New foreign currency bonds to be exchangeable for equity

By Sawant Singh and Akanksha Midha, Trilegal

The finance minister, during his budget speech of 2007-08, promised to introduce a new financing option for corporate India – the foreign currency exchangeable bond (FCEB).

The FCEB was conceived as an innovative structured finance product that would enable Indian companies to leverage the value of their holdings in group companies and use them to raise relatively cheap funds in a foreign currency.

Sawant Singh

Nearly a year later, the Finance Ministry has notified a scheme that provides for the issuance of the promised FCEBs.


The FCEB is redeemable after five years. However, it is optionally exchangeable for the issuer’s equity holdings in its listed group companies.

The exchange price of the offered listed equity shares is fixed at the time of issuance and is based on the quoted price of the shares of the issuing company.

The issuer must own the shares being offered and such shares will be locked in until the date of exchange or redemption of the bonds.
The issuer is prohibited from transferring, trading in or encumbering the offered shares during this lock-in period.


xisting instruments and give corporations options to raise capital that they could not access previously.

While retaining the characteristics and advantages of convertible instruments like foreign currency convertible bonds (FCCBs), the FCEB scheme allows the issuer to deploy the proceeds of the issuance towards the requirements of any company within the issuer’s group.
This is a distinct advantage.

Existing avenues to raise resources in foreign currency – like the external commercial borrowing (ECB) and the foreign currency convertible bond (FCCB) routes – do not provide the flexibility of such downstream investments.

At the same time, the FCEB is also likely to find favour among promoters of large corporate houses because these type of issuances protect the promoters from dilution of their equity holdings when resources are being raised by the parent flagship entity.

An alternative

While the introduction of FCEBs does provide alternate means of raising credit and the resources needed for expansion, it may not significantly supplement the amount of growth capital that is currently at the disposal of corporate India.

The reason is simply that borrowings through FCEBs continue to be subject to the stringent ECB guidelines on end use.

For example, rupee expenditure is not permitted, while minimum maturity periods and all-in-cost ceilings still apply to funds raised through FCEBs.
What’s more, these restrictions are not likely to change in the short term given the government’s desire to rein in inflation by controlling capital inflows.

Moreover, the exchange of FCEBs for shares of listed group companies is subject to the foreign direct investment policy of the Government of India.
This means that the proceeds from FCEBs cannot be used for investments in the country’s capital markets or real estate.

Exchange option

The proposed FCEB scheme allows the exchange option to be exercised at any time before the redemption date.

However, the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines impose post-listing lock–in requirements on shares held by the promoters of a listed company.

This could adversely impact the ability of promoter companies to raise capital through this route by leveraging shares of companies that are recently listed.

Further, it is unclear why the scheme includes a requirement for the prior permission of the Reserve Bank of India – a requirment imposed by the government. This requirment is particularly puzzling given that no such approval is required for ECB or FCCB issuances, which fall under the automatic approval route.

Although the FCEB scheme is a step in the right direction, its success as a financing tool will very much depend on the ability of the Indian government to balance the needs of a growing economy with populist measures.

Sawant Singh is a partner and Akanksha Midha is an associate at Trilegal in Mumbai. Trilegal is a full service law firm that advises on corporate and commercial law in India and provides commercially oriented legal advice and services in relation to all sectors of the economy. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 80 lawyers, some of whom have experience with law firms in the United States, the United Kingdom and Japan.



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