Exchangeable bonds may be a reality soon

There may finally be some good news for Indian companies on foreign currency exchangeable bonds (FCEB's).

The finance ministry wants the central bank to permit corporate houses to use FCEBs for import of capital goods. The ministry said RBI’s proposal to limit the use of the instrument only for financing overseas acquisitions by Indian companies is “too restrictive.”

Exchangeable bonds are instruments that allow a holding company or the parent company of a group to raise funds from the overseas markets for use by any of the group companies.

The bonds will then be converted into shares of the company for which funds were raised.

Though the finance ministry issued the guidelines for companies to use the route to access overseas funds in February this year, RBI is yet to be convinced about the scheme that was announced by Finance Minister P Chidambaram in February 2007.

RBI had raised various concerns, starting with aligning the rules with the norms applicable for external commercial borrowings. The finance ministry responded by saying that the end-use restrictions under the external commercial borrowings (ECB) policy should be amended for FCEBs.

ECB proceeds cannot be used for investment in the equity of another company.

This will mean that FCEB proceeds for investment in the equity of the promoter group company is not a permissible end-use.

But the finance ministry wants an exception to be made in case of FCEBs to allow the funds raised through the instrument for overseas acquisition through joint ventures and wholly-owned subsidiaries.

In addition, Mint Road has concerns over how companies use the funds.

The finance ministry notification had specified that a promoter group company cannot utilise the proceeds for investments in the capital market or in real estate in India. RBI has also written to the government arguing that it may be difficult to monitor whether companies were adhering to the foreign investment limit.

The difference of opinion between Mint Road and North Block has meant that the scheme has not been operationalised as the government has mandated prior RBI central approval for issuing these exchangeable bonds.