Foreign Currency Convertible Bonds (FCCB) is a type of convertible bond that are issued in a currency different than the issuer’s domestic currency. It means bonds issued under FCCB are subscribed by a non-resident in Foreign currency. For example, If you buying an Indian FCCB in UK then it means you can invest using your pounds and they will be converted by the further investment. And any time you can get your money back in your currency. It helps companies to raise money in the form of Foreign Currency by issuing FCCB bonds. The maximum tenure of the bond is five years. A convertible bond is a mix between a debt and equity instrument. 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 on 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. These bonds also give the bondholder an option to convert the bond into shares, either in whole or in parts. The investor makes a significant gain 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 freedom to decide to hold the bond till maturity, receive regular interest payments and principal and redeem on maturity, rather than opting to converting the debt instruments into equity.
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Company issuing FCCB’s have to face Foreign Exchange risk, as the repayment to bond holders will be made in Foreign Currency which are highly volatile.
These types of bonds are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company’s stock. Issuer can raise money in the form of Foreign Currency.
Advantage Of Issuing FCCB’s
- Interest rate on FCCB bonds are normally 30 to 50% lower than the market rate.
Disadvantage Of Issuing FCCB’s
- If the exchange rate goes up, the issuer has to pay more to the investors.