What Is Foreign Currency Convertible Bonds (FCCB)?

Today, when companies want to expand internationally, they need financial tools that can attract global investors. Foreign Currency Convertible Bonds is one such option, the demand for which has increased rapidly in the last few years. This bond allows companies to raise funds in foreign currency and later these can be converted into shares of the company. 

In this blog, we will know how these FCCBs work, what their special features are and why they are becoming an important part of the funding strategy of many Indian companies.

What Are Foreign Currency Convertible Bonds (FCCBs)?

Foreign Currency Convertible Bonds (FCCBs) are debt securities issued in foreign currency that can be converted into the issuer’s equity shares at predetermined terms. Initially, it is a debt instrument on which the investor gets a fixed interest. But if the company performs well and the share price rises, the investor can convert this bond into a share, which also gives him the benefit of equity.

1. In which currency are FCCBs issued?

Foreign Currency Convertible Bonds (FCCBs) are issued in currencies that are commonly used for international transactions, aimed at foreign investors. The most common currency is the US Dollar (USD), but sometimes these bonds are also issued in other stable currencies like Euro (EUR) or Japanese Yen (JPY). The reason for this is simple—if a company has to raise funds from the foreign market, it has to issue bonds in the currency that is convenient for the investors there.

2. Why are they attractive for investors?

FCCBs offer investors a combination of debt and equity. On one hand, there is the security of fixed interest, while on the other hand, additional returns can be earned by converting into shares on the possibility of growth of the company. This is why they are becoming a preferred option for investing in companies with high growth potential.

3. Use and trend of FCCBs in India

Indian companies, especially in the IT, pharma and manufacturing sectors, have been using FCCBs for global expansion and raising capital. RBI and SEBI have made clear guidelines for this, due to which FCCBs have once again emerged as a reliable and regulated financing tool.

Read Also: Types of Bonds in India

Key Features of FCCBs

• Issued in foreign currency : FCCBs are issued in foreign currency, such as the US dollar (USD), euro (EUR) or Japanese yen (JPY). This allows companies to raise capital directly from international investors, giving them an opportunity to grow beyond the boundaries of the domestic market.
• Conversion to equity : The most important feature of these bonds is that they can be converted into shares of the company after a certain period of time. This conversion takes place at a pre-fixed price, giving the investor upside potential in equity.
• Fixed maturity period : FCCBs have a fixed maturity period usually between 3 to 5 years. At the end of this period, the investor can convert the bond or withdraw the entire amount of principal and interest from the company.
• Funding at low interest rate : The coupon rate on these bonds is lower than that of normal debt instruments. Since the investor also gets the option of conversion, he is willing to invest even at lower returns.
• Delayed share dilution : Another advantage of FCCBs for companies is that there is no immediate share dilution. The conversion happens in the future, thereby protecting the company’s existing shareholding.
• International listing : FCCBs are usually listed on international stock exchanges—such as Luxembourg, Singapore or London. This maintains their value in the global market and provides investors with trading facilities.
• Impact of currency risk : Since FCCBs are denominated in foreign currency, companies are exposed to currency risk. If the Indian rupee depreciates against the dollar, repayment of the bond may be costly for the company.
• Regulatory compliance : For Indian companies, strict guidelines of RBI and SEBI apply to the issuance of FCCBs. The conversion price, maturity period, and listing are all subject to regulations.
• Double benefit to investors : Investors get fixed interest on one hand, and on the other hand, there is a possibility of additional profit from share conversion as per the growth of the company. This is why FCCBs are considered a balanced investment tool.
• Suitable for institutional investors : FCCBs are usually purchased by large institutional investors, such as hedge funds, mutual funds and foreign portfolio investors. These investors choose this instrument considering the long-term growth and conversion potential.

Read Also: What Are Corporate Bonds?

Why Do Companies Issue FCCBs?

• Easy access to global capital : When it is difficult or expensive to raise capital in the domestic market, companies raise funds from foreign investors through FCCBs. This gives them an opportunity to access capital internationally.
• Funding at lower interest rates : The interest rate on FCCBs is usually lower than domestic loans, as investors get the option of conversion into shares later. This reduces the financing cost of companies.
• Avoidance of immediate share dilution : Companies get capital without selling their shares initially. Conversion usually happens after a few years, which prevents immediate dilution.
• Global presence of the brand : FCCBs are often listed on international stock exchanges (such as Luxembourg or Singapore), increasing the company’s credibility and global recognition.
• Favourable regulatory or tax benefits : In some countries, tax or regulatory rules are more favourable, which makes companies interested in raising capital through such means.

Benefits of Foreign Currency Convertible Bonds

Benefits for companies

• Low-cost funding : FCCB is a type of debt, but the interest rate is lower than traditional debt. Because the investor gets the option of conversion into shares in the future, financing is cheaper for companies.
• No immediate share dilution : Through FCCB, a company can raise capital without issuing equity immediately. This does not reduce the share of existing shareholders immediately; the dilution is gradual.
• Access to global investor base : FCCB is denominated in foreign currency and is often bought by international investors. This allows the company to get investments from around the world and also increases its brand value.
• Suitable for those with foreign income : If the company’s income is in foreign currency like dollars or euros (like IT or export companies), then FCCB helps in balancing their currency risk.

Benefits for investors

• Safe income with low risk : Even if the company does not perform well, a fixed interest is received on FCCB. This gives a basic safety to the investors.
• Opportunity to increase returns : If the share price of the company increases, then investors can earn profit by converting FCCB into shares. That is, low risk, high opportunity.
• International diversification : This is a great way for foreign investors to invest in companies of emerging countries in a safe and smart way.

Key Risks and Drawbacks of Foreign Currency Convertible Bonds

• Currency fluctuation risk : FCCBs are issued in foreign currency (such as the US dollar or the euro). If the rupee weakens, the company has to pay more at the time of repayment, which increases its overall cost.
• Possibility of share dilution : These bonds can be converted into shares later. If this happens, the total number of shares of the company increases, which may reduce the stake of old investors and profit per share.
• Share price risk : If the company’s stock trades below the conversion price, investors will not convert the bonds into shares. In this case, the company has to pay in cash, which can affect its liquidity arrangements.
• Complexity of regulatory process : There are many permissions and regulations to be followed before issuing an FCCB, which can be time consuming and complex for the company.
• Refund pressure if conversion is not done : If investors do not exercise the conversion option, the company has to return the entire amount in foreign currency on maturity which can impact its financial position.
• Interest rates and return calculations : Although interest on FCCBs is usually low, if conversion does not happen, the company has to pay back the entire amount just like a loan.
• Market uncertainty : If market conditions change suddenly such as regulatory policy or a global crisis a financial plan based on FCCBs can become unstable.
• Impact on the company’s credit rating : If the company is unable to meet the terms of FCCBs on time, it can have a negative impact on its credit rating.

FCCBs vs Other Instruments

Feature	Foreign Currency Convertible Bonds (FCCBs)	Foreign Bonds	Global Depository Receipts (GDRs)	Non-Convertible Debentures (NCDs)
Currency of Issue	Issued in foreign currency (e.g., USD, EUR)	Issued in foreign currency	Issued in foreign currency like equity instruments	Issued in Indian Rupees
Equity Conversion	Convertible into company equity at a future date	Cannot be converted into equity	Represent equity but not directly convertible	Purely debt, no equity conversion
Interest Payment	Offers low interest rate for the issuer	Generally moderate interest rate	Usually no interest paid (equity-like instrument)	Offers fixed, higher interest to investors
Impact on Ownership	Dilution of ownership may occur upon conversion	No dilution in ownership	May indirectly reflect ownership but no direct dilution	No impact on company ownership
Investor Type	Foreign investors seeking low risk with equity potential	Risk-averse foreign debt investors	Foreign investors interested in international equity exposure	Domestic investors looking for fixed income
Regulatory Requirements	High regulatory scrutiny and compliance	Moderate regulatory framework	Moderate regulatory requirements	Least complex in terms of compliance
Risk Factors	Exposed to both currency and market risk	High currency risk involved	Includes both currency and market risks	Mainly interest rate and credit risk
Use of Funds	Ideal for raising global funds with future equity possibility	Used for long-term international debt funding	Used for equity fundraising and international listing	Suitable for short- to mid-term capital requirements
Market Acceptance	Used by select Indian companies only	Issued by a few well-established companies	Mostly used by large listed companies	Very popular among mid-size Indian companies
Liquidity	Limited secondary market liquidity	High liquidity in global bond markets	Traded on international stock exchanges	Easily tradable in domestic markets

Read Also: Benefits of Investing in Bonds

Indian Context: FCCBs in India Past, Present, Future

FCCBs became a major vehicle for Indian companies to raise foreign funds during the period 2004 to 2008. During this period, companies such as IT, infrastructure and real estate issued FCCBs on a large scale due to the availability of international capital and the strengthening of the rupee.

• Post 2008 Crisis and Buyback Pressure : After the global recession of 2008, Indian companies faced a lot of difficulties in repaying FCCBs. Due to the sharp fall in share prices, conversion was not possible, forcing many companies to buy back these bonds at a higher price.
• Current Regulations RBI and SEBI Strictness : Today, RBI and SEBI have set stringent norms for FCCBs such as a minimum maturity period, conditions related to conversion price, and mandatory reporting with full transparency. These regulations have reduced the possibility of misuse of FCCBs.
• 2023–25 trend Return in select sectors : In recent years, FCCBs have been used in a limited but strategic way in sectors such as technology, pharma and green energy. Companies are now issuing these bonds with better planning.
• Way forward (2025–30): If the rupee remains stable and global capital flows strengthen, FCCBs could once again become a profitable instrument for Indian companies. The recent regulatory framework and financial discipline will allow them to be used with greater caution and transparency.

Read Also: Government Bonds India – Types, Advantages, and Disadvantages of Government Bonds

Conclusion

Foreign Currency Convertible Bonds (FCCBs) play a vital role in today’s global financing strategy. These bonds provide companies with an option to raise foreign investment that combines the benefits of both debt and equity. If used timely and wisely, they can not only reduce the cost of funding but also open the way for expansion into foreign markets. For Indian companies, this is a tool that can strengthen their presence in the international financial landscape.

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