Foreign Currency Convertible Bonds (FCCBs) have become hugely popular in the Indian corporate sector as an instrument to raise funds. However, the fall in the stock markets over the past couple of weeks has taken the shine off these instruments as investors are thinking twice before choosing the option to convert these bonds into equity shares.

Indian companies are putting their best foot forward when it comes to meeting their ambitious capex plans and projecting the economy with an outstanding bias against its peers. While there are a plethora of routes available for arranging finances today including ADR/GDR issues, Qualified Institutional Placements (QIPs), private equity placement, public issue and the plain vanilla bank funding, the option that has been popular amongst India Inc., today is Foreign Currency Convertible Bond, better known as FCCB. An FCCB, issued as a bond by an Indian company, is a type of convertible bond expressed in foreign currency different from that of the issuer's domestic currency. Simply put, it is a mix of debt and equity instruments or a cross between a bond and an equity share. Indian companies widely use FCCBs as a source of capital mobilization to fund their long-term capital expansion plans. Through these bonds, bond-holders get an opportunity to convert them into stocks. With such a conversion option, they become attractive to such foreign investors who are new to the world of equity markets. Prithvi Haldea, Managing Director of PRIME Database, says, "FCCBs are a good proxy for debt and hence, companies that do not carry much debt find this instrument attractive. Also, investors can get assured returns and can look at equity at a later date."

According to industry estimates, India Inc., has issued close to $20 bn of FCCBs over the past few years. In spite of a slew of curbs on overseas borrowings, Indian companies raised $7.72 bn in the form of FCCBs in 2007, more than 43% higher than the previous year. The growing importance of India as an investment destination, active stock markets and their essential nature as a low-cost financing option, lured investors. Added to this, the coupon rate payable by issuers worked out to be lower than pure debt instruments. Last year, Reliance Communications successfully raised $1 bn FCCB in the international markets and Tata Steel ended up raising $875 mn, including a $150 mn green shoe option. It has been observed that many tier-II and tier-III technology companies are also taking the FCCB route to raise funds from overseas markets. The appetite for FCCBs is on the rise as this is an easy way for corporates to fund their ambitious expansion-cum-acquisition plans and even postpone dilution of equity.

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