FCEB involves at least two companies — the bonds are usually of the parent company, while the shares are of the operating company
The Union Finance Minister in his budget speech of 2007-08 had proposed the introduction of foreign currency exchangeable bonds (FCEBs). Pursuant to the announcement, the RBI (Reserve Bank of India) initially issued guidelines with respect to such bonds in form of a scheme being the issue of Foreign Currency Exchangeable Bonds Scheme, 2008 (Scheme). Thereafter, the Scheme was notified in February 2009 by amendments to the Foreign Exchange Management Regulations with retrospective effect from September 2008.
Under the said Regulations, prior approval of the RBI would be required for issue of FCEB. Let's understand what are foreign currency exchangeable bonds, who regulates them and their maturity, among others.
Issue of foreign currency exchangeable bonds (FCEB) are regulated by Foreign Currency Exchangeable Bond
Scheme 2008 issued by Ministry of Finance, Department of Economic Affairs.
What is FCEB?
- A bond expressed in foreign currency.
- The principal and the interest of which is payable in foreign currency.
- The issuer of the bond is an Indian company.
- The bonds are subscribed by a person resident outside India.
- The bonds are exchangeable into equity shares of another company which is also called the offered company.
It may be noted that issuing company is to be the part of promoter group of offered company and the offered company is to be listed and be eligible to receive foreign investment.
The launch of the FCEB scheme affords a unique opportunity for Indian promoters to unlock value in group companies. FCEBs are another arrow in the quiver of Indian promoters to raise money overseas to fund their new projects and acquisitions, both Indian and global, by leveraging a part their shareholding in listed group entities.
An FCEB involves three parties: The issuer company, offered company (OC) and an investor.
Under this option, an issuer company may issue FCEBs in foreign currency, and these FCEBs are convertible into shares of another company (offered company) that forms part of the same promoter group as the issuer company. For example, company ABC Ltd issues FCEBs, then these FCEBs will be convertible into shares of company XYZ Ltd that are held by company ABC Ltd and where companies ABC Ltd and XYZ Ltd form part of the same promoter group.
Thus FCEBs are exchangeable into shares of offered company. They have an inherent advantage that it does not result in dilution of shareholding at the offered company level.
FCCB vs FCEB
Foreign currency convertible bonds (FCCBs) are issued by a company to non-residents giving them the option to convert them into shares of the same company at a predetermined price. On the other hand, foreign currency exchangeable bonds are issued by the investment or holding company of a group to non-residents which are exchangeable for the shares of the specified group company at a predetermined price.
The key difference, therefore, is while FCCB involves just one company, FCEB involves at least two companies — the bonds are usually of the parent company while the shares are of the operating company which must be a listed company.
Issue of Foreign Currency Exchangeable Bonds (FCEB) Scheme, 2008
In financial year 2007-08, the Indian Government notified the Foreign Currency Exchangeable Bonds Scheme, 2008 for the issue of FCEBs. The provisions of the scheme is as under:
Eligibility conditions and subscription
- The issuing company should be part of the promoter group of the offered company and should hold the equity share/s being offered at the time of issuance of foreign currency exchangeable bond.
- The offered company should be a listed company which is engaged in a sector eligible to receive foreign direct investment and eligible to issue or avail of foreign currency convertible bond.
- The subscriber to the foreign currency exchangeable bond should comply with the foreign direct investment policy and adhere to the sectoral caps at the time of issuance of FCEB.
- The proceeds of FCEB may be invested by the issuing company overseas by way of direct investment including in joint ventures or wholly owned subsidiaries abroad.
- The proceeds of FCEB may be invested by the issuing company in the promoter group companies.
Prior approval of the Reserve Bank of India is required for issuance of foreign currency exchangeable bond.
The minimum maturity of the FCEB is five years for purpose of redemption. The exchange option can be exercised at any time before redemption. While exercising the exchange option, the holder of the bond should take delivery of the offered shares. Cash (net) settlement of these bonds is not permissible.
Taxation on exchangeable bonds
- Interest payments on the bonds, until the exchange option is exercised, is subject to deduction of tax at source as per the provisions of Section 115 AC of the Income Tax Act, 1961.
- Tax on dividend on the exchanged portion of the bond is in accordance with the provisions of Section 115 AC of the Income Tax Act, 1961.
- Exchange of foreign currency exchangeable bonds into shares shall not give rise to any capital gains liable to income-tax in India.
- Transfers of these exchangeable bonds made outside India by an investor who is a person
- resident outside India to another investor who is a person resident outside India shall not give rise to any capital gains liable to tax in India.