Wo rld of FCCB Foreign Currency Convert ible Bond

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Project Complied by:

Group no 05 Sanket Thakkar 30 Deepa lohana - 05 Dilpreet kaur alag - 07 Nitya Menon - 25

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INTRODUCTION TO FCCB
Foreign Currency Convertible Bonds are debt instruments issued in a currency different than the issuers domestic currency with an option to convert them in common shares of the issuer company. FCCB are also referred as Foreign Currency Convertible Notes. FCCBs are essentially foreign currency-denominated debt with a maturity period of three-to-five years. The investor has the option of converting the bond into equity. He (investor) would typically convert it into equity and sell it for a premium if the stock is trading above the conversion price, which is the price at which the bond is to be redeemed. In the eventuality of non conversion, the bond has a coupon rate and a redemption premium. If the scrip is trading below conversion price, the investor would hold the bonds as a debt paper and go for redemption on maturity. Either way, the investment is protected.

FEATURES

OF FCCB

The interest on FCCBs is generally 30 % - 40 % less than on normal debt paper or foreign currency loans or ECBs . This translates to cost saving of approx 2 - 3 percent p . a . FCCB can be secured as well as unsecured . Most of the FCCB issued by Indian Companies are generally unsecured .

FCCB can be converted into Indian Shares or American Depository Receipts ( ADR ) or Global Depository Receipt ( GDR )

FCCB are generally listed to improve liquidity , generally Indian issuer have listed at Singapore Stock Exchange and in ITM CAPITAL AND MONEY
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Guidelines laid d own by Re serve bank of India ( RBI ) for i ssue of FCCB :RB I

Company can issue FCCB only upto value of USD 500 million in a single year . Issue of FCCBs exceeding USD 500 mn subject to approval of RBI . The company issuing FCCB should be listed in NSE & BSE and the minimum net worth should not be less than 500 Crores for 3 consecutive years . Minimum average maturity shall be 3 years for borrowing upto US $20 million and 5 years in case it exceeds US $20 million . FCCB can be raised under the automatic route and also by the approval of Reserve bank of India ( RBI ). The automatic route is available to real sector i . e . Industrial sector , especially infrastructure sector - in India , financial housing sector HDFC , LIC housing ITM CAPITAL while all Finance AND MONEY
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Eligible issuer
Indian corporate except financial intermediaries banks, FIs NBFCs. NGOs engaged in microfinance activities. such as

Eligible subscriber
International Capital markets International Banks Multilateral Financial Institutions Export Credit Agencies Supplier of equipment Foreign Collaborator.. Foreign equity holder

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Permitted End Use

Investment in real - industrial sector including SMEs 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 Government s disinvestment programme of PSUs

Prohibited End Use

Investment in real estate excluding integrated township

On - lending Investment in capital markets .

Acquisitions . As working capital For general corporate purposes For Repayment of Rupee Loans

Structure of FCCB
Issuer of FCCBs 29-Apr-2010 Capital in $ Lender of money FCCBs 29-Apr-2010 raises money in dollars sets conversion price at premium (say Rs 125) Equity at conversion price maturity period between 3-5 years receives FCCBs can trade FCCBs if in liquidity crunch

If markets are good Issuer of FCCBs

Lender of money FCCBs Converted 29-Apr-2015 no need to pay in cash issues equity at pre decided price (Rs 125) equity dilution Capital in $ Lender of money FCCBs returned 29-Apr-2015 redeem bonds at par value huge requirement of cash redeem FCCBs at par value principal investment comes back with small returns makes windfall profit by selling equity at prevailing market prices (say Rs 200)

29-Apr-2015

If markets are bad Issuer of FCCBs 29-Apr-2015

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FLO W CHA RT

FFLO

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Venus Remedies Indian company is slapped with a winding-up petition

Venus Remedies , Chandigarh - based company defaulted on a foreign currency convertible bond ( FCCB ) issue . New York - based DE Shaw and Chicago - based Citadel Investment subscribed to a $12 - million FCCB issue of Venus Remedies in May 2006 which is came up for redemption on May 2 2010 , but company failed to pay the investors . Sue against defaulted to honor FCCB investors . Formal request to a court for the compulsory liquidation of a company by FCCB investors . Willful default by company - Crisilhad in February 2009 assigned A - rating to Venus Remedies on its debt facilities , citing comfortable financial risk profile marked by healthy size of net worth and strong debt protection indicators .

Introduces Buy - back / Pre - payment of Foreign Currency Convertible Bonds ( FCCBs ) on 15 th November 2008

Automatic Route : Buy back value of FCCBs should be at a minimum discount of 15 % on the BV Funds to be used for this purpose will be either existing foreign currency funds held or out of fresh ECBs . Approval Route : Buy back value of FCCBs should be at a minimum discount of 25 % on the BV .

Funds to be used for this purpose shall be internal accruals ; and

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Approval Route Revised 1 . Total amount of buy back permitted shall not exceed US$ 100 Mn out of internal accruals , subject to : Min. discount: 25% @ Redemption value US$ 50 Mn Min. discount: 35% @ Redemption value US$ 50 75 Mn Min. discount: 50% @ Redemption value US$ 75 100 Mn 2 . Later RBI issued notification to consider further buy back of FCCBs ( only under approval route ) till 30th June 2010 .

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F u n d r a i s i n g t h r o u gh FC CBs

Am ou nt Ra is ed (U S$ Bi ll io n)

No . of FCCBs : 75 Average : $ 100.33 Mn

No . of FCCBs : 20 Average : $ 74.23 Mn

No . of FCCBs : 19 Average : $ 195.87 Mn

No . of FCCBs : 5 Average : $ 98.01 Mn

Funds raised through FCCBs

* 20 10 da ta is ti ll Ap ri l 20 10
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FCCBs Pros

FCCBs Cons

Provides downside protection for The risk for the investor is that the investor with an option on the the stock of the issuer does not equity know as the Equity Kicker perform over the life of the bond and the investor returns the bonds back to the issuer at maturity above par depending on the coupon structure . If the stock does not perform over the life of the bond , then at Will the issuers be able to redeem maturity the issuer redeems the their bonds back on the redemption bonds back at a premium , which is date? basically the accretive yield on the bond . For the issuer , the FCCB ( mostly From the investor s prespective , a Zero Coupons ) are not shown convertible bond has a value - added through the P & L until maturity , component build into it ; it is which makes this an attractive essentially a bond with a stock method of raising finances . option hidden inside . Thus , it tends to offer a lower rate of return in exchange for the value of the option to trade the bond From the issuer s perspective , it into stock tends to offer a lower rate of return in exchange for the value of the option to trade the bond into stock ITM CAPITAL AND MONEY
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CLN is a credit derivative linked to foreign currency convertible bonds ( FCCBs ). Protection from Credit Risk . Indian bank overseas wings bank buys CLN . No Default by FCCB issuer the bank makes money on this . Syndicating foreign banks exit after offloading the CLN in the secondary market . Lapped up by Indian banks as they earn a coupon of 50 - 60 basis point .
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CRE DIT - LINKED NOTES

To Conclude
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. Greater return potential if the stock price appreciates more than the previously fixed conversion price. 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. Investors are mostly non-residents or hedge fund arbitrators. Saves the risk of immediate equity dilution as in the case of public shares Redeemable at maturity if not converted.

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VM is a Fund Manager working with one of the Top Five mutual fund . He typically , visits 3 - 4 companies a month . As a Fund Manager he is in great demand . He likes to stay alert , 24X7 . He keep checking stock ideas company updates from company firms . Real estate companies gives fund managers flats at throw away prices in return for subscribing to their IPOs . Market operators & promoters are also known to pay cash to fund managers to buy stocks off them . In 1990 , A fund manager of leading US Investment firm who was fired for allegedly taking sexual favours from some investor s .
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Case S tudy Fund Manager

During 1999 - 2000 , fund managers used to buy illiquid technology stock to boost NAV ( Net Asset Value ). He has been approached several times for favours , by providing expensive gifts , free passes for movies , music concert etc .. but he rebuff them . He doesn t chase inside information . Instead , he prefers to rely on market intelligence , his sources are his friends , broker , vendor or relatives . VM say s , A Good Fund Manager should : 1 . Be on top of at least 100 companies . 2 . Know their company balance sheet . 3 . Be forgiven for going wrong on valuation occasionally , but not for going wrong on a business . 4 . Believes that there is fine line between insider information & research information .
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