What is the full form of FCCB
FCCB: Foreign Currency Convertible Bond
FCCB stands for Foreign Currency Convertible Bond. It is a special type of bond which is issued by a company in a currency different from its domestic currency usually with tenure of 3-7 years. It is an excellent instrument for a company to raise foreign capital. It is generally issued by listed companies in the overseas to raise money in foreign currency. FCCB is a mix of debt and equity instrument. Like any other bond, it makes regular coupon and principal payments till the specified date after which it can be converted into equity at a pre-agreed price.
The companies generally issue FCCB in the currency of those countries where interest rates are usually low or the economy is more stable than their home country. What makes FCCB an interesting investment option for the investors is that it comes with a clause that allows bondholder to convert the bonds into shares at a predetermined price on expiry of specific duration. Thus, the FCCB holder has the option of redeeming their investment or converting it into equity after the specified duration.
Let us understand it with the following example:
A company "XYZ" issues FCCBs with the following details:
An investor subscribes to 4 such bonds, so the total amount invested would be 8000. As per the features of the bond, the bondholder is entitled to receive 4% coupon rate for 3 years and has the option of conversion into equity @ Rs. 1600 per share. If the bondholder chooses to convert the bond into shares, he would be entitled to 5 (8000/1600) shares. Else, he can redeem the invested amount.
Thus, on maturity, after three years, the investor will have two options: he can either claim full redemption of the amount or get the bonds converted equity shares @ Rs. 1600. The decision made by the investor depends on the market price of the share on the date of conversion.
Suppose the share of the company "XYZ" is trading at Rs. 1000 which is lower than Rs. 1600. Then the investor would choose the full redemption of his bonds and can buy 8 shares (8000/1000) with that money from the market instead of 5 which he would have received on conversion. Let us consider another scenario; the share is trading at Rs. 2000. In this case, the investor will benefit by getting the bonds converted into 5 shares whose current market value would be Rs. 10000 (2000x5).
So, on the day of maturity, the investor will decide to go for full redemption if the conversion price is higher (1600>1000) than the current market price of the share and will go for conversion if the conversion price is less than the market price of the share (1600<2000).