international financial instruments presentation

8/7/2019 International Financial Instruments Presentation

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INTERNATIONAL FINANCIALINSTRUMENTS

International Business Presentation By:

Ankur Srivastava*

Sabyasachi Mondal*

Shankha Sengupta*

*Doctoral Research Scholar,

IBS, Hyderabad


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Foreign Currency Convertible Bonds (FCCB)

FCCBs may be defined as debt instruments denominated in foreign

currency and are generally subscribed by non-residents ; the bonds may be

converted into equity shares of the issuer after a pre-decided period at the

pre-defined strike price, or, may be paid off at a conditioned premium

Important Features of FCCBs:

It is a quasi-debt instrument, which may be transformed into the

companys equity shares at the discretion of the investor, at a pre-

determined strike rate.

FCCB issues have a Call and Put option as per the structural

requirement of the bond. A call option provides the right to the issuer to

Call the loan and make an early redemption. In contrast, a put option

entitles the lender to exercise the option to convert the FCCB into equity;

both options subject to RBI guidelines.


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The coupon on bonds can also be zero and are known as zero coupon

Bonds (ZCB) in view of attractiveness of options attached to them. In

case of ZCB, the holder is basically interested in either conversion of

the bonds in equity or capital appreciation.

The redemption ofFCCB can be made at a premium or at par or

even at a discount depending upon the coupon offered. The Present

value of overall remaining cash flow determines the valuation of

Bonds.

FCCB are generally issued by Corporate, which have high promoter

shareholding and hence do not perceive any risk of losing

management control even after exercise of conversion option.

The foreign holder ofFCCB can trade the FCCB in part or in full.

Therefore, the holder can sell the debt part while retaining the Option;

and vice versa.

Important Features of FCCBs (contd..):


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Regulatory Guidelines for Issuing FCCBs:

Prior information should be given to the Stock Exchange by the listed

issuer company, seven days before the board meets for considering the same Board of Directors need to pass Board resolution pertaining to the issue of

the FCCBs

Shareholders meeting should be arranged to receive the shareholders

consent regarding future enhancement of borrowing powers of the Board,

creating mortgage for secured FCCBs, or obtaining approval for further

capital procurement through issue ofFCCBs

Trust Deed should be frames, and respective Trustees for the bondholders

should be appointed as also redemption reserve amount should be created

Indian Stock Exchange should provide in-principal bond approval, to

allow listing of the shares issued upon conversion of bonds, when the

bondholder implements the convertibility option

Offer Document should be filled with SEBI, RBI and stock exchanges

prior to FCCB issue


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External Commercial Borrowings (ECBs)

DefintionI: External Commercial Borrowings (ECB) refer to commercial

loans in the form of bank loans, buyers credit, suppliers credit,

securitized instruments (e.g. floating rate notes and fixed rate bonds)

availed of from non-resident lenders with minimum average maturity of

3 years. (RBI Directive, 2009)

DefinitionII: ECBs may also be defined as source of funds pertaining to

the requirement of corporates from abroad with the advantage of:

Reduced interest rates prevailing in the international financial markets

Longer maturity period

Assists in financing expansion of existing capacity as well as for fresh

investment


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Modes of Raising ECBs:Modes of Raising ECBs:

Foreign currency loan raised by residents from recognized lenders

Commercial Bank Loans : in the form of term loans from banks outside

India

Buyer's Credit & Supplier's Credit

Securitized instruments such as Floating Rate Notes (FRNs), Fixed Rate

Bonds(FRBs), Syndicated Loans etc. Syndicated Loan

Credit from official export credit agencies

Commercial borrowings from the private sector window of multilateral

financial institutions such as International Finance Corporation

(Washington), ADB, AFIC, CDC,

Loan from foreign collaborator/equity holder, etc and

corporate/institutions with a good credit rating from internationally

recognized credit rating agency

Lines ofCredit from foreign banks and financial institutions


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Financial Leases

Import Loans

Investment by Foreign Institutional Investors (FIIs) in dedicated debt

funds

External assistance, NRI deposits, short-term credit and Rupee debt

Foreign

Currency

Convertible Bonds

Non convertible or optionally convertible or partially convertible

debentures

Redeemable preference shares are considered as part of ECBs

Modes of Raising ECBs (contd.):Modes of Raising ECBs (contd.):

As per Indian corporate law, all preference shares are

mandatorily redeemable unless they are convertible

Hence, convertible preference shares will not be ECB (will be

Foreign Direct Investment)

Non convertible, partly convertible or optionally convertible

preference shares are treated as ECBs


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ECBs can be accessed under two routes:

Automatic Route and

Approval Route.

Routes for Obtaining ECBs:


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Eligible Borrowers:


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Recognized Lenders:


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Permitted End Uses of ECBs:


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Participatory Notes:

Participatory Notes (PNs) are instruments used by foreign funds, not

registered in the country, for trading in the domestic market

Participatory notes are like contract notes and are issued by foreign

institutional investors, registered in the country, to their overseas

clients who may not be eligible to invest in the Indian stock markets

Foreign institutional investors invest funds on the behalf of suchinvestors, who prefer to avoid making disclosures required by various

regulators. The associates of these FIIs generally issue these notes

overseas.

PNs are, in fact, offshore derivative instruments issued by foreign

institutional investors and their sub-accounts against underlyingIndian securities. Participatory notes are issued where the underlying

assets are securities listed on the Indian bourses.

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