World of FCCBForeign Currency Convertible Bond

Praful Anchaliya Sabina Islam Sahil Jain Vijay Krishna

Project Complied by:

Objective• Understanding of FCCB

• Conversion of FCCB

• Awareness of FCCB

• Why should companies go issuing FCCBs & Why should investors invest in them?

FCCBs & its features• Foreign Currency Convertible Bond (FCCB) - Mix

between debt and equity instruments

• A quasi-debt instrument attractive to both investors and issuers

• Acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock

• Investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock

RBI GUIDLINESRBI GUIDLINES• Company can issue FCCB only upto value of USD 500 million in a single

year. However issue of FCCBs exceeding USD 500 mn subject to approval of RBI.

• Should be listed on BSE and NSE and minimum net worth during the previous three years should not be less than 500 crore

• Minimum average maturity shall be 3 years for borrowing upto US $20 million and 5 years in case it exceeds US $20 million.

• Can be raised through two route Automatic and RBI approval The automatic route is available to real sector i.e. Industrial sector, specially infrastructure sector-in India, while all other sectors have to take RBI approval

Structure

Issuer of FCCBs Lender of money

Capital in $

FCCBs

29-Apr-2009 raises money in dollars sets conversion price at premium (say Rs 125) maturity period between 3-5 years

29-Apr-2009 receives FCCBs can trade FCCBs if in liquidity

crunch

Issuer of FCCBs Lender of money

Equity at conversion price

FCCBs returned

29-Apr-2014 no need to pay in cash issues equity at pre decided price (Rs 125) equity dilution

29-Apr-2014 makes windfall profit by selling equity at

prevailing market prices (say Rs 200)

If markets are good…

Issuer of FCCBs Lender of money

Capital in $

FCCBs returned

29-Apr-2014 redeem bonds at par value huge requirement of cash buy back from market before

maturity if traded at discount

29-Apr-2014 redeem FCCBs at par value principal investment comes back with

small returns

If markets are bad…

Benefits to Issuer

Benefits to Investor

FCCB can be raised in a month usually and thus takes lesser time.

Help to diversify their portfolio

Low overseas interest rate Find better option to invest in emerging markets like India

Credit rating is not mandatory, since bonds are issued by top corporate having excellent rack record.

If share price goes up benefit from the capital appreciation

Low cost means of financing Assured of fixed return and capital appreciation.

Regards with FCCB

Rising Markets…

IVRCL INFRA…• 1 Bond is worth Rs. 1000/- (say)

• Conversion Price = Last trading price

• Last trading price = 369.95

• Market expectation = 400, since the rise.

Recent FCCBs• Reliance Energy has converted FCCBs of $112.84

million (about Rs 507 crore) into equity shares during the last 30 days

• JPMorgan officials say the bonds were sought after aggressively and priced at an attractive yield rate of 4.95 per cent

• The largest issuances were in the range of $500 million.

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.

THANK YOU

Foreign Currency Convertible Bond