A Study on Foreign Currency Convertible Bonds FCCBs Theory and Evidence from Corporate Bond Market of India

Abstract

newline Foreign Currency Convertible Bonds(FCCB) is one of the product of the Indian corporate bond market which have been preferred for the fundraising purpose from the international markets by Indian firms since 1993. FCCBs issues resulted in the inflow of around and#8377;11,84,134.37 million to the Indian economy as foreign investments. FCCB looks attractive to the Indian firms due to its low-cost feature and convertible option. FCCBs came to the limelight during 2004 as a result of the bull run in the stock market, the expectation of high conversion rate motivated many Indian firms to issue FCCBs during the period 2004 to 2007. The expectation of Indian firms turned to reality in many cases till 2008 as good amount of FCCBs conversion took place During 2005-2008, but the global crisis changed the entire scenario of FCCBs after 2008-09 where redemption pressure, buybacks and defaults, restructuring of FCCBs etc. are observed. The FCCBs issued by the Indian corporate sector have been a matter of debate from the context of boon or bane as it proved as boon in some cases where the firms ensured low cost of capital due to high conversion rate and even bane in some cases where few firms ended up paying huge amount excess to the amount raised and few firms liquidated/windup due to the default during the FCCBs repayments. To have a clear picture about FCCBs we have analysed the FCCBs related aspects such as total issues, conversions, buybacks, redemptions, default and active/outstanding bond etc in this study, we found that, the overall FCCB conversion is not as per the expectation of the Indian firms, the low cost feature of FCCBs is not truly justified from the overall FCCBs view point as around 202 FCCBs have undergone the redemption process which resulted in the outflow of excess amount due to the redemption premium payment and adverse exchange rates. From the shareholders perspective, we have examined the wealth effects of FCCB related events, the study found that, the overall FCCB issues created a negative wealth