Definition: 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. FCCBs are typically issued by multinational companies operating in a global space and looking to raise capital in foreign currencies. FCCB investors are usually hedge fund arbitrators and foreign nationals.
Explanation: FCCBs are a hybrid security, combining features of both debt and equity. They act like bonds by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock at a predetermined price and conversion ratio.
Advantages
For issuers:
FCCBs can be a cheaper way to raise capital than traditional debt or equity offerings, as they typically offer lower interest rates than conventional bonds.
FCCBs can help to diversify the issuer’s investor base and reduce its reliance on domestic capital markets.
FCCBs can also help to improve the issuer’s credit rating.
For investors:
FCCBs offer the potential for both fixed-income and equity returns.
FCCBs can be a way to gain exposure to emerging markets without having to invest directly in stocks.
FCCBs can also be used to hedge against currency fluctuations.
Disadvantages
For issuers:
FCCBs can be risky for issuers, as they are exposed to both foreign exchange risk and equity risk.
If the issuer’s stock price falls below the conversion price, the bondholders may convert their bonds into stock, diluting the equity of the issuer’s existing shareholders.
For investors:
FCCBs are complex securities and can be difficult to understand.
FCCBs are exposed to a number of risks, including foreign exchange risk, equity risk, and credit risk.
Issuers of FCCBs in the Indian market
FCCBs can be issued by any Indian company that meets the eligibility criteria set by the Reserve Bank of India (RBI). Some of the factors that the RBI considers include the company’s financial health, credit rating, and track record.
Some of the Indian companies that have issued FCCBs in the past include:
Reliance Industries
Infosys
Tata Consultancy Services
HDFC Bank
ICICI Bank
Wipro
Dr. Reddy’s Laboratories
Cipla
Sun Pharmaceutical Industries
Kotak Mahindra Bank
Process of Issue
To issue FCCBs in the Indian market, a company must first obtain approval from the RBI. The company must then file a prospectus with the Securities and Exchange Board of India (SEBI). The prospectus must contain all of the relevant information about the FCCB offering, including the terms and conditions of the bonds. Once the prospectus has been approved by SEBI, the company can then launch its FCCB offering. The offering will typically be managed by a syndicate of investment banks.
Regulatory guidelines associated with the issuance of FCCBs in the Indian market
The issuance of FCCBs in the Indian market is governed by a number of regulatory guidelines, including:
The Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993
The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009
The Basel III Accord
Other aspects related to the Indian market
FCCBs are a relatively new instrument in the Indian market, but they have become increasingly popular in recent years. This is due to a number of factors, including the growing appetite of foreign investors for Indian assets and the need for Indian companies to raise capital in foreign currencies.
Some of the key aspects related to the Indian FCCB market include:
The Indian FCCB market is one of the largest in the world.
FCCBs are typically issued with a maturity of 5-7 years.
The conversion price of FCCBs is typically set at a premium to the issuer’s current stock price.
FCCBs are typically listed and traded on overseas stock exchanges.
The risks involved with FCCBs include:
Currency risk: FCCBs are typically issued in a foreign currency, which exposes the issuer to the risk of fluctuations in the exchange rate. If the issuer’s domestic currency depreciates the cost of repaying the FCCBs will increase.
Equity risk: FCCBs give the bondholder the option to convert the bond into stock at a predetermined price. If the issuer’s stock price falls below the conversion price, the bondholders may convert their bonds into stock, diluting the equity of the issuer’s existing shareholders.
Credit risk: FCCBs are debt securities, so investors are exposed to the risk that the issuer may default on its obligations.
Conversion risk: If the issuer’s stock price does not rise above the conversion price, the bondholders may not convert their bonds into stock, which means that the issuer will have to repay the FCCBs in full at maturity.
In addition to these general risks, there are also some specific risks associated with FCCBs in the Indian market:
Regulatory risk: The issuance of FCCBs in India is subject to a number of regulatory guidelines, and the RBI may change these guidelines at any time.
Settlement risk: The settlement of FCCBs in India can be complex and time-consuming.
Liquidity risk: FCCBs may not be as liquid as other types of securities, which means that it may be difficult to sell them quickly.
Overall, FCCBs are a complex and risky instrument, but they can also offer a number of advantages for both issuers and investors. It is important for both issuers and investors to carefully consider the risks involved before investing in FCCBs.
Here are some additional tips for investors who are considering investing in FCCBs:
Make sure you understand the terms and conditions of the FCCBs before you invest.
carefully consider the risks involved, including currency risk, equity risk, credit risk, conversion risk, regulatory risk, settlement risk, and liquidity risk.
Diversify your portfolio by investing in a variety of different asset classes and securities.
Consult with a financial advisor to get personalized advice.
Case study: Reliance Industries
Reliance Industries is one of the largest companies in India, and it has issued FCCBs on a number of occasions. In 2005, Reliance Industries issued $1 billion in FCCBs with a maturity of 5 years and a conversion price of ₹1,000 per share. The FCCBs were issued at a coupon rate of 4.25%.
The FCCBs were well-received by investors, and they were oversubscribed by several times. The FCCBs were converted into equity in 2010, when Reliance Industries’ stock price was above the conversion price.
The FCCB issuance was beneficial for Reliance Industries in a number of ways. First, it allowed Reliance Industries to raise capital at a lower cost than traditional debt or equity offerings. Second, it helped to diversify Reliance Industries’ investor base and reduce its reliance on domestic capital markets. Third, it helped to improve Reliance Industries’ credit rating.
Case study: Infosys
Infosys is another large Indian company that has issued FCCBs. In 2007, Infosys issued $1.5 billion in FCCBs with a maturity of 7 years and a conversion price of ₹1,200 per share. The FCCBs were issued at a coupon rate of 4.75%.
The FCCBs were issued at a time when the Indian stock market was booming, and Infosys’ stock price was rising rapidly. However, the global financial crisis hit in 2008, and Infosys’ stock price fell sharply. As a result, the conversion price of the FCCBs became above the market price of Infosys’ stock.
This meant that the FCCB holders could not convert their bonds into equity at a profit. However, Infosys was still required to repay the FCCBs in full at maturity.
The FCCB issuance was ultimately a costly mistake for Infosys. The company had to repay the FCCBs in full, even though the conversion price was above the market price of its stock. This resulted in a significant loss for Infosys.
Conclusion
FCCBs can be a useful tool for companies to raise capital, but they are also a complex and risky instrument. It is important for both issuers and investors to carefully consider the risks involved before investing in FCCBs.FCCBs can be a complex and risky instrument, but they can also offer a number of advantages for both issuers and investors. Issuers can use FCCBs to raise capital at a lower cost than traditional debt or equity offerings, and investors can use FCCBs to gain exposure to both fixed-income and equity returns. However, it is important for both issuers and investors to carefully consider the risks involved before investing in FCCBs.