Foreign Currency Convertible Bonds

(FCCBs)

for

CHAMBER OF TAX CONSULTANTS

FEB 2015

ARVIND RAO & ASSOCIATES

FCCB - Meaning

External Commercial Borrowing (ECB) Guidelines:

FCCB means a bond issued by an Indian company expressed inforeign currency and the principal and interest in respect of which is

payable in foreign currency.

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FCCB - Meaning

Issue of Foreign Currency Convertible Bonds and

Ordinary Shares

(Through Depository Receipt Mechanism) Scheme, 1993:

FCCB means a bond issued in accordance with this scheme &

subscribed by a non-resident in foreign currency & convertible intoordinary shares of the issuing company in any manner either in

whole or in part, on the basis of any equity related warrants

attached to the debt instrument.

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Foreign Currency Convertible Bond (FCCB)

• Governed by RBI through

– Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary

Receipt Mechanism) Scheme, 1993

– Guidelines on External Commercial Borrowings (since Aug 2005)

– Provisions of Notification FEMA No. 120/RB-2004 dated July 7, 2004 , as amended

• FCCBs are hybrid instruments standing between debt and equity

– Issued by a Indian Company in foreign currency

– convertible debt instrument; tailor made; maybe bearing interest coupon; mostly unsecured

– Gives its holders the right to convert for a fixed no of shares at a pre-determined price

– Convertible into Equity at the option of the holder; normally at a premium of 20% to 30%

over prevailing market price at the time of issue

– At maturity, if not previously converted, bonds are worth the GREATER of,

• Cash redemption value and

• Market value of the shares into which they are convertible

– Proceeds from the issue have restrictive use in line with ECB guidelines

– Inbuilt Exchange risk; Treated as debt by Financial Institutions

Regulations applicable for issue of FCCB

• Issue to conform to Foreign Direct Investment policy (incl. sectors

and sectoral caps)

• Ceiling of USD 500 million in one FY (automatic route)

• Public issue only through reputed lead managers in intl. capital

market

• Maturity not less than 5 years

• Call / put option shall not be exercisable before 5 years

• Issue with attached warrants not permitted

• Issue related expenses not to exceed 4% of issue size – 2% in case

of private placements

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Regulations applicable for issue of FCCB

• All in cost ceiling as per ECB guidelines

• Proceeds not to be utilized for investment in stock markets ~ end-

use as per FCCB

• Corporate investments in industrial sector, esp. infra sector

• Financial intermediaries shall not be allowed to access FCCBs

(exceptions noted)

• Banks, Fis, NBFCs shall not provide guarantee / letter of comfort

• Reporting within 30 days of date of completion of issue

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Refinancing of FCCBs

• Fresh ECBs/ FCCBs for Refinancing of FCCBs

– To be raised within stipulated avg. maturity period & all-in-cost;

– Amount not to exceed redemption value at maturity of o/s FCCBs;

– Not to be raised 6 months prior to the maturity date of the o/s FCCBs ;

– Amount beyond USD 500 mn for FCCB redemption to be considered under approval route;

– Amount raised to be reckoned as part of the limit of USD 750 mn under automatic route;

• Restructuring of FCCBs involving change in existing conversion price is not permissible

under Automatic Route; However proposals not involving change in conversion

price will be considered under the approval route

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Foreign Currency Convertible Bond (FCCB)

• Minimum Conversion Price shall not be less than the higher of the

following two:

– average of the weekly high and low of the closing prices of the related

shares quoted on the stock exchange during the six months prior to the

relevant date (RD), and

– 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 (RD: 30 days before the AGM)

• In absence of conversion into Equity shares it has to be redeemed

at premium along with the interest in foreign currency

• The tenure of the instrument is minimum 3 or 5 years depending

upon the issue size

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Typical Terms and Conditions of FCCB

• Initial Conversion Price: Min Conversion Price plus Conversion Premium

– Minimum Conversion Price

– Conversion Premium: Normally 20% - 30%

• Maturity Date: To meet the ECB guidelines of Average Maturity depending

on the amount raised

• Current Coupon: 0% - 5%

• Yield to Maturity (YTM): Currently 6% - 8%

• Redemption Price: In case the Bonds are not previously converted, they

are redeemed on the Maturity Date at principal plus YTM

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Typical Terms and Conditions of FCCB

• Fixed Exchange Rate: Generally fixed at the time of issuance of Bonds

• Conversion Rights: Holder of Bonds have the right to exercise the option of

conversion into Equity Share anytime before the Redemption Date

• Conversion Price Reset: Normally linked to the market price of the Equity Shares or

on every defined period;

– Cannot go below the Minimum Conversion Price

• Accreted Principal Amount: Is in respect of each Bond, the principal amount

determined which, together with accrued interest from the immediately preceding

Interest Payment Date

• Issuer Mandatory Conversion: Issuer may redeem the Bonds at Accreted Principal

Amount, together with accrued interest, in case the Aggregate Value is above a

certain defined % (generally around 125% – 135%) of the Accreted Principal Amount

– In this case, the Bond holder has the option to exercise the option of converting the Bonds

into Shares before the date of redemption

• Tax Gross Up: All payments made are generally Grossed Up

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Typical Terms and Conditions of FCCB

• Adjustment to Conversion Price: The Conversion Price is subject to adjustment in

certain circumstances:

– Capitalization issue, division, consolidation and reclassification of Shares

– Dividend in Shares

– Capital Distribution and Extraordinary Dividends

– Rights Issue to Shareholders

– Warrants issued to Shareholders

– Issues of rights or warrants for equity-related securities to Shareholders

– Other Distribution to Shareholders

– Issue of Convertible or exchangeable securities other than to Shareholders or on exercise of

warrants

– Other issues of Shares

– Issue of equity-related securities

– Tender or Exchange Offer

• Negative Pledge: Issuer not to create or permit any mortgage on assets and

revenue generally in favor of unsecured Lenders

• Use of Proceeds: As per the End Use restrictions provided in ECB guidelines

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Agencies & Documentation

Agencies FCCB ECB

Merchant Banker / Arranger

Trustee

Conversion Agent -

Process Agent

International Lawyers / Local Lawyers

Documents FCCB ECB

Offering Circular / Information Memorandum

Trust Deed / Trustee Agreement

Paying & Conversion Agency Agreement -

Facility Agreement / Loan Agreement -

Subscription Agreement -

Security Documentation *

*

*Only in case if secured

Main Agencies involved in the International Issues

Major Documentation

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FCCB: Splitting of the Instrument

FCCB

INSTRUMENT

Debt Investors 20%-

30% is provided as

credit comfort by

third party

D

E

B

T

EQUITY

Conversion

Option is

retained by the

Equity Investor

Sold

as

Debt

Instrument

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Typical FCCB Transaction – Asset Swap

Investor

Company

IntermediateBank

CLN Provider

CLN $ 60 Mn

Cash $ 60 Mn L + SpreadL + Spread

Cash $ 120 Mn

$57 Mn Cash

$ 120 Mn FCCB

$60 Mn FCCB

ASSET SWAP

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Typical FCCB Transaction – CDS

Investor

Company

IntermediateBank

CLN Provider

CDS

SpreadSpread

CDS

$ 120 Mn FCCB

CDS

Cash $ 120 Mn

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FCCB - Advantages and Disadvantages

Advantages Disadvantages

Low cost debt

•Option value allows issuer to achieve long-

term financing at sub-market interest rate

•Minimizes dilution

Contingent sale of equity at a premium

•Equity sold at a premium to prevailing share

price

Rapid issuance

•Post regulatory approvals accelerated

book building process reducing market

exposure

Distinct investor base

•Distributed to a distinct non-equity specialist

investor base

Flexibility

• Versatile product can be tailored to issuer’s

needs

Debt or equity

•Debt on balance sheet until conversion Issuer does

not control conversion

•Cost ultimately dependent on share price

development

Equity impact

•Underlying share price may fall upon

announcement

•Usually recovers in the medium term

Investors

•FIIs and long-only institutional investors do not invest

in CB issuances

•Most often, company is unable to track Investors

Turbulent markets

•If the share price does not reach the conversion

price the company will need to refinance

•Lost the chance to dilute at a higher price

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Foreign Currency Exchangeable Bond (FCEB)

• Issued by a Indian Company in foreign currency

• Type of a convertible debt instrument; tailor made; maybe bearing interest

coupon; mostly unsecured

• Convertible into Equity Shares of “Offered Company” at the option of the

holder;

– Issuing Company – “Part of Promoter Group of the Offered Company, holding

shares offered in FCEB”

– Offered Company – “A Listed Company, engaged in business eligible to receive

FDI and avail FCCB / ECB

• Entities not eligible to issue FCEB: Indian Company restricted from raising

funds from Indian Securities Market; including that from SEBI

• Eligible Subscribers: Entities complying with FDI policy and adhering to 1.1

caps; prior approval of FIPB to be obtained wherever required

• Non Eligible Subscribers: Entities prohibited by SEBI to buy, sell or deal in

securities

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Foreign Currency Exchangeable Bond (FCEB)

• End Use by Issuing Company:

– Investments by way of direct investment in JV or WOS abroad

– Investment in promoter group companies; such company to use these funds in

line with the end uses prescribed in ECB policy

• End Use not permitted: Capital Markets and Real Estate

• All in cost – as per ECB policy

• Minimum Pricing shall not be less than the higher of the following two:

– average of the weekly high and low of the closing prices of the related shares

quoted on the stock exchange during the six months prior to the relevant date

(RD), and

– 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 (RD: 30 days before the AGM)

• Average maturity of five years; holder to take delivery of offered shares; cash

settlement of FCEB not permissible

• Funds raised to be parked abroad pending utilization in India

Conversion of ECB into Equity

Conversion of ECB into equity is permitted subject to the

following conditions:

The activity of the company is covered under the Automatic Route

for FDI or FIPB approval for foreign equity participation has been

obtained by the company, whichever applicable,

The foreign equity holding after such conversion of debt into equity is

within the sectoral cap, if any,

Pricing of shares is as per the SEBI and RBI guidelines as may be

applicable for listed / unlisted companies.

Conversion of ECB into Equity

Full conversion

Form FC-GPR with the Regional Office concerned of the RBIalong and form ECB-2 submitted to DSIR RBI within seven

working days from the close of month to which it relates.

The words "ECB wholly converted to equity" should be clearly

indicated on top of the ECB-2 form. Once reported, filing of

ECB-2 in the subsequent months is not necessary.

Conversion of ECB into Equity

Partial Conversion

Converted portion of ECB should be reported in form FC-GPR

to the Regional Office concerned and form ECB-2 clearly

differentiating the converted portion from the unconverted

portion.

The words "ECB partially converted to equity" should be

indicated on top of the ECB-2 form. In subsequent months, the

outstanding portion of ECB should be reported in ECB-2 form

to DSIM.

Trade Credits

Definition

Credits extended for imports directly by the overseas supplier,

bank and financial institution for maturity of less than three

years. Trade credits include suppliers’ credit or buyers’ credit.

Buyers’ credit and suppliers’ credit for three years and above

come under the category of External Commercial Borrowings(ECB) which are governed by ECB guidelines.

Amount and Maturity

Transaction Amount

permitted per

import

transaction

Maturity Period

Import transaction for

imports permissible

under the current

Foreign Trade Policy of

the DGFT

USD 20 Million One year or less

Import of capital goods

as classified by DGFT

USD 20 Million More than one

year and less

than five years

All-in-cost Ceilings

Average Maturity Period All in Cost ceiling over 6

months LIBOR*

Upto One year 350 basis points

More than one year but less

than three years

More than three years and

upto five years

The all-in-cost ceilings include arranger fee, upfront fee,

management fee, handling/ processing charges, out of

pocket and legal expenses, if any

Guarantees

AD banks permitted to issue Letters of

Credit/guarantees/Letter of Undertaking (LoU) /Letter of

Comfort (LoC) in favour of overseas supplier, bank and

financial institution up to USD 20 million for

Up to one year for import of all non-capital goods permissible

under FTP (except gold, palladium, platinum, Rodium, silver etc.)

and

Up to three years for import of capital goods.

The period of guarantees has to be co-terminus with the

period of credit, reckoned from the date of shipment.

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Thank You

Disclaimer: The information contained in this document is intended only for use during the presentation and should

not be distributed to parties outside the presentation.