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Foreign currency convertible bonds

manpreet.kaur (Student) (184 Points)

15 October 2012

WHAT IS THE DIFFERNCE BETWEEN ISSUE OF DEBENTURES ABROAD AND ISSUE OF FOREIGN CURRENCY CONVERTIBLE BONDS(FCCB) ...

AND IN CASE OF EXTERNAL COMMERCIAL BORRWINGS GUIDELINES,,,,WHEN WE ISSUE DEBENTURES ABROAD ,DO WE CONSIDER THE ECB GUIDELINES OR FCCB GUIDELINES... AS PROVIDED IN ECB GUIDELINES

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(Guest)

Dear Manpreet,

RBI/2012-13/12 Master Circular No.12/2012-13 dated July 02, 2012, is a Master Circular on External Commercial Borrowings and Trade Credits. This Master Circular consolidates the existing instructions on the subject of "External Commercial Borrowings and Trade Credits" at one place.

As per this circular, External Commercial Borrowings and Trade Credits availed of by residents are governed by clause (d) of sub-section 3 of section 6 of the Foreign Exchange Management Act, 1999 read with Notification No. FEMA 3/ 2000-RB viz. Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, dated May 3, 2000, as amended from time to time.

This circular will stand withdrawn on July 1, 2013 and be replaced by an updated Master Circular on the subject.

As per this circular, Foreign Currency Convertible Bonds (FCCBs) means 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. The ECB policy is applicable to FCCBs. The issue of FCCBs is also required to adhere to the provisions of Notification FEMA No. 120/RB-2004 dated July 7, 2004, as amended from time to time.

As per RBI/2012-13/15 Master Circular No.15/2012-13 dated July 02, 2012, Under the Foreign Direct Investments (FDI) Scheme, investments can be made in mandatorily and fully convertible debentures of an Indian company by non-residents through two routes i.e automatic route and approval route.

Thus, mandatorily and fully convertible debentures of an Indian company, constitute equity and not a debt like FCCB, thereby falling under the guidelines pertaining to foreign direct investment (FDI) and not ECB.

Hence, RBI treats FCCB’s as a debt and mandatorily and fully convertible debentures as an equity. Hence, FCCB are governed by ECB Guidelines whereas, mandatorily and fully convertible debentures are governed by FDI scheme.

Regards,

Veeral Gandhi

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Ankur S Kumar (CA) (204 Points)
Replied 15 October 2012

The query was quite tricky and complex. The answer that Mr. Veeral Gandhi gave is quite perfect.

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Smriti Dhawan (Company Secretary ) (347 Points)
Replied 15 October 2012

Very nicely explained by Mr. Veeral.

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manpreet.kaur (Student) (184 Points)
Replied 15 October 2012

THANX VEERAL SIR.. BUT I STILL DIDNT GET ANSWER TO MY QUERY........ MY QUESTION WAS THAT UNDER WHICH GUIDLINES ISSUE OF DEBENTURES ABROAD WILL COME;AS ECB GUIDELINES ALSO INCLUDES FCCB GUIDELINES.. SO NOW ,WHICH GUIDELINES I NEED TO FOLLOW ECB OR FCCB WHEN COMPANY IS ISSUING DEBENTURES ABROAD...??? AS BOTH COMES UNDER ECB GUIDLINES..

(Guest)

Manpreet, I already mentioned in the last two paragraphs of my previous reply that Issue of Debentures abroad and issuing FCCB are two different things. RBI treats Issue of Debentures abroad as an issue of equity and issuing FCCB as a debt. Since issuing FCCB is considered as a debt, ECB Guidelines will apply and since mandatorily and fully convertible debentures are considered as equity and not debt, ECB Guidelines will not apply but only FDI Scheme will apply.

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Ankur S Kumar (CA) (204 Points)
Replied 16 October 2012

Dear Manpreet,

I agree with Mr. Veeral. It's indeed true that since issuing FCCB is considered as a debt by RBI, ECB Guidelines will apply and since mandatorily and fully convertible debentures are considered as equity and not debt, ECB Guidelines will not apply but only FDI Scheme will apply.

I think that you have still not understood it's meaning. Is there anyway by which we can help you in this regard ? If you have any counter questions, please feel free to express it as we all are learners.

Regards,

A.Kumar

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manpreet.kaur (Student) (184 Points)
Replied 16 October 2012

thanks veeral sir and kumar sir... what if the company is issuing debentures abroad for repayment of its rupee loan taken in India???? can that be considered as an External commercial borrowings as it includes repayment of rupee loan???

(Guest)

Dear Manpreet,

As per RBI/2012-13/15 Master Circular No.15/2012-13 dated July 2, 2012 Section I, Point 4(iii) :

“As far as debentures are concerned, only those which are fully and mandatorily convertible into equity, within a specified time would be reckoned as part of equity under the FDI Policy.”

Non convertible debentures would be reckoned as a debt and ECB Guidelines will apply.

Finally, for conditions for repayment of Rupee loan by means of ECB, please refer RBI circular : RBI/2012-13/200 A.P. (DIR Series) Circular No. 26 dated September 11, 2012.

Regards,

Veeral

manpreet.kaur (Student) (184 Points)
Replied 18 October 2012

n what in case of partially convertible debentures????

(Guest)

Dear Manpreet,

Non-convertible, Optionally Convertible or Partially Convertible are considered as debt and must comply with ECB Guidelines.

Regards,

Veeral Gandhi

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manpreet.kaur (Student) (184 Points)
Replied 19 October 2012

m sorry but m still not very clear...though i have completely understood what u said but ecb guidelines and fccb guidlines are shown under different topics under the ecb guidelines. so i just wanted to know that which type of debentures can be included in those ecb guidelines n which shud be taken under fccb guidelines... m not clear about it till nw..

(Guest)

Dear Manpreet,

As of now, there is no clear Guideline regarding Issuance and repayment of FCCB’s. Currently, the ECB policy is applicable to FCCBs. The issue of FCCBs is also required to adhere to the provisions of Notification FEMA No.120/RB-2004 dated July 7, 2004, as amended from time to time and ‘Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993’.

As I have already said you in this post that ECB Guidelines are applicable to certain kinds of debentures (Non-convertible, Optionally Convertible or Partially Convertible) issued to non-residents and FDI Guidelines are applicable to certain kinds of debentures (fully and mandatorily convertible) issued to non-residents. So, when we say that ECB Guidelines will apply to issuance of certain kinds of debentures, It does not mean ‘FCCB Guideline’. It just means ECB Guidelines.

Regards,

Veeral Gandhi

1 Like