Jul 6, 2012

Relaxation in FCCB Buyback Norms

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Relaxation in FCCB Buyback Norms

Foreign Currency Convertible Bond (FCCB) is one of the options with Indian companies to raise funds from aboard. Foreign currency convertible bonds are bonds which are convertible into equity on the maturity date on exercise of the option by the bond holder. Generally if the market in the future is not favorable to the bond holder and the bond holder is of the opinion that share prices will go down compared to present price or the future price they would like to receive, the bond holders do not go for conversion rather they go for redemption. Companies generally do not want to let the bondholders redeem the bond and therefore many companies want to buyback those bonds as it is a cheaper option than paying the full coupon (interest rate on the face value) and repaying the principal amount if they wait for the bonds to reach maturity.

Generally companies offers to Buyback FCCB from their bond holders at discount. In respect to the buyback of FCCB, Reserve Bank of India has issued various circulars stipulating the guidelines for the buyback. Buyback of the FCCB is allowed by the Indian companies under automatic as well as approval route. As per the norms prior to the issue of A. P. (DIR Series) Circular No.1 dated 5th July, 2012 , the Indian companies were allowed to buyback FCCB under the automatic route subject to the minimum discount of 8 per cent on the book value. And under the approval route, the Indian companies were permitted to buyback FCCBs up to USD 100 million of the redemption value per company, out of their internal accruals with the prior approval of the Reserve Bank, subject to a :

  1. minimum discount of 10 per cent of book value for redemption value up to USD 50 million;
  2. minimum discount of 15 per cent of book value for the redemption value over USD 50 million and up to USD 75 million; and
  3. Minimum discount of 20 per cent of book value for the redemption value of over USD 75 million and up to USD 100 million.
As per the A. P. (DIR Series) Circular No.1 dated 5th July, 2012 Reserve Bank of India has decided to continue the Scheme of buyback of FCCB and has come out with following modification & conditions in the discount rate for buyback of FCCB under the approval route:.

  1. Indian companies are now required to buy back their FCCB at a minimum discount of 5% on the accreted value
  2. In case the Indian company is planning to raise a foreign currency borrowing shall for buy back of the FCCBs, all FEMA rules/regulations relating to foreign currency borrowing shall be complied with.
  3. All terms other terms and conditions as stipulated in paragraph 5 of A.P. (DIR Series) Circular No. 39 dated December 8, 2008 will continue to be applicable.
That is the overall discount rate under the approval route, has been reduced to five percent but that is on the accreted value and not the book value.
Accreted Value is the value of an original issue discount bond or other bond where the interest (or the equivalent) is not paid until maturity. The accreted value of such a bond often has only a rough relationship with its market value.

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