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RBI allows issue of FCEBs
Wednesday, September 24, 2008

The Reserve Bank of India (RBI) has allowed Indian companies raise foreign capital by issuing foreign currency exchangeable bonds (FCEBs) with immediate effect. The move will attract foreign currency and strengthen the Rupee. FCEBs give companies the option of issuing bonds in a foreign currency, which are exchangeable into equity shares of the offered company, either wholly or partly or on the basis of any equity related warrants attached to debt instruments. The step by the RBI facilitates promoters of Indian companies raise funds without diluting their stake.

Industrial houses can now raise funds in exchange of their shares in their listed subsidiaries. It means that a company with a small balance sheet can raise funds on the strength of its parent or group company. At the time of its maturity, the lender could either convert bonds into equity shares or opt for a repayment of the loan. Companies can exercise the option to exchange the bonds into equity shares at any time before redemption.

An FCEB is a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency. The 'issuing company' shall be part of the promoter group of the 'offered company' and shall hold the equity shares being offered at the time of the issuance of the bond. The 'offered company' should be a listed company engaged in a sector eligible for FDI and eligible to issue or avail FCEBs or ECBs. The investment under the scheme shall comply with the FDI and the ECB policy requirements.

NRI investment and investment by foreign entities will increase due to the move. The issuing company can invest proceeds from FCEBs in its group companies or in overseas joint ventures or wholly owned subsidiaries, though investment in Indian capital markets or real estate is prohibited. The norms laid down by the government for FCEBs incorporate all the restrictions applicable to external commercial borrowings (ECBs) as well as foreign ownership guidelines in Indian companies.



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