The inflow of foreign funds into an
economy plays a pivotal role in
its process of development. It necessitates an ongoing structuring
and restructuring of regulatory and governing measures to make sure that
such foreign fund is employed fairly and justly. In the case of India, the
central bank has to manage the `impossible trinity'—fixed exchange rate, free
capital movement and an independent monetary policy. An increase in
foreign inflows into the domestic economy means overseas confidence in
domestic economy; at the same time, it poses different challenges for the central
bank and the related regulatory authority. Foreign capital can flow in different
formats (viz., debt, equity, hybrid) as well as with varied interests (viz.,
long-term, speculative). Since the liberalization
of Indian economy, overseas flows have entered Indian market through
various modes such as Foreign Direct Investment (FDI), private equity, direct
equity investment and External Commercial Borrowings (ECB). This article is an
attempt to analyze the trends in overseas inflow via Foreign Currency
Convertible Bond (FCCB) route into the Indian market.
FCCB is an unsecured instrument with an option to convert it into equity after
a certain time frame. This instrument is made more exotic by adding call
option, put option, and coupon payments so as to attract different types of investors.
In simple terms, when equity market is underperforming, a convertible
bond acts like a fixed income instrument. On the other hand, in a rising equity
market, a convertible bond outperforms underlying equity.
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