FCCB: luring those who eye cheap money from abroad

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Sumit Binani, VP, SREI Capital Markets gives you a perspective on the cues you must draw when a company goes for FCCB. He interacted with Rajesh Naidu of The Financial Express.

What are the factors investors must consider when subscribing to an FCCB issue?

A foreign currency convertible bond (FCCB), issued as a bond by an Indian company, is expressed in foreign currency, and the principal and the interest too are payable in foreign currency. The maximum tenure of the bond is five years. A convertible bond is, in fact, a quasi-debt instrument, which can be converted into equity shares at the choice of investors either immediately after issue, or upon maturity, or during a set period, at a predetermined strike rate or a conversion price. It acts like a bond by making regular interest and principal payments, but these bonds also give the bondholder an option to convert the bond into shares. The investor benefits if the conversion price is higher than the traded price and suffers a loss if the traded price is higher than the conversion price. The investor has the discretion to hold the bond till maturity, receive regular interest payments and principal on maturity, without exercising the option of converting the debt instruments into equity.

This future switching option allows the bond-holder to judge the performance of the company down the line, and then decide whether to substitute the debt for equity in her portfolio. This naturally reduces the capital risk of investment. FCCBs are usually priced at a premium over the prevailing market price. If the market price of the share does not exceed the conversion price, the holders do not opt for equity conversion and the issuer has to redeem the debt after the expiry of the stipulated period of five years. Clearly, the debt servicing rack record of the issuer company, its solvency, its business fundamentals and growth, the interest rate and other macro economic indicators influence the decision of an investor to invest in such an instrument.

Could give us your take on qualified institutional placement and an FCCB issue? Which one would you prefer?