RBI allows parent firms to issue exchangeable bonds

The Reserve Bank of India on Tuesday allowed holding companies to issue bonds overseas to raise funds on behalf of listed group companies. The bonds can be converted into shares of the company for which funds were raised.

RBI decided to operationalise the scheme six months after the finance ministry notified the guidelines for issuing foreign currency exchangeable bonds (FCEBs) as it had certain reservations about the new fund raising mechanism that was announced by Finance Minister P Chidambaram in February 2007. RBI had raised concenrs over monitoring FDI caps and end-use of the funds raised through FCEB.

HOW IT WORKS

Holding company or parent can issue bonds to raise funds for group firms

The bonds will be convereted into equity of the listed company for which funds were raised

Bonds have to be expressed in foreign currency and interest and principal are also payable in foreign currency

Only foreign residents can subscribe to the bonds

 

The notification comes at a time when the liquidity conditions are tight globally and yesterday, the government and the central bank decided to ease the external commercial borrowings (ECB) norms for infrastructure companies.

Now that the scheme has been operationalised, Indian holding companies can issue bond expressed in foreign currency, with the principal and interest also payable in foreign currency. The bonds can be subscribed to by those who are not Indian residents. The bonds can be converted into equity of a listed group company that is engaged in a sector that is eligible to receive foreign direct investment and is eligible to issue or avail of foreign currency convertible bond (FCCB) or ECB.

Prior Foreign Investment Promotion Board clearance is required in case there are sectoral caps and issuing FCEB will require prior approval from RBI.

In its notification, RBI has permitted the issuing company to invest the FCEB proceeds in overseas joint ventures or wholly-owned subsidiaries as also in promoter group companies.

Promoter group companies have, however, been barred from using these funds for investment in the capital market or in real estate in India.

While prescribing a minimum maturity period of five years, companies can exercise the option to exchange the bonds into equity at any time before redemption, cash settlement has been restricted. The interest payable on these bonds will be within the ceiling prescribed for ECB.