Foreign Currency Convertible Bond and its uses.

Indian companies have been able to tap the global market to raise foreign currency funds by issuing various types of financial instruments which are discussed shortly as follows:-

1. Foreign currency convertible bonds(FCCBs)

These are issued in accordance with the guideline dated 12th. Nov,1993 as amended from time to time and subscribed for by Non Resident in foreign currency and convertible in to ordinary/equity shares of the issuer company in any manner whether in whole or in part or on the basis of any equity related warrants attached to debt instruments.

Advantages of FCCBs:-

i. The convertible bond gives the investor the flexibility to convert the bond in to equity at a price or redeem the bond at the end of a specified period.
ii. Companies prefer bonds as it lead to delayed dilution of equity and allows company to avoid any current dilution in earning per share that a further issuance of equity would cause.

iii. It is easily marketable as investors enjoys option of conversion in to equity if resulting to capital appreciation. Further investor is assured of a minimum fixed interest earnings.

Disadvantages of FCCBs:-

i. Exchange risk is more in FCCBs as interest on bond would be payable in foreign currency. Thus companies with low debt equity ratios, large forex earnings potential only opted for FCCBs.

ii. FCCBs means creation of more debt and a forex outgo in terms of interest which is in foreign exchange.

iii. In case of convertible bond the interest rate is low (around 3 to 4%) but there is exchange risk on interest as well as principal if the bond are not converted in to equity.

The only major advantage would be that where the company has a high growth rate in earnings and the conversion takes place subsequently, the price at which share can be issued can be higher than the current market price.

Therefore it is very much important for a international business to know the details about FCCBs to get the advantage from International Market.

Aparna