India’s Ministry of Finance publishes Issuance of Foreign Currency Exchangeable Bonds Scheme 2008

LAWFUEL – Legal Newswire – Following last week’s announcement by the Ministry of Finance (MOF) that Indian companies would be permitted to raise funds abroad by issuing foreign currency exchangeable bonds (FCEB), the MOF has now published the Issuance of Foreign Currency Exchangeable Bonds Scheme 2008 (FCEB Scheme).

FCEBs are defined as bonds expressed in foreign currency and in which the principal and interest are payable in foreign currency only.

Until now, Indian companies were only allowed to issue Foreign Currency Convertible Bonds (FCCB) which meant that they could offer debt instruments convertible into their own shares to subscribers at a pre-determined price.

Pursuant to the FCEB Scheme, Indian promoters will be able to issue FCEBs against shares in listed group companies in accordance with the Foreign Direct Investment (FDI) rules and the External Commercial Borrowings (ECB) guidelines. The FCEB Scheme is intended to help large Indian business groups raise funds abroad without diluting their promoters’ equity.

The main features of the FCEB Scheme are as follows:


FCEBs can be issued by Indian companies. The company that issues the FCEBs (issuing company) should be part of the promoter group of the company, the shares of which are being offered (offered company) and should hold the shares that are being offered.
The offered company must be listed on a stock exchange and must be engaged in a sector eligible to receive foreign direct investment under the FDI rules.
Use of Proceeds

The proceeds of the FCEB must comply with end uses prescribed under the ECB guidelines Currently permitted end uses include the import of capital goods, modernisation of exiting plants in the real sector, and financing the infrastructure sector. Investments in the capital markets or in the real estate sector in India are not permitted.
The proceeds must be kept overseas and deployed in accordance with ECB guidelines. As per current ECB guidelines, only an equivalent of US$20 million of external commercial borrowings may be used for Rupee related expenses.
The proceeds may also be used overseas for direct investment in joint ventures or wholly-owned subsidiaries in accordance with the existing guidelines on Direct Investment by Residents in Joint Ventures or Wholly Owned Subsidiaries abroad.


Prior approval of the Reserve Bank of India is required for issuance of FCEBs.
Prior approval of the Foreign Investment Promotion Board (FIPB) is required if under the FDI rules, a subscriber requires FIPB approval for investment in the offered company.

Pricing and Maturity

Minimum maturity period for the FCEBs is five years for the purpose of redemption. However, the FCEB can be converted into equity at any time before redemption, either partly or wholly. Subscribers will only be permitted to take shares while exercising the options. Cash settlements are not permitted.
The rate of interest payable on the FCEB and the issue expenses incurred by the issuing company must be within the all-in-cost ceiling provided in the ECB Guidelines, currently LIBOR + 250 basis points.
The exchange price of the listed shares of the offered company quoted at the time of issuance of the FCEBs must not be less than the higher of the two average closing prices of the shares of the offered company on the stock exchange:

the average of the weekly high and low closing prices for the preceding 6 months; and
the average of the weekly high and low closing prices for the preceding 2 weeks.


Interest on FCEBs will be liable to tax deduction at source as per the Indian Income Tax Act.
Tax on dividend on any exchanged portion of the FCEB will be as per the Indian Income Tax Act.
Income tax on capital gains will not be applicable to an exercise of option under the FCEB.
Transfers of FCEBs from one non-resident to another non-resident outside of India will not attract tax in India on capital gains.

Other requirements

Issuing companies and offered companies must comply with the provisions of the Companies Act 1956 with respect to the authorisations required.
Issuing companies must comply with Securities and Exchange Board of India act, rules, guidelines and regulations with respect to disclosure of their shareholding in the offered company.
Offered shares should be kept free from encumbrance until the date of exchange or redemption.

It is unlikely that the FCEB Scheme will result in a significant number of offerings in the near future because the Reserve Bank of India’s amendments to the ECB policy that were put in place in August 2007 which limit the use of proceeds from any ECB are applicable to offerings under the FCEB Scheme. However, it is likely to increase the flexibility of Indian promoters to raise financing for overseas acquisitions.

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