15. Give the definition and characteristics of Foreign Currency Convertible Bonds (FCCB).
A Foreign Currency Convertible Bond (FCCB) is a hybrid debt instrument issued by a company in a currency different from its domestic currency. It pays regular interest and principal in foreign currency but gives the investor the option to convert the bonds into equity shares of the issuing company at a predetermined price. [1, 2, 3, 4]
Key Characteristics
- Hybrid Nature: Acts as a traditional bond (paying fixed coupons) but includes an embedded equity derivative.
- Foreign Denomination: Principal and interest payments are made in a foreign currency (e.g., USD, EUR, or JPY).
- Lower Coupon Rates: Because investors get the added benefit of potential equity conversion, the issuing company pays a lower interest rate than standard corporate debt.
- Conversion Option: Bondholders can convert the bonds into a fixed number of equity shares during a specified conversion period, which is highly profitable if the issuer's stock price rises.
- Call and Put Options:
- Put Option: Allows the investor to demand early repayment of the bond.
- Call Option: Allows the issuing company to redeem the bonds before the maturity date. [9, 10]
- Unsecured Structure: FCCBs are generally issued as unsecured debt without collateral or underlying security.
- Redemption: If the stock price falls and conversion becomes unprofitable, the investor retains the status of a debt holder and receives the original principal on the maturity date. [11]
For detailed regulatory frameworks and guidelines governing these issuances, you can refer to the Reserve Bank of India or explore market mechanisms on Investopedia. [12]
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