Foreign Currency Convertible Bonds Features & Taxation

A Foreign Currency Convertible Bond (FCCB) primarily serves as a financial instrument used by companies to raise capital in a foreign currency. The primary purpose of issuing an FCCB is to take advantage of lower interest rates in fccb meaning foreign countries while also minimizing the risk of exchange rate fluctuations. They offer a fixed income like a traditional bond yet carry the added advantage of potential capital appreciation if the issuer’s share price goes up.

The coupon payments and principal repayment would be made in foreign currency to the investors. At the maturity date, they would have the option of converting the bond into shares of the company. If the share prices fall below the conversion rate, bondholders would rather redeem the principal amount. Foreign currency convertible bonds, as the name suggests, are bonds that are issued in a currency foreign to the investor. The name also suggests that the bonds are convertible in nature, indicating that investors not only receive principal and coupon payments but also offer the option of converting their bonds into stocks. Foreign currency convertible bonds are issued in a currency foreign to the investor.

It is determined by dividing the par value of the bond by the conversion price. For example, if the par value of the bond is $1,000 and the conversion price is $10, the conversion ratio would be 100 shares per bond. The key difference, therefore, is while FCCB involves just one company, FCEB involves at least two companies — the bonds are usually of the parent company while the shares are of the operating company which must be a listed company. She has diversified and rich experience in personal finance for more than 5 years. Her previous associations were with asset management companies and investment advising firms. She brings in financial markets subject matter expertise to the team and create easy going investment content for the readers.

As FCCBs are denominated in foreign currency, issuers can use the proceeds to fund overseas operations or acquisitions, reducing their exposure to exchange rate fluctuations. FCCBs possess several unique features that differentiate them from traditional bonds and make them attractive to both issuers and investors. When a company decides to issue a Foreign Currency Convertible Bond (FCCB), it typically follows a specific process. First, the company needs to determine the terms and conditions of the bond, including the conversion price, interest rate, maturity date, and any other relevant details. One of the advantages of FCCBs is that they provide companies with a lower cost of capital compared to other financing options, such as equity or traditional debt.

The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. As global economic conditions continue to change, FCCBs are expected to maintain their prominence as a key financing option for companies seeking to diversify their funding sources and seize opportunities in the international market. In recent years, the FCCB market has experienced significant growth, driven by a growing number of issuers exploring international markets for funding. After the allocation process, FCCBs are listed on a stock exchange, typically in the jurisdiction where they were issued.

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  2. They can also choose to receive coupon payments during the tenure and redeem the principal amount at maturity.
  3. This can be done through private placements or public offerings, depending on the company’s preference and regulatory requirements.
  4. The bondholder becomes a shareholder in the company and is entitled to all the rights and benefits of a shareholder, including voting rights and dividends.
  5. A downgrade in the issuer’s credit rating can negatively impact the bond’s value.
  6. After the allocation process, FCCBs are listed on a stock exchange, typically in the jurisdiction where they were issued.

●    Since they are equity-linked debt securities, the holder can transfer the bond into equity or depository receipt after some time. ●    The funds collected through the FCCB will be used according to ECB guidelines. Foreign currency convertible bonds (FCCBs) are issued by a company to non-residents giving them the option to convert them into shares of the same company at a predetermined price. On the other hand, foreign currency exchangeable bonds are issued by the investment or holding company of a group to non-residents which are exchangeable for the shares of the specified group company at a predetermined price. The term Foreign Currency Convertible Bond (FCCB) is significant in the finance/banking sector because it combines debt and equity advantages.

Companies planning to issue FCCBs must obtain approvals from relevant regulatory authorities, both in their home country and in the jurisdiction where the bonds will be listed. This may involve meeting specific eligibility criteria and providing necessary documentation. This can be particularly advantageous for companies with significant foreign currency liabilities or those operating in multiple countries.

What Are Foreign Currency Exchangeable Bonds

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Prior approval of the Reserve Bank of India (RBI) is required for issuance of FCEBs. It is a popular route for Indian companies for borrowing in a foreign currency. But are you familiar with the relatively newer Foreign Currency Exchangeable Bonds (FCEBs)? When a company issues an FCCB, it sets a conversion price, which is the price at which the bond can be converted into shares.

How Is Capital One Minimum Payment Calculated

FCEBs are another arrow in the quiver of Indian promoters to raise money overseas to fund their new projects and acquisitions, both Indian and global, by leveraging a part their shareholding in listed group entities. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. These bonds assume great importance for multinational corporations and in the current business scenario of globalisation, where companies are constantly dealing in foreign currencies. All content on this website, including dictionary, thesaurus, literature, geography, and other reference data is for informational purposes only. This information should not be considered complete, up to date, and is not intended to be used in place of a visit, consultation, or advice of a legal, medical, or any other professional.

FCCBs can sometimes suffer from liquidity risk, as they may not be as widely traded as traditional bonds or equities. This can make it difficult for investors to buy or sell the bonds in the secondary market, potentially impacting their ability to exit the investment. Interest rate risk arises from the potential for changes in market interest rates to affect the value of FCCBs. An increase in market interest rates can lead to a decline in the bond’s price, resulting in capital losses for investors.

Essentially, it is a type of corporate bond that the holder can convert into equity or cash at a specific rate and time. An FCCB investor can purchase these bonds at a stock exchange, and has the option to convert the bond into equity or a depositary receipt after a certain period of time. Investors can participate in any price appreciation of the issuer’s stock by converting the bond to equity.

Emily Bibb simplifies finance through bestselling books and articles, bridging complex concepts for everyday understanding. Engaging audiences via social media, she shares insights for financial success. Active in seminars and philanthropy, Bibb aims to create a more financially informed society, driven by her passion for empowering others. Once the terms are finalized, the company will approach potential investors to gauge their interest in purchasing the FCCBs. This can be done through private placements or public offerings, depending on the company’s preference and regulatory requirements. Under IFRS provisions, a company must mark-to-market the amount of its outstanding bonds.

FCCBs, like other debt instruments, are subject to credit ratings by agencies such as Moody’s, Standard & Poor’s, and Fitch Ratings. The credit rating reflects the issuer’s creditworthiness and ability to repay the debt, influencing the interest rate offered on the bond. The maturity period of FCCBs can vary, but they generally have a medium to long-term maturity, ranging from five to ten years. This extended maturity period provides issuers with a longer time horizon to repay the debt, reducing the burden on their cash flows. Foreign Currency Convertible Bonds are a type of hybrid financial instrument combining features of both debt and equity. 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.

Issue of Foreign Currency Exchangeable Bonds (FCEB) Scheme, 2008

Investors can convert these bonds into equity or redeem the principal amount and receive coupon payments. A foreign currency convertible bond (FCCB) is 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 foreign currency. 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. They make regular coupons and principal payments in a foreign currency till a particular date. ●    These convertible bond offerings come with lower interest rates than standard bonds.

A foreign currency convertible bond is one such option for these companies to raise capital in a foreign market. If the value of the issuer’s currency falls against the investor’s domestic currency, the value of the bond could decline. Additionally, there’s a risk that the issuing company could perform poorly, making conversion into equity less attractive.

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This feature provides flexibility to both parties, allowing them to respond to changes in market conditions. They have to follow the ECB and FDI norms and the various scheme regulations concerning the Issue of Securities. Thus, the issuance of FCCB requires careful analysis of business needs, corporate finance structure and financial market sentiments.