Are changes in FCCB pricing norms a boon?

With the gradual liberalization of exchange control regulations in India during the 1990s, Indian corporates have had the ability to raise funds from global markets. A popular instrument, especially in the past few years, has been the foreign currency convertible bond (FCCB).

FCCBs are quasi-equity instruments which enable holders to convert their bonds into equity at a later date. FCCBs became popular with issuers given their lower coupon rates which reduced debt financing costs while also affording bondholders the ability to take advantage of any price appreciation of the stock. If the prevailing market price was lower than the conversion price then the FCCB holder would not exercise their option to convert the debt into equity and would instead redeem the FCCB.

A critical component of such instruments, i.e. the conversion price, until late 2008 was based on the following pricing formula: the minimum conversion price would have to be the higher of (a) the average price of the shares of the issuing company for the six-month period preceding the relevant date; and (b) the average price of the shares of the issuing company for a period of two weeks preceding the relevant date. The relevant date for this purpose was 30 days prior to the date on which the meeting of the shareholders of the issuer company was held to consider the proposed FCCB issuance.

Sawant Singh is a partner and Arun Madhu an associate at Phoenix Legal in Mumbai. They can be reached at sawant.singh@phoenixlegal.in and arun.madhu@phoenixlegal.in.