A foreign currency convertible bond (FCCB) is a form of convertible bond that is issued in a currency other than the issuer’s own. To put it another way, the money raised by the issuing firm is in foreign currency. Convertible bonds are a hybrid of debt and equity securities. It functions similarly to a bond in that it pays regular coupon and principal payments, but it also allows the bondholder to convert the bond into stock.
What are convertible bonds used for?
- Convertible bonds are corporate bonds that can be exchanged for the issuing company’s common stock.
- Convertible bonds are issued by companies to cut debt coupon rates and defer dilution.
- The conversion ratio of a bond decides how many shares an investor will receive in exchange for it.
- Companies can force bond conversion if the stock price is higher than the bond’s redemption price.
What does it mean to issue a foreign currency bond?
The necessity for foreign currency financing is the key motivation for issuing Eurobonds. Because bonds are fixed-income products, investors typically receive a fixed interest rate.
Assume a US corporation wants to break into a new market and is planning to build a huge factory, say in China. Large sums of money will have to be invested in local currency, the Chinese yuan. Because the company is new to the Chinese market, it may have difficulty obtaining loans.
In the United States, the corporation opts for yuan-denominated Eurobonds. The bonds will be purchased by investors with yuan in their accounts, and the cash will be used to fund a new facility in China. If a new factory is profitable, the cash flow will be used to pay interest to bondholders in the United States.
Are foreign currency convertible bonds considered foreign direct investment?
corporation in foreign currency, subscribed by a non-resident in foreign currency, and convertible, in whole or in part, into ordinary shares of the issuing company.
- FCCBs are a type of corporate debt obligation. Redeeming or converting them into underlying local shares or global depository receipts is an option for investors. If investors wish to keep their FCCBs until the redemption date, the company must redeem them on that day.
- When debt is converted into equity, there will be dilution. These bonds are covered under the FDI policy and counted towards FDI because they are convertible into equity shares over a period of time as specified in the instrument.
- If they are redeemed, they are treated as ECB and a debt obligation; however, when they are converted into equity, they are treated as FDI. As a result, statement 1 is true.
- In India, according to SEBI(FPI regulations) 2019, a single FII is allowed to invest up to 10% of a company’s paid-up capital, implying that any investment above 10% will be considered FDI. As a result, statement 2 is true.
- According to IMF and OECD standards, foreign direct investment is defined as the acquisition of at least 10% of the ordinary shares or voting power in a public or private firm by non-resident investors.
- Global Depository Receipt – Any instrument provided to non-resident investors in the form of a depository receipt or certificate prepared by the oversees depository bank outside India and backed by the issuing company’s underlying shares or foreign currency convertible bonds.
- GDRs are equity that represents shareholder funds, foreign investment in the form of equity shares issued outside of India by a Depository Bank on behalf of an Indian company that is covered by the FDI policy. Foreign Direct Investment (FDI) is the term used to describe the proceeds of the GDR. As a result, statement 3 is true.
- Non-resident foreign deposits – repatriable NRI investments are classified as FDI, whereas non-repatriable investments are classified as domestic investments.
What is the floor price for FCCB issuance?
The board of Indiabulls Housing Finance Limited approved the issue of foreign currency convertible bonds (FCCBs) at a floor price of Rs231.48 per FCCB and the opening of the issue on September 16.
What are some of the benefits of convertible bonds?
- Because the investor can reclaim their original investment when the bond expires, the risk is minimal.
- Convertible bonds can help diversify a portfolio by lowering risk while preserving projected returns.
- Convertibles provide a higher rate of return than regular corporate bonds, and the investor can convert to take advantage of stock price gains.
- Convertibles can improve returns in a fixed income portfolio by providing exposure to equity-driven price gains while also reducing the impact of rising interest rates.
- Convertible bonds can help decrease negative risk in a stock portfolio without sacrificing all upside potential.
- Bondholders are paid before stockholders, thus investors have some protection against default before the conversion.
Why are investors drawn to convertible bonds?
Convertible bonds are appealing because the fixed income component (i.e., the investment value) of the convertible bond functions as a support level below which the convertible bond will not fall as the stock price declines.
Are convertible bonds a safe investment?
Convertible bonds are a type of hybrid investment that provides some downside protection due to their bond classification, but can also be converted into the issuing company’s common stock in the future. These investments, however, are not without danger.
Is it wise to invest in foreign bonds?
Foreign bonds often have higher yields than domestic bonds because investing in them entails many risks. Interest rate risk is inherent with foreign bonds. The market price or resale value of a bond decreases when interest rates rise. Assume an investor owns a 4-year bond with a 4% interest rate, and interest rates rise to 5%. Few investors are willing to take on the bond without a price reduction to compensate for the income gap.