The bull run witnessed by the Indian stock markets has seen a number of issuers raise funds through Foreign Currency Convertible Bonds (FCCBs).
The term FCCBs has been defined in the FCCB Scheme to mean bonds issued in accordance with the Scheme and subscribed by a non-resident in a foreign currency and convertible into ordinary shares of the issuing company, either in whole or in part, on the basis of any equity-related warrants attached to debt instruments.
FCCBs are hybrid instruments, essentially a debt, that is (optionally) convertible into equity.
FCCBs have a minimal regulatory framework in India as compared to domestic issues by issuers in India. FCCBs can be denominated in any freely convertible foreign currency.
FCCB’s may be underwritten or non-underwritten.
Further, there are also deals where a sole subscriber/investor buys out the entire FCCB issue size and where the lead manager(s) act as placement agent(s).
FCCBs have proven to be popular tools among Indian issuers for several reasons, including speed, the fact that dilution kicks in when shares are allotted, which is few years later, and giving the issuer an international investor profile.
The issue of FCCBs is authorized (and inter alia regulated) by the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 (the FCCB Scheme), which was notified by the Central Government, and is amended from time to time.
FCCBs are classified as External Commercial Borrowings (ECBs).
The ECB regulatory framework is governed by the Foreign Exchange Management Act, 1999 (FEMA), and by notifications issued thereunder.
Further, the circulars issued by the Reserve Bank of India (RBI) from time to time in relation to ECBs/FCCBs are consolidated into an annual master circular. This master circular is issued at the beginning of July of every calendar year.
The latest master circular was dated July 2 2007.
Additionally, the Department of Economic Affairs, Ministry of Finance, also issues press notes/press releases on matters governing ECB policy.
Some of the salient features of the latest master circular regarding ECBs (and consequently FCCBs) are as follows:
- Funds may be raised under the “automatic route”, that is without RBI approval, and under the “approval route”, that is with RBI approval.
- Parameters for raising of funds under the automatic route have been prescribed, and include type of issuer, permitted categories of lenders, size of the issue, tenure of the ECB, all-in-cost ceilings and end-use of funds restrictions.
- If the issuing company does not fulfil the parameters, or if there is any doubt as to whether it falls under the automatic route, then it must go under the approval route, and obtain approval from the RBI.
- Even under the approval route, there are conditions and restrictions, and the powers of the approving authority, that is the RBI, are constrained to that extent.
Certain regulatory aspects governing FCCBs need further clarity.
To give one example of this need for clarity, under the FCCB Scheme, the pricing (of the shares) by listed companies is expressed to be the higher of the average weekly highs and lows of the closing prices for six months and two weeks preceding the relevant date.
The relevant date is considered to be the date 30 days prior to the date when approval for the FCCB issue is obtained from the relevant shareholders.
However, there is no clarification or enabling provision for subsequent adjustments for corporate actions like bonuses, stock splits, consolidation or sub-division in value of shares, etc, which may happen during the life of the FCCBs, typically around five years.
A clarificatory provision along the lines of Clause 13A.4 of Chapter XIII-A (Guidelines for Qualified Institutional Placement) of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 is required to obviate the need for relying on interpretations and equity for adjusting the conversion price downwards.
There have been several FCCB deals in the Indian market in the last year alone.
India has grown on to become a mature convertible bond market.
Sanjay Asher is a partner with Crawford Bayley & Co, Prerak Ved is an associate.
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