Foreign Currency Convertible Bond
Also written FCCB · FCCBs · Foreign Currency Convertible Bonds · Foreign Currency Convertible Bond (FCCB)
A bond issued by an Indian company to investors in foreign currency, paying interest and principal in that currency and convertible into ordinary shares at a price usually set above the market price.
In plain language
An FCCB lets an Indian company borrow abroad, in dollars or another foreign currency, on terms that include a way out of repaying.
The investor lends foreign currency and receives a fixed coupon in foreign currency. Built into the bond is the right to turn it into a set number of the company's ordinary shares at a pre-agreed price. If the company's share does well, the investor converts and the loan never has to be repaid in cash. If it does not, the investor keeps the bond and the company must repay the principal — in foreign currency.
The workbook's summary of the attraction to the issuer: lower rates abroad, protection of cash flows because maturity is by conversion of debt into equity, and often less time to raise than pure debt abroad.
How it works
The features the workbook lists:
| Feature | FCCB |
|---|---|
| Issuer | Indian company |
| Subscribed in | Foreign currency |
| Coupon | Fixed interest rate |
| Conversion | Into a certain number of ordinary shares at a preferred price |
| Interest and principal (if required) | Paid in foreign currency |
| Conversion price | Usually set at a premium to the current market price |
Regulation. FCCB issues are regulated by RBI notifications under the Foreign Exchange Management Act (FEMA). The guidelines are laid down in the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 — the same scheme that governs depository receipts. Issues must be within the limits specified by RBI from time to time.
Against a domestic convertible debenture. Both are hybrids that save a cash repayment on conversion. The difference the workbook draws is the pricing: a domestic convertible's conversion price is usually at a discount to the market price, while an FCCB's is usually at a premium. And an FCCB's cash flows are in foreign currency.
For the registrar. Conversion is an allotment of new equity shares — share capital increases, authorised capital headroom is used, and the new shares enter the register and the depository system like any other allotment.
A worked example
Illustrative figures. An Indian company issues USD 50 million of FCCBs in bonds of USD 1,000, with a 2 percent annual coupon. Each bond converts into 140 equity shares. The share trades at Rs 500, and the rupee is at Rs 85 per dollar on the issue date.
Number of bonds = 50,000,000 ÷ 1,000 = 50,000
Rupee value at issue = USD 50 million × 85 = Rs 425 crore
Implied price per share = (1,000 × 85) ÷ 140 = Rs 607.14
Premium to market = 607.14 ÷ 500 − 1 = 21.4%
Annual coupon = 2% × USD 50 million = USD 1 million, paid in dollars
Scenario A — the share rises to Rs 800. Each bond is worth 140 × Rs 800 = Rs 1,12,000 as shares against Rs 85,000 of principal at the issue exchange rate. Investors convert. The company issues 50,000 × 140 = 70 lakh new shares and repays nothing in cash.
Scenario B — the share is at Rs 450 at maturity. 140 shares are worth Rs 63,000, less than the principal. Investors do not convert. The company must repay USD 50 million. If the rupee has weakened to Rs 90, that costs Rs 450 crore — Rs 25 crore more than it borrowed in rupee terms.
The second scenario is the one the phrase repayment of principal (if required) is warning about.
Why NISM asks about it
Chapter 4.4 (Foreign Currency Convertible Bonds). The chapter's sample question asks whether interest and principal on an FCCB are paid in foreign currency — true. Expect also the premium-versus-discount contrast with domestic convertibles, and the regulator question: RBI under FEMA, through the 1993 scheme.
Common exam traps
- An FCCB is a bond, not a depository receipt. It shares the 1993 scheme with DRs, which is why the two get confused.
- Interest and principal are paid in foreign currency, not in rupees.
- Conversion price is usually at a premium to market — the opposite of the domestic convertible debenture, which usually converts at a discount.
- The issuer is Indian; the investors are abroad. An IDR is the reverse direction — a foreign company's shares underlying receipts in India.
- Regulated by RBI notifications under FEMA, and issues must stay within the limits RBI specifies.
- Conversion increases share capital; non-conversion leaves a foreign-currency repayment obligation.
Where this is taught
- Series XXI-B · Chapter 2: Introduction to Securities Marketsintroduced here
- Series II-A · Chapter 4: Characteristics of Other Securitiesintroduced here
Related terms
- ADR, GDR and IDRDepository receipts represent shares of a company in one country but trade on an exchange in another — American inside the US, Global outside it, Indian for foreign shares listed here.
- Convertible debenturesDebentures that turn into equity shares on terms fixed at issue — the investor draws a coupon until conversion, and the company settles the debt in shares instead of cash.
- Debt capitalMoney a company borrows — through debentures, bonds, commercial paper or bank loans — which must pay interest and be repaid on maturity, whether or not the company is doing well.
- Equity capitalMoney put into a company by its owners — promoters and shareholders — in return for ownership, votes and a claim on residual profits. It is never repaid and ranks last in a winding up.
- Coupon rateThe rate of interest a bond pays, applied to its face value and never to its market price — which is why the coupon tells you the cash flow but not the return.
- Convertible bondA bond carrying an embedded option that lets the holder exchange it for a specified number of the issuer's equity shares — a plain bond plus an equity conversion right.
- Sponsored depositary receiptA depositary receipt that the issuing company itself creates by delivering its own shares to a depository, which lets it list on the exchange of the country where the receipt is issued.
- Sponsored DR issueA depository receipt issue built from existing shares bought back from current shareholders, rather than from fresh shares issued by the company — the alternative being an unsponsored or fresh-share DR issue.
- Hybrid instrumentA security that combines features of both debt and equity in one instrument — the workbook's two examples are convertible debentures and preference shares.
- Foreign bondAn external bond issued in a foreign country and denominated in the local currency of that same foreign country — such as an Indian company issuing US dollar bonds in the United States.
- Euro bondAn external bond issued in a foreign country in a currency that is not the local currency of that country — nothing to do with Europe or with the euro.
- Masala bondA bond issued outside India by an Indian company but denominated in Indian rupees, so the foreign investor — not the Indian issuer — bears the risk of the rupee falling.
- WarrantAn option issued by a company giving the holder the right, not the obligation, to subscribe to its shares at a fixed price on or after a set date. SEBI requires 25 per cent of the price upfront.