The Hindu Business Line : Cos allowed to issue foreign currency bonds to meet fund requirements

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Cos allowed to issue foreign currency bonds to meet fund requirements

Protection for listed co against adverse effect of additional issue of shares abroad

The group company receiving such investments will not be permitted to utilise the proceeds for investments in the capital market or realty in India.

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New Delhi, Feb. 15 Indian promoters can now raise money abroad by issuing foreign currency bonds against the value of their investments in shares of listed group companies.

Termed as foreign currency exchangeable bonds (FCEB), they would help the promoter to meet the financing requirements within the group.

These bonds are described as ‘exchangeable bonds’ as it would be exchangeable into equity shares or the warrants of the listed group company any time before its redemption.

The minimum maturity of a FCEB would have to be five years for the purpose of redemption.

However, the exchange option can be exercised at any time before redemption, according to a FCEB scheme announced by Finance Ministry on Friday.

One of the advantages of the ‘exchangeable bonds’ is that a promoter company can help the group company to protect its earnings till the latter’s acquisition abroad, if not profitable, is able to generate returns. “The listed group company can be protected against the adverse effect of additional share issuance for acquisition abroad”, sources said.

For example, in the recent Tata Steel-Corus deal, the availability of mechanism of exchangeable bonds could have enabled Tata Sons (the promoter company) to issue exchangeable bonds to raise money for Tata Steel to finance its acquisition of Corus. By this, Tata Steel would have been able to protect its earnings till the time Corus turns profitable and generates returns for the company.

Meanwhile, the scheme –Issue of Foreign Currency Exchangeable Bonds Scheme 2008 — provides that the proceeds of the FCEBs can be invested by the issuing company in the promoter group companies and would have to be used in accordance with the end uses prescribed under the External Commercial Borrowing Policy (ECB).

The group company that receives such investments would not be permitted to utilise the proceeds for investments in the capital market or real estate sector in India.

An official release said that the proceeds of FCEBs could be invested by the issuing company overseas by way of direct investment including in Joint ventures or wholly owned subsidiaries subject to the existing direct investment guidelines.

Moreover, the rate of interest payable on such bonds and the issue expenses incurred in foreign currency would have to be within the all-in cost ceiling specified by RBI under the ECB policy.

The proceeds of the FCEBs would have to be retained and/or deployed overseas in accordance with the ECB policy.