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.
