Foreign Currency Convertible Bonds Features & Taxation

Thus, the issuance of FCCB requires careful analysis of business needs, corporate finance structure and financial market sentiments. Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, financial institutions and NBFCs relating to ECB is not normally permitted. Applications for providing guarantee/standby letter of credit or letter of comfort by banks, financial institutions relating to ECB in the case of SME will be considered under the approval route on merit subject to prudential norms. AD Category – I banks may invariably specify that the ‘no objection’ is issued from the foreign exchange angle under the provisions of FEMA, 1999 and should not be construed as an approval by any other statutory authority or Government under any other law/ regulation. If further approval or permission is required from any other regulatory / statutory authority or Government under the relevant laws / regulations, the applicant should take the approval of the authority concerned before undertaking the transaction. Further, the ‘no objection’ should not be construed as regularizing or validating any irregularities, contravention or other lapses, if any, under the provisions of FEMA or any other laws or regulations.

These are listed and traded in foreign stock exchange and similar to the debenture. 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 Regulations, 1999. Bond is an obligation to pay a fixed sum of money, at a definite time and with a stated interest.

fccb meaning

Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government are also permitted to the extent of their investment in the package and assessment by Reserve Bank based on prudential norms. Any ECB availed for this purpose so far will be deducted from their entitlement. Borrowers may enter into loan agreement with recognised lender for raising ECB under Automatic Route complying with the ECB guidelines without prior approval of the Reserve Bank. The borrower must obtain a Loan Registration Number from the Reserve Bank before drawing down the ECB. The existing ECB may be refinanced by raising a fresh ECB subject to the conditions that the fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the original ECB is maintained. The Indian company shall open an escrow account with the branch or subsidiary of an Indian bank overseas or an international bank for buying back the FCCBs to ensure that the funds are used only for the buyback.

What are the Taxes on Foreign Currency Convertible Bond (FCCB)

However, FCCBs also carry some additional risks compared to regular bonds, such as the risk of currency exchange rate fluctuations and the risk of dilution if the bond is converted into equity. With the rapidly rising index and foreign funds investing heavily in the Indian market, the corporate sector has seen a massive surge of profits in the recent past. According to a recent World Bank report, India is now the largest recipient of non-resident transfers in the world. Following the foot steps of the Booming Chinese economy, the Indian government has introduced an alternative means for the Indian entities to raise funds from the international markets by way of the Bonds Issue. The most common facet of this bonds issue is the foreign currency convertible bonds, which are open to the foreign markets by making regular coupon and principal payments and also giving the foreign bondholder an option to convert the bond into stock when the market fluctuations favour them. A foreign currency convertible bond is a type of bond that can be converted into the issuing company’s stock at a predetermined conversion price.

Foreign Direct Investment (“FDI”) Master Circular and Sectoral Caps – the circulars are related to the sectoral caps on the FDI which are also issued by the RBI. All aspects with respect to ECB policy, including the borrower, lender, repayment, etc., shall remain the same. The all-in-cost ceilings also include arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any. In real estate, it helps to have experience. Housebuyernetwork.com is reliable, which is good for our customers. Knowing about the local market helps a business do well. In this study, we put together a plan and make a case for details. There are online, offline, and creative ways to market and sell your home. We know enough to make sure the deal goes well. 

fccb meaning

Individual lenders from countries wherein banks are not required to adhere to Know Your Customer guidelines are not eligible to extend ECB. Ø The bond to equity convertible option attached to the FCCBs is subject to the Reserve bank of India guidelines. Such FCCBs can be converted by exercising the Call option and Put option to suit the structure of the Bond. Technically debenture is an unsecured corporate obligation while bond is secured by a lien or mortgage on the corporate property.

Hotels, hospitals and software sector are allowed to avail of ECB up to USD 100 million or its equivalent in a financial year for meeting foreign currency and / or Rupee capital expenditure for permissible end-uses. Non-Government Organizations engaged in micro finance activities are eligible to avail ECB. This definition is taken from the Securities and Exchange Board of India guidelines, 2000 and The Companies Act, 1956. 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. 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. 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.

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In subsequent months, the outstanding portion of ECB should be reported in ECB-2 form to DSIM. Iv) All-in-cost ceilingsAll-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. Moreover, the payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.

fccb meaning

Corporates which have violated the extant ECB policy and are under investigation by Reserve Bank and / or Directorate of Enforcement, are allowed to avail ECB only under the Approval route. Ensuring that the period of such corporate or personal guarantee is co-terminus with the maturity of the underlying ECB. Board Resolution for issue of corporate guarantee from the company issuing such guarantees, specifying names of the officials authorised to execute such guarantees on behalf of the company or in individual capacity. Such ‘no objection’ should not be construed as a permission to acquire immovable asset in India, by the overseas lender / security trustee. ECB above USD 20 million or its equivalent and up to USD 500 million or or its equivalent with a minimum average maturity of five years.

of FCCBs

Utilization of ECB proceeds is permitted for first stage acquisition of shares in the disinvestment process and also in the mandatory second stage offer to the public under the Government’s disinvestment programme of PSU shares. Overseas direct investment in Joint Ventures /Wholly Owned Subsidiaries subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad. ECB up to USD 20 million or its equivalent can have call/put option provided the minimum average maturity of three years is complied with before exercising call/put option. ECB up to USD 20 million or its equivalent in a financial year with minimum average maturity of three years. The maximum amount of ECB which can be raised by a corporate other than those in the hotel, hospital and software sectors is USD 500 million or its equivalent during a financial year.

  • FCCBs are typically issued by companies in developing countries and are denominated in a foreign currency, such as the U.S. dollar or the euro.
  • Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, financial institutions and NBFCs relating to ECB is not normally permitted.
  • In other cases, the all-in-cost for the relevant maturity of the ECB shall apply.
  • Prepayment of ECB up to USD 500 million may be allowed by AD banks without prior approval of the Reserve Bank subject to compliance with the stipulated minimum average maturity period as applicable to the loan.

SEZ developers can avail of ECBs for providing infrastructure facilities within SEZ, as defined in the extant ECB policy, viz. Power, telecommunication, railways, road including bridges, sea port and airport industrial parks urban infrastructure and mining, refining and exploration. However, ECB will not be permissible for development of integrated township and commercial real estate within SEZ. ECB funds may also be remitted to India for credit to the borrowers’ Rupee accounts with AD Category – I banks in India, pending utilization for permissible end-uses. Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, Financial Institutions and Non-Banking Financial Companies from India relating to ECB is not permitted. For working capital, general corporate purpose and repayment of existing Rupee loans.

This means that FCCBs are like the bonds which make regular interests and principal payments, and these bonds give the bondholder the option to convert their bonds into stocks/equity shares. FCCBs offer investors the option to convert their bonds into equity, which can be attractive if the company’s stock is expected to appreciate in value. Trade Credits refer to credits extended for imports directly by the overseas supplier, bank and financial institution for maturity of less than three years. Depending on the source of finance, such trade credits include suppliers’ credit or buyers’ credit. Suppliers’ credit relates to credit for imports into India extended by the overseas supplier, while buyers’ credit refers to loans for payment of imports in to India arranged by the importer from a bank or financial institution outside India for maturity of less than three years. It may be noted that buyers’ credit and suppliers’ credit for three years and above come under the category of External Commercial Borrowings which are governed by ECB guidelines.

Foreign Currency Convertible Bonds is a special type of debt instrument issued in a currency other than a home currency. It acts like a bond making regular coupon and principal payments and provides investors with an option to convert them into equity. Therefore, upon maturity, the holders can convert the equivalent value of equity at a set conversion rate. Usually, the Indian company issues these convertible bonds abroad to raise money in foreign currency. In simple words, these bonds could only be issued to a country outside India, which means the currency that follows the arrangement is foreign i.e., the payment of the interest or the wholesome loan amount is to be made in the foreign currency only, rather than making it in rupees.

FCCB Full Form in Marathi

Ø Indian Companies, eligible to issue shares to persons residents outside India under the Foreign Direct Investment Scheme can raise foreign currency resources aboard through the issue of American Depository Receipts or Global Depository Receipts . 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. Debt-Instrument means an instrument which creates or acknowledges indebtedness, and includes debenture, stock, bonds and such other securities of a body corporate, whether constituting a charge on the assets of the body corporate or not. FCCBs may offer investors a higher yield than traditional debt securities, as the option to convert into equity represents a potential upside.

The choice of security to be provided to the lender / supplier is left to the borrower. However, creation of charge over immovable assets and financial securities, such as shares, in favour of the overseas lender is subject to Regulation 8 of Notification No. FEMA 20/RB-2000 dated May 3, 2000 as amended from time to time, respectively. Powers have been delegated to Authorised Dealer Category I banks to issue necessary ‘no objection’ under FEMA ,1999 as detailed in para I ibid. Iii) Amount and MaturityCorporates can avail of ECB of an additional amount of USD 250 million with average maturity of more than 10 years under the approval route, over and above the existing limit of USD 500 million under the automatic route, during a financial year.

Utilisation of ECB proceeds is not permitted for on-lending or investment in capital market or acquiring a company in India by a corporate except banks and financial institutions eligible under paragraph I and I . 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. Before the Foreign Currency Convertible Bonds 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.

It is the discretion of the investor or bondholder whether to convert the bonds into equity or take back the loan amount along with interest upon the expiry of the specific period. Hence, FCCB could be retained as a bond or with pre-determined price or exchange rates to convert into equity. FCCBs are typically issued by companies in emerging markets looking to raise capital from international investors. They are a popular way for companies to access global capital markets and diversify their investor base.

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