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Traditionally, overseas acquisitions were being funded through a verity of sources such as drawl of Foreign Exchange in India, Capitalization of Exports, External Commercial Borrowings (ECBs), Foreign Currency Convertible Bonds (FCCBs), Shares conversion/exchanges through American Depository Receipts (ADRs)/Global Depository Receipts (GDRs), Preference Shares (i.e. non-convertible, optionally convertible or partially convertible) and balance held in Exchange Earner’s Foreign Currency Accounts (EEFCs). A substantial portion of foreign investments take place through Special Purpose Vehicles (SPVs) set-up in overseas for specific purpose, Existing Wholly Owned Subsidiaries (WOS)/Joint Ventures (JV) are being used to fund acquisitions through Leverage Bay-Out (LBO) Rout.
Mr. P. Chidambaram, India’s Finance Minister in his Budget speech 2007-08 promised a mechanism for Indian Companies to unlock part of their holdings in its group companies to meet financing needs by issuing exchangeable bonds. This led to the formulation of new scheme in February 15, 2008, of the Issue of Foreign Currency Exchangeable Bonds Scheme 2008 vide Notification GSR 89 (E). In order to facilitated the issuing of Foreign Currency Exchangeable Bonds (FCEBs) by Indian Companies the Reserve Bank of India issue a A.P. (DIR Series) Circular No. 17 dated September 23, 2008 to operation the above mention FCEB Scheme 2008.
DEFINITION OF FOREIGN CURRENCY EXCHANGABLE BONDS (FCEBs)
Regulation 2(s) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Second Amendment) Regulations, 2009 defines Foreign Currency Exchangeable Bond (FCEB) means “a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed to by a person who is a resident outside India, in foreign currency and exchangeable into equity share of another company, to be called the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments. The FCEB may be denominated in any freely convertible foreign currency”.
FCEB as defined in the Regulation includes the following:
(1) FCEB is a bond expressed in foreign currency;
(2) The principle amount and interest thereon payable in foreign currency.
(3) The Bond is issued by an Issuing Company.
(4) The Bond is exchangeable into equity shares of Offered Company.
(5) FCEBs are subscribed by a person resident outside India.
(6) FCEBs are issued either wholly or partly or on the basis of any equity related warrants attached to debt instruments.
As per Regulation 2(t) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Second Amendment) Regulations, 2009, “Issuing Company” means a company registered under the Companies Act, 1956 (1 of 1956) and eligible to issue Foreign Currency Exchangeable Bond under these regulations.
As per definition, the Issuing Company should be an Indian Company and should also be eligible to issue FCEBs. The words “eligible to issue “used in definition connotes that the Issuing Company satisfies certain conditions and from perusal of the Scheme the conditions can be inferred to refer to the following:
i. compliance with the provisions of the Companies Act, 1956 and necessary approvals of its Board of Directors and shareholders; and
ii. compliance with all the applicable provisions of the Securities and Exchange Board of India Act, Rules, Regulations or Guidelines (with respect to disclosures of their shareholding in the Offered Company).
The Issuing Company shall be part of the promoter group of the Offered Company and shall hold the equity shares being offered at the time of issuance of FCEBs. In other words, if Company X issues FCEBs then the FCEBs will be convertible into equity shares of Company Y that are held by Company X and where Company X and Company Y form part of the same promoter group and Company Y shall be Listed Company.
As per Regulation 2(u) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Second Amendment) Regulations, 2009, "Offered Company" means a company registered under the Companies Act, 1956 (1 of 1956) and whose equity share/s is / are offered in exchange of the Foreign Currency Exchangeable Bond.
The Offered Company is also an India Company and its shares should be listed on Stock Exchanges. The definition of Offered Company thus excludes those promoter group companies which are not listed. Further, the Regulations specifically provide that the Offered Company should belong to a sector permitted to receive Foreign Direct Investment (FDI) and should also meet eligibility conditions to issue or avail Foreign Currency Convertible Bonds (FCCBs) or External Commercial Bond (ECB).
As per Regulation 2(u) of Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Second Amendment) Regulations, 2009, "promoter group" has the same meaning as defined in the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000”.
The eligible issuer under the Scheme is the Issuing Company which shall be part of the promoter group of the Offered Company and shall hold the equity shares being offered at the time of issue of FCEBs and the Offered Company is the listed company, which is engaged in a sector eligible to receive Foreign Direct Investment (FDI) and eligible to issue or avail of Foreign Currency Convertible Bond (FCCBs) or External Commercial Borrowings (ECBs).
RESTRICTION ON ISSUE OF FCEB
The Regulations prohibits issue of FCEB by certain companies on the basis of following grounds:
(i) An Indian company, which is not eligible to raise funds from the Indian securities market;
(ii) A company which has been restrained from accessing the securities market by the SEBI.
(iii) Entities prohibited to buy, sell or deal in securities by SEBI.
Entities complying with the Foreign Direct Investment policy and adhering to the sectoral caps at the time of issue of FCEB can subscribe to FCEB. Prior approval of the Foreign Investment Promotion Board, wherever required under the Foreign Direct Investment policy, should be obtained.
Entities prohibited to buy, sell or deal in securities by SEBI are not allowed to subscribe to FCEB.
END USE REQUIREMENTS OF FCEB PROCEEDS
1. The Issuing Company is allowed to invest the proceeds of FCEBs in the promoter group company.
2. The Promoter Group Companies receiving such investments out of proceeds of FCEBs are allowed to invest in those activities allowed under the ECB policy and which iter-alia
Includes the following:
(i) Overseas investment in Joint Ventures/Wholly Owned Subsidiaries subject to the existing guidelines.
(ii) Modernization or Expansion of existing production in real sector, industrial sector and infrastructure.
(iii) New Projects.
(iv) NBFC Sector.
(v) Development of SEZ for infrastructure facilities.
(v) Integrated Township.
(vi) Interest During Construction (IDC) for Indian companies which are in the infrastructure sector.
(vii) Payment for Spectrum Allocation (Telecommunications Sector).
(viii) Acquisition of shares under disinvestment process.
(ix) Repayment of Rupee loans availed from domestic banking system.
(x) Bridge Finance.
3. Promoter Group Companies receiving such investments will not be permitted to utilize the proceeds for investment in the capital market or in real estate.
ALL-IN- COST CEILING
All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.
The all-in-cost ceilings for ECB are reviewed from time to time. The following ceilings are applicable upto March 31, 2012 and subject to review thereafter:
Average Maturity Period
All-in-cost Ceilings over 6 month LIBOR*
Three years and up to five years
350 basis points
More than five years
500 basis points
* for the respective currency of borrowing or applicable benchmark In the case of fixed rate loans, the swap cost plus the margin should be the equivalent of the floating rate plus the applicable margin.
The rate of interest payable on Foreign Currency Exchangeable Bond and the issue expenses incurred in foreign currency shall be within the all in cost ceiling as specified by Reserve Bank of India and External Commercial Borrowing Policy.
PRICING OF FCEB
Pricing has been very important component in the transactions involving foreign investors and the same is covered under the concerned Regulation and since the offered shares in lieu of FCEB are listed shares mechanism for arriving at the share price has inevitably taken the same into consideration. At the time of issue of FCEBs, the exchange price of the offered shares shall not be less than the higher of the following two:
(i) The average of the weekly high and low of the closing prices of the shares of the offered company quoted on the stock exchange during the six months preceding the relevant date; and
(ii) The average of the weekly high and low of the closing prices of the shares of the offered company quoted on a stock exchange during the two week preceding the relevant date.
Explanation to clause (i) and (ii): "Relevant date" means the date on which the Board of directors of the issuing company passes the resolution authorizing the issue of FCEB.
Minimum maturity of FCEB shall be five years for the purpose of redemption. The exchange option can be exercised at any time before redemption. While exercising the exchange option, the holder of the FCEB shall take delivery of the offered shares. Cash settlement of FCEB shall not be permissible.
OVERSEAS PARKING OF FCEBS PROCEEDS
The proceeds of FCEB may be retained and / or deployed overseas by the issuing / promoter group companies in accordance with the policy for the ECB or repatriated to India for credit to the borrowers’ Rupee accounts with AD Category I banks in India pending utilization for permissible end-uses. It shall be the responsibility of the issuing company to ensure that the proceeds of FCEB are used by the promoter group company only for the permitted end-uses prescribed under the ECB policy. The issuing company should also submit audit trail of the end-use of the proceeds by the issuing company / promoter group companies to the Reserve Bank duly certified by the designated AD bank.
Under the existing policy, the proceeds parked off-shore is allowed to be invested in the following liquid assets:
a. deposits or certificate of deposit offered by banks rated not less than AA (-) by Standard and Poor / Fitch IBCA or Aa3 by Moody’s;
b. deposits with overseas branches/subsidiaries of Indian Bank; and
c. treasury bills and other monetary instruments of one year maturity having minimum rating of not less than AA (-) by Standard and Poor / Fitch IBCA or Aa3 by Moody’s;
DIFFERENCES BETWEEN FCCBs AND FCEBs
Foreign Currency Convertible Bonds (FCCBs) mean a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency. Further, the bonds are required to be issued in accordance with the scheme viz., "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993”, and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments.
Foreign Currency Exchangeable Bond (FCEB) means a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed to by a person who is a resident outside India, in foreign currency and exchangeable into equity share of another company, to be called the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments. The FCEB must comply with the “Issue of Foreign Currency Exchangeable Bonds (FCEB) Scheme, 2008”, notified by the Government of India, Ministry of Finance, Department of Economic Affairs vide Notification G.S.R.89(E) dated February 15, 2008.
There are following differences between FCCBs and FCEBs:
1. The essentials differences between an FCCB and FCEB lies in their convertibility. Unlike an FCCB which is convertible into new shares of the issuing company, an FCEB is convertible into existing shares of the offered company held by the issuing company.
2. The shares issued on conversion of FCCB would be issued a fresh by issuing company on conversion, whereas when the investor in FCEB want shares in exchange, he has to approach to issuing company which has already hold shares of offered listed company.
3. The Company that issue FCCB and the Company that issue shares on conversion are same and one whereas in case of FCEB the Company that issue FCEB and the Company whose shares are offered on exchange will be different but should belong to the same promoter group.
4. FCCBs are issued by an Indian Company to a person resident outside India giving them an option to convert them into shares of the company at a pre determined price. On the other hand, FCEBs are issued by Indian Investment Company or Holding Company of a group to non-resident which are exchangeable for the shares of a specified group company at a pre determined price.
5. In case of FCCBs issue, there is a change in the shareholding of issuing company on the other hand, in case of FCEBs issue there is no changes in the shareholding of issuing company.
Thanks & Regards
CS Ajay Mishra