Astute Consulting

NEWS FLASH - 28 February 2008

Foreign Currency Exchangeable Bonds Scheme, 2008
The Government of India has recently notified a Scheme vide notification dated 15 February 2008 for Issue of Foreign Currency Exchangeable Bonds, which would allow Indian promoters to unlock part of holding in listed group companies for meeting their financial requirements for various projects from outside India without diluting their stake in Indian listed companies. The key features of the Scheme are as follows:

Foreign Currency Exchangeable Bond (FCEB) is a bond expressed in foreign currency the principal and interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed to by a person who is a resident outside India in foreign currency and exchangeable into equity share of another company listed, to be called the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments.

Eligibility Conditions and subscription of FCEB

The Issuing Company being an Indian Company shall be part of the promoter group of the Offered Company and shall hold the equity shares being offered at the time of issuance of FCEB. Further, an Indian Company, which is not eligible to raise funds from the Indian securities market, including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI) shall not be eligible to issue Foreign Currency Exchangeable Bond(FCEB) The Offered Company shall be a listed Indian company which is engaged in a sector eligible to receive Foreign Direct Investment (FDI) and eligible to issue or avail of Foreign Currency Convertible Bond (FCCBs) or External Commercial Borrowings (ECBs).

End use requirements

The proceeds of FCEB can be invested by the issuing company in the promoter group companies and shall be used in accordance with end use as prescribed under the External Commercial Borrowings policy. The promoter group company receiving such investments will not be permitted to utilize the proceeds for investments in the capital market or in real estate in India. The proceeds of FCEB can also be invested by the issuing company overseas by way of direct investment including in Joint Ventures or Wholly Owned Subsidiaries subject to the existing guidelines as prescribed.

Partnering
For Your Success Always.

Astute Consulting

The diagrammatic representation of the scheme for issue of FCEB is as under:

Foreign Investor

JV / WOS of Issuing Company Outside India

Issue of FCEB exchangeable into Equity shares of Offered Company Promoter Indian Company (Issuing Company) Existing equity Investment Listed Indian Company (Offered Company)

In India Investment from FCEB proceeds

Promoter Group Companies

Pricing and Maturity

The rate of interest payable on exchangeable bond and the issue expenses would have to be within the all-in cost ceiling as specified by the RBI under the ECB policy. At the time of issuance of Foreign Currency Exchangeable Bond, the exchange price of the offered listed equity shares shall be not be less than the higher of the following two

The average of the weekly high and low of the closing prices of the shares of the offered company quoted on the stock exchange during the six months preceding the date of passing of board resolution for issuance of FCEB, and

Partnering
For Your Success Always.

Astute Consulting

The average of the weekly high and low of the closing prices of the shares of the offered company quoted on the stock exchange during the two weeks preceding the date of passing of board resolution for issuance of FCEB.

The minimum maturity of the Foreign Currency Exchangeable Bond shall be five years for purposes of redemption. The exchange option can be exercised at any time before redemption

Other Relevant Aspects

The Issuing Company shall comply with the requirements of the Companies Act, 1956, SEBI disclosure requirements. Issuing Company shall not transfer, mortgage or offer as collateral or trade in the offered shares from the date of issuance of FCEBs till date of exchange or redemption and is obliged to keep the offered shares from all encumbrances till date of exchange or redemption. Entities prohibited to buy, sell or deal in securities by SEBI, shall not be eligible to subscribe to FCEB. The investment under the scheme shall comply with the FDI policy as well as the ECB Policy requirements. Prior approval of the Reserve Bank of India (RBI) would be required for issuance of FCEB.

Taxation on Exchangeable Bonds

Interest and dividend payments on the bonds, until the exchange option is exercised shall be subject to withholding tax of 10% plus applicable surcharge and education cess as per Section 115AC(1) of the Income Tax Act, 196 l. Exchange of FCEBS into shares shall not give rise to any capital gains. Transfer of FCEBS by non-resident to non-resident shall not give rise to any capital gains in India.

SCOPE AND LIMITATIONS

This above circular is general in nature. In this circular, we have endeavored to prepare a summary of detailed scheme issued by Finance Ministry for issuance of FCEB. It may be noted that nothing contained in this circular should be regarded as our opinion and facts of each case will need to be analyzed to ascertain applicability or otherwise of tax and other laws and professional advice should be sought for applicability of legal provisions based on specific facts. We are not responsible for any liability arising from any statements or error contained in this circular.

Partnering
For Your Success Always.