Alot
of Indian companies are raising funds through the Foreign
Currency Convertible Bond (FCCB) route these days. The reason
for this could be threefold: the longterm stability of the
rupee visàvis the major currencies of the world,
especially the US Dollar, the expectation of hardening of
interest rates in the near future in the global financial
markets, the continuing growth story of India Inc., in the
years to come. Some of the companies, which raised FCCBs in
February, 2006 were Panacea Biotec ($100 mn), Tata Motors
($100 mn) and Ranbaxy Laboratories ($440 mn). This article
looks at the tax perspective of Panacea Biotec's FCCB. The
company has been chosen specifically because of the unique
structure of the instrument.
Convertible
securities are bonds or preference shares that under specified
terms and conditions can be converted into equity shares at
the option of the holder. This conversion does not infuse
fresh capital into the firm. There is a change in the Balance
Sheetthe debt is replaced by equity. This action will strengthen
the financial position of the firm. This is a form of hybrid
financing, which offers a security of a bond and can be converted
into equity, as the valuations of the firm rises. The advantage
for the corporates is that they have to pay a lower coupon
than for a regular bond or in some cases the bond is a zero
coupon.
One
of the most important provisions of a convertible bond is
the conversion ratio. It is the number of equity shares that
the bondholder will receive in exchange of the bonds, at the
time of conversion. The price that the investors pay for the
equity shares at the time of conversion is known as the conversion
price. Typically, the conversion price is set at 2030% above
the current market price of the share, on the issue date.
The conversion price and the conversion ratio are fixed for
the entire life of the bond. Sometimes, a stepped up conversion
price is used. |
