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th Floor- Sangita Ellipse | Sahakar Road |Vile Parle (East) | Mumbai - 57.

Tel 022-40481400. Fax +91(0) 22 40481411 Email: admin@indiaforex.in For more analysis visit: www.indiaforex.in

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What is FCCB ?

A Foreign Currency Convertible Bond (FCCB) is a type of convertible bond issued in a currency

different than the issuer's domestic currency. In other words, the money being raised by the

issuing company is in the form of a foreign currency.

Advantages

The issuer pays the interest and the principal at a lower interest rate.

More importantly, it can convert the bond into equities.

The issuing company gets the benefit of raising money form the foreign markets, thus

opening another source of financing.

Disadvantages

The exchange risk is more in FCCB’s as interest on bond would be payable in foreign

currency. FCCB’s means the creation of more debt and a forex outage in terms of interest

which is in foreign exchange.

In case of convertible bond the interest rate is low (around 3 to 4 per cent) but there is

exchange risk on interest as well as principal if the bonds are not converted into equity.

If the stock price plummets, investors will not go for conversion but redemption. So,

companies have to refinance to fulfill the redemption promise which can hit earnings.

It will remain as debt in the balance sheet until conversion.

It is a double whammy for the FCCB issuing companies because the weak rupee means not only

will the companies have to repay the loans, but there will be an added cost because of the weak

rupee. The company will have to provide for the currency loss in its profit & loss statement.

India Forex Advisors

IFA Classroom - Day 15

Dated- 5th July, 2013

Key Highlights:

What is FCCB ?

Trend of FCCB

Recent Complications

7th Floor- Sangita Ellipse | Sahakar Road |Vile Parle (East) | Mumbai - 57.

Tel 022-40481400. Fax +91(0) 22 40481411 Email: admin@indiaforex.in For more analysis visit: www.indiaforex.in

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Trend of FCCB

For companies, FCCB’s gave them access to funds at cheaper rates, given the fact that many of

these were zero coupon bonds with a yield-to-maturity structure, meaning the company would

have to make large-scale payments only when the bonds were redeemed. Also, the interest rates

were much lower than that of normal debt.

The given boom in the markets and rising share prices, the markets assumed that a larger number

of bondholders would choose to convert their bonds into shares eventually. The company could

also then benefit from the lack of outflows from their reserves.

Recent Complications

The current environment of risk aversion and depreciation of the Indian rupee has complicated

the refinancing challenges faced by Indian corporates with regard to their foreign currency

convertible bonds (FCCBs).

FCCB’s raised in pre-crisis years at zero coupon or very low coupon bonds will need to be

refinanced through domestic sources at the higher interest rates prevailing currently.

With the slowdown and stocks trading at prices below the conversion price, the chances of

bondholders exercising conversion option became minimal.

Recently we saw a leading pharma company defaulting on its FCCB repayment and depreciating

rupee was one of the factors behind the default.

There are 47 companies with outstanding FCCB’s worth $4.7 billion. FCCB’s of a dozen

companies are set to mature next year. The largest FCCB dues are of Tata Steel - $546.94

million due for maturity in November 2014, Sterlite Industries has $500 million FCCB’s due in

October 2014, while Sesa Goa has $216.8 million FCCB’s, also due in October.

Recent Developments

RBI has allowed companies to prepay or buy back these bonds to prevent further losses due to

rupee depreciation. RBI typically does not allow corporates to prepay or buy back these bonds as

this would reduce the tenure of the loan and the central bank discourages short-term borrowings.

In a circular to all banks, RBI said: "Considering the developments in the global financial

markets and on a review of the aforesaid scheme, it has been decided that the existing scheme of

buyback/prepayment of FCCB’s under the approval route which expired on March 31, 2013 may

be continued till December 31, 2013 and shall stand discontinued thereafter.

India Forex Advisors

IFA Classroom - Day 15

Dated- 5th July, 2013