In yet another initiative to uphold the Indian Economy, the Reserve Bank of India on Tuesday contended to operationalise the move to attract foreign currency inflows into the country, by issuing guidelines for Foreign Currency Exchangeable Bonds (FCEB), which will come into effect immediately.  

The advantage of this is that in case the promoter’s holding in a particular company is low, the company can raise funds, with a public sector bank, without diluting the promoter’s stake, said a senior official in charge of treasury. Thus the companies have the option of issuing bonds in foreign currency, which can be converted into equity shares of another group company. This move would in turn provide corporate groups more flexibility to raise funds abroad.  

The norms laid down by the government for FCEBs incorporate all the restrictions applicable on external commercial borrowing (ECB) as well as foreign ownership in Indian companies. The scheme was notified by the finance ministry in February this year.  

Though raising money in the international market would prove a major challenge looking at recent financial turmoil, from the regulator’s perspective. it could be a move to attract more foreign exchange inflows into debt, given that foreign investors have been heavy sellers in equity markets of late. The minimum period of maturity for FCEBs have been stipulated at five years.  

The central bank has stipulated that the funds raised through FCEBs cannot be used for investments in the capital markets or real estate in India, the proceeds from FCEBs can be invested by the issuing company in promoter group companies.  

FCEB is a bond which is expressed in a foreign currency with the principal and interest payable in foreign currency itself. Foreigners, NRIs and overseas entities are eligible to subscribe to these bonds, which can be converted into equity shares of a group company also known as the ‘offered company’. The ‘offered company’ should be a listed company engaged in a sector eligible for FDI and is eligible to issue or avail of Foreign currency convertible bonds (FCCBs) or ECBs.

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 issuance of the bond. The norms governing tax treatment and eligibility for FCEBs are on the same lines as FCCBs. In the case of FCCBs, bonds can be converted to the equity of the issuing firm. As a result, payment of interest on FCEBs would be subjected to the payment of withholding tax.