For Quick Alerts
ALLOW NOTIFICATIONS  
For Daily Alerts

What are foreign currency convertible bonds (FCCBs)?

|
What are foreign currency convertible bonds (FCCBs)?
Foreign currency convertible bonds (FCCBs) are a type of convertible bonds that are issued in currency other than the domestic currency of the issuing company. FCCB's are issued by corporates for raising funds in foreign currency. With all the inherent features of convertible bonds, FCCBs emerge as a good bet for both the issuers and investors.
 

FCCBs with a maturity term of 3-7 years provide an option to the bondholders to either redeem their investments or convert FCCBs into equities at or before maturity term at pre-determined price. Consequently, FCCBs entitle an investor for coupon rate payments with an additional option of conversion of bonds into equities.

Illustration for clear understanding of FCCBs:

If a Company 'X' issues FCCBs with :

Issue Price : Rs. 500

Coupon rate: 2%

Maturity term : 2 years

Convertible into equity shares @ Rs.400 per share.

In this case, if an investor subscribes to 4 such bonds, total invested amount would be Rs. 2000. As per the term of the bond, bondholder becomes entitled to receive 2% coupon rate for 2 years. Also, as the bond comes with an inherent option of conversion into equity @ Rs. 400, bondholder would exercise the option at his discretion depending on the market price of the stock at the time of conversion. In case of opting for conversion into equity, the investor would be entitled to 5 (2000/400) shares. Else, he could go for redemption of the invested amount.

Considering that scrip of the company 'X' is trading at Rs.500, more than the conversion price, investor would be better off by exercising the conversion as then he would be entitled to 2000/400 = 5 shares instead of the otherwise 2000/500 = 4 shares. However, if the market price of the scrip is lower in comparison to the conversion price, say for instance, Rs 200, an investor can claim for 2000/200= 10 shares as against 5 shares that he would get on conversion. So a better option in this stance is to redeem the total investment amount.

 

Hence, the decision of the bondholder to either redeem the invested amount or opt for conversion of equity is dependent on market price of the company's stock. In case, the conversion price is less than the market price at the time of maturity, bondholder would opt for conversion into equity, else go for full redemption of the invested amount.

Salient features of FCCBs

1. FCCBs carry comparably lower interest rates in comparison to regular bonds. Low interest is partly on account of the inherent option available to investors for conversion of FCCBs into equities.

2. Issuance of FCCBs does not require any collateral or security.

3. FCCBs are a low-cost source of borrowing for corporates.

4. Funds raised through issuance of FCCBs meet various expansion plans and capital expenditure requirement of corporates

GoodReturns.in

Read more about: bonds fccbs
Company Search
Get Instant News Updates
Enable
x
Notification Settings X
Time Settings
Done
Clear Notification X
Do you want to clear all the notifications from your inbox?
Settings X
We use cookies to ensure that we give you the best experience on our website. This includes cookies from third party social media websites and ad networks. Such third party cookies may track your use on Goodreturns sites for better rendering. Our partners use cookies to ensure we show you advertising that is relevant to you. If you continue without changing your settings, we'll assume that you are happy to receive all cookies on Goodreturns website. However, you can change your cookie settings at any time. Learn more