Foreign Currency Convertible Bond

FCCB or Foreign Currency Convertible Bond is a convertible bond that is issued in a currency different to the issuer’s home currency. It’s a bond with a dual character of debt and equity instrument. Upon maturity, holder can convert the equivalent value of equity at a set conversion rate.

Indian companies issue FCCB to raise money in foreign currency. This technique also gives them a boost in the name of expansion by giving them access to new markets. These bonds have lower interest rates than regular bonds. The funds collected by a company through FCCB shall be used as ECB guidelines.

The issuance of FCCB does not require any sort of collateral security. If the investor converts FCCB to shares, it will be considered as capital gain, but transfer of FCCB made outside India by a NRI to another NRI won’t be a capital gain. TDS of 10% will be deducted on the converted portion of the FCCB.

For example, an American listed company that issues a bond in India in rupees has, in effect, issued an FCCB.

Foreign currency convertible bonds are classified as quasi-debt instruments. They allow both the investor and the corporation issuing bonds to share risk and reward. Investors take on risk by putting faith in the corporation doing well financially, while companies are able to raise money in different currencies to finance their operations.

If the bond is issued with a put option, the investor has the authority or right to redeem when they want to convert their bond to stocks. If the bond is issued with a call option, then the issuing company holds the right to redemption