Indian firms issuing exchangeable bonds will be allowed to redeem these even before their expiry period. The option will give companies more flexibility while issuing such bonds.
According to fresh norms being prepared by the government, companies will have a ?call option? and a ?put option? for these bonds. While the former would give issuer the right to ?call? the bond and make an early redemption, the latter would enable them to convert these into equity post maturity. At present, the draft guidelines are being studied by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi).
Exchangeable bonds will be issued against share capital of companies and can be converted back into equities after a specified number of years. The minimum maturity period of such bonds was likely to be three years but companies could redeem them earlier, a finance ministry official said.
Similar options are available to companies issuing foreign currency convertible bonds (FCCBs). The central bank would detail norms to enable companies to exercise pre-maturity redemption, the official said.
The government would further allow companies to issue these bonds only to foreign investors. Once the issuer exercises the ?put?option, or converts these bonds into equity, they will be counted as foreign direct investment (FDI). This means companies will have to take into account the sector-specific FDI caps while issuing such bonds.
But bonds redeemed at or before maturity will not be counted as FDI. The finance ministry, in consultation with the department of industrial policy and promotion (DIPP) is further putting in place an enabling mechanism to count bond converted into equity FDI. DIPP is the nodal agency on FDI policy.
Exchangeable bonds were announced in the Budget as an instrument for domestic firms to unlock a part of their holdings in group companies for raising funds. Such bonds, issued by one company to subscribers, can be converted to shares of another group company.
