In the last 2 weeks, Foreign Currency Convertible Bonds (FCCBs) has come into lime light after Castex Technologies has alloted shares against FCCBs and its shares plunged by 80%. Foreign investors has cried blaming Castex Technologies has manipulted its share price and converted bonds into equity shares. What are these Foreign Currency Convertible Bonds (FCCBs)? How Indian companies can issue and convert it to their advantage? Can foreign investor of such bond can safeguard themselves? Can investors who has invested in such company shares need to take any precautions to safeguard their investments?
What are Foreign Currency Convertible Bonds (FCCBs)?
FCCBs are Foreigh Currency convertible bonds issued by Indian listed companies at overseas / foreign market. These generally carry a nominal interest rates.
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Features of Foreign Currency Convertible Bonds (FCCBs)
- These are issued by listed Indian companies to foreign investors.
- These are issued at nominal interest rate of 4% to 6% per annum.
- These FCCBs bonds carry a clause to convert such bonds to equity shares at pre-defined price mid-way during the term of the bond.
- These conversion to shares can be done at the option of bond issuer or bond holder. Means either company or foreign investor can request for conversion from bond to equity shares.
- Conversion to equity shares would be done at predefined price, however is generally at premium price as share prices can always go up in future.
- Good option for investors during bull run, bad in bear market.
What are the advantage of Foreign Currency Convertible Bonds (FCCBs) for foreign investors?
Foreign investors has several advantages like:
- Get good interest rate on FCCBs.
- Would carry an option to convert such bonds into equity shares. They can take advantage of price appreciation in equity share price and book short term gains.
What are the advantage for companies issuing such bonds?
- FCCBs Bonds are like own and free money. They need not re-pay in case of conversion to equity shares. Instead of re-payment, they would issue equity shares, that’s it.
- Companies can pay only nominal interest rates of 4% to 6% per annum to foreign investors. They need not pay 8% to 11% interest rates which are being paid for NCD Bonds to Indian investors.
- It is immaterial whether it is bull market or bear market, they can convert such bonds to equity shares at any price.
- Critics say that companies can manipulate share price and can convert Foreign Currency Convertible Bonds (FCCBs) to equity shares to their advantage.
E.g. Few days back, Castex Technologies, subsidiary of Amtek Auto share price was above Rs 160 for one month. As per the clause in the FCCBs agreement which states that if price of such stock is above specific level, it can convert to equity shares. It has passed resolution to convert FCCBs Bonds worth USD 200 Mn to equity shares at a price of Rs 160 per share. However now, such shares are below Rs 35 (as on 15-Sep-15) where foreign investors lost more than 80% with such company move. Foreign investors approached SEBI indicating that share price has been manipulated by company and then converted to equity shares at higher price.
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What should investors do, If they invested in shares of such companies which issued FCCBs?
If you have invested in shares of companies which issued FCCBs, you should monitor the following:
- Investors need to keep an eye on such companies which has issued FCCBs Bonds. They need to monitor on how such companies would meet obligations to repay the bonds money. If they convert FCCBs bonds to equity shares, earnings per share would reduce and share prices can fall.
- Companies which issue FCCBs has an obligation to settle in US Dollars only. Due to rupee depreciation, instead of Rs 60, now companies need to pay Rs 66 per dollar. Means more rupee amount to be spent to redeem such FCCBs which would be cost to company and it would reduce in profits. This would affect the share price of the company.
- In above two cases, there are chances that share prices would fall in short term. If you are short term investor, you should review and exit such stocks.
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What are Foreign Currency Convertible Bonds (FCCBs)
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Nice post , Simple and clear.
Sounds good to me 🙂