What are Foreign Currency Exchangeable Bonds?


“Issue of Foreign Currency Exchangeable Bonds (FCEB) Scheme, 2008” was noti d by the
Government of India, Ministry of Finance, Department of Economic Affairs vide notification
G.S.R 89(E) dated February 15, 2008.
 FCEB is a foreign currency bond, issued by an Indian issuing company (IC) and
subscribed to by a person who is a resident outside India. FCEBs are exchangeable
into equity shares of an offered company (OC). Such bonds can be denominated in
any freely convertible currency and both principal and interest at the stipulated
coupon is payable in foreign currency.
 The IC must be an Indian company, which is part of the promoter group of OC; and
must hold the offered shares in OC. It must be eligible to raise funds from the
securities market.
 Non-corporate entities (such as trusts, individuals and firms) are not permitted to
issue FCEBs.

OC should be an Indian listed company, which is engaged in a sector eligible to
receive foreign investment; and is eligible to issue / avail FCCB (foreign currency
convertible bond) or ECB (external commercial borrowing).
 Investor can be any person resident outside India who is permitted to invest in OC,
under the FDI (foreign direct investment) policy.
 The FCEB proceeds can be invested by IC in overseas joint ventures / subsidiaries
(including acquisitions) as also in any promoter group company. Effectively proceeds
can be used for any normal business activity but cannot be invested in real estate
and capital market.
 For a FCEB issue the IC requires approval from RBI (Approval Route) or from the
FIPB (Foreign Investment Promotion Board), if the investment in OC is not under the
automatic route. As per company Law, the Board of Directors and shareholders of IC
also need to approve the issue.
 FCEBs provide an option to the investor for redemption or exchange into shares of
OC on or before maturity (Minimum maturity 5 years) which means that the exchange
option can be exercised at any time before redemption. Investors are allowed to sell
OC shares received upon exchange but need to take delivery of the offered shares.
Cash settlement with the IC on net basis (Market value – Bond value) at the time of
exchange is not permitted.
 The offered shares shall be kept free from all encumbrances. IC cannot transfer,
mortgage, make collateral offer of, or trade in, OC shares offered as part of FCEB
issue, till its redemption/exchange.
 Interest payments up-to conversion or redemption are subject to withholding tax of
10% but the non-resident is eligible to claim tax treaty benefits, based on his country
of residence. Dividend received after conversion into shares is not subject to income
tax in India. The transfer of FCEBs between non-residents shall be exempt from tax
in India. The investor is not liable for capital gains tax on conversion of FCEBs into
OC shares. This means, only the investor who exchanges the FCEB for OC shares
would be exempt from capital gains tax.


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