Module: | MODULE A: INTERNATIONAL BANKING
Q205: Consider the following statements regarding Foreign Currency Convertible Bonds:
1. Foreign Currency Convertible Bonds are debt instruments issued in a foreign currency that grant the investor the option to convert the bond into the equity shares of the issuing company.
2. If the investor choose not to exercise the conversion option, the issuer must redeem the principal and accumulated interest in the designated foreign currency.
3. The issuance of these convertible bonds is governed by the Securities and Exchange Board of India but falls completely outside the regulatory purview of the External Commercial Borrowing guidelines.
Which of the statements given above is or are correct?
2. If the investor choose not to exercise the conversion option, the issuer must redeem the principal and accumulated interest in the designated foreign currency.
3. The issuance of these convertible bonds is governed by the Securities and Exchange Board of India but falls completely outside the regulatory purview of the External Commercial Borrowing guidelines.
Which of the statements given above is or are correct?
✅ Correct Answer: A
🎯 Quick Answer:
Option A is correct because only statements 1 and 2 are accurate.Structural Breakdown: They function as standard bonds paying interest until maturity.
At maturity, the holder can either take their cash back in foreign currency or convert the bond into shares of the Indian company, validating statements 1 and 2. Statement 3 is completely incorrect.
Because they represent a foreign currency liability until the moment of conversion, Foreign Currency Convertible Bonds are strictly governed by the External Commercial Borrowing framework established by the Reserve Bank of India, in addition to capital market rules.
Historical Context: These instruments became highly popular among Indian mid-cap companies as a way to raise foreign capital at extremely low interest rates, because the investors accept a lower yield in exchange for the lucrative equity conversion option.
Causal Reasoning: The causal logic for treating these bonds under the foreign borrowing rules is macroeconomic risk.
If the company's stock price crashes and investors refuse to convert to equity, the company is suddenly faced with a massive foreign currency cash repayment, creating immediate pressure on India's foreign exchange reserves.