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Foreign currency convertible bonds

FCCBs are becoming increasingly popular amongst Indian and emerging market companies as a means of raising funds from overseas markets. Aggressive companies are going the FCCB route to fund their expansion/acquisition plans because of the shorter lead times associated with the process as well as for the fact that the company gains exposure in to a global investor base.

In the past few years FCCBs have been very extremely popular with Indian companies as they seek innovative financing options for their expansion plans. The reasons for their popularity amongst borrowers can be cited as

• Being a hybrid instrument, the coupon rates on FCCBs are typically lower than pure debt or zero, thereby reducing the debt-financing costs.
• FCCBs are book value accretive on conversion.
• Saves the risk of immediate equity dilution as in the case of public issues.

Investors are also happy to go down the FCCB route. They provide substantial incentive to investors such as

• Guaranteed returns on the bond in the form of coupon rates
• Ability to take advantage of the price appreciation in the stock by means of warrants attached to the bonds, which are activated when the price of the stock reaches a certain point.
• Substantial yield-to-maturity (YTM) is guaranteed at maturity.
• Lower tax liability as compared to pure debt instruments due to the lower coupon rates.