similar credit have risen to about 400 basis points over LIBOR
since then, bankers said. FEW OPTIONS Indian companies, which have
refrained from big investments in recent quarters as global and
local economic conditions weakened, have relied on offshore sources
to raise funds this year due to a poor stock market -- the
benchmark is down 23 percent -- and high interest rates at home.
India's main policy interest rate, at 8.5 percent, is at its
highest since July 2008 after the central bank raised rates 13
times between March 2010 and this past October in a tightening
cycle that is widely seen to be ending. Slowing economic growth and
high interest rates, meanwhile, are squeezing profits at Indian
companies, making them less attractive to lenders. Capital-hungry
Indian firms are hoping the market picks up. "Today, since the
situation is tight, we are not even approaching banks," said H.S.
Bharana, chairman of construction firm Era Group, which has been
looking to convert $100 million of rupee loans into cheaper U.S.
dollar loans. Auto parts maker Amtek India, which plans to raise
$250 million, is waiting for markets to become
more
favorable.
"We are watching overseas markets and believe that in the next
six months we should borrow in dollars," saidSantosh Singhi,
Amtek's chief financial officer. Liquor maker United Spirits,
headed by flamboyant tycoon Vijay Mallya, who also controls ailing
Kingfisher Airlines, recently said it had hired StanChart, DBS Bank
and Rabobank to raise up to $225 million in offshore convertible
bonds in early 2012 to cut high-cost debt. DOUBLE WHAMMY Firms in
India have raised $30 billion through external commercial
borrowings in 2011, about a third higher than a year earlier, RBI
data showed. Many of those borrowers are exposed to currency losses
after the rupee lost nearly 20 percent of its value from a July
peak to a record low earlier this month. Brokerage SMC Global
Securities has estimated provisions for mark-to-market losses on
foreign exchange requirement for Indian firms at 270 billion rupees
($5 billion), resulting in "disastrous December quarterly results."
"Smaller companies will not get dollar funding and are in danger of
default," said Sunil Shirole, chief executive at Mumbai-based
boutique investment bank Yen Capital Advisors. "They may be able to
access the domestic debt market, but that will be very costly," he
said. Shirole is working on two or three fundraising proposals
including one for an energy company and another for an IT-services
firm, which is looking to raise dollars to meet repayment
obligations of its convertible bonds. India's central bank in its
Financial Stability Report last week noted that foreign sources of
lending are declining due to a rise in risk aversion and "tensions
arising from Europe." Although rates have moved up, HPCL may still
look for overseas funding in the near future as it enjoyed a 200
basis points discount to local borrowing, the executive said. "The
market is tough, but good bluechip names can still borrow in
dollars. There are deals in the pipeline for the right kind of
borrowers," Standard Chartered's Singh said.
U NITED S PIRITS
TO HOLD EGM SEEKING SHAREHOLDER APPROVAL FOR FCCB
ISSUEBANGALORE: Vijay Mallya-promoted liquor company United Spirits
said an extraordinary general meeting of the shareholders will be
held on Jan 20, 2012 to approve a fund-raising plan of $225 million
through the issue of foreign currency convertible bonds (FCCB).
FCCBs are funds raised in foreign currency which have
characteristics of debt and equity instruments. They carry coupon
rate payments while giving theFCCB holder an option to convert into
equity. The Bangalore-based company said it has proposed an issue
of FCCBs to garner long term resources early next year. This was
primarily to retire foreign currency debts through investments in
wholly-owned overseas subsidiaries. It said this would consequently
improve profits and earnings per share. The company additionly said
it would help meet its fund requirements for expansion and capital
expenditure. United Spirits said its board of directors had
approved an issue of FCCBs worth $175 million and a green shoe
option of upto further $50 million, in a stock exchange filing on
December 21. Standard Chartered Bank, Rabo Bank and DBS Bank have
been appointed as advisors to the issue. United Spirits' stock
closed at Rs 547.20 on the BSE, 4.81% lower on Wednesday
trading.
EXAMPLE A conversion ratio of 45:1 means one bond (with a $1,000
par value) can be exchanged for 45 shares of stock. Or it could be
specified at a 50% premium, meaning that if the investor chooses to
convert the shares, he or she will have to pay the price of the
common stock at the time of issuance plus 50%. Basically, these are
the same thing said two different ways.