This is brief note on foreign currency convertible bonds (FCCBs) crisis of 2008-12 1. Between 2005-08, Indian firms raised foreign capital through FCCBs at [[RBI_Report_110614_Financial Stability Report.pdf#page=17&selection=19,0,22,31|elevated premia]] owing to the bull-run in the equity market. 2. The conversion price on such bonds was 25 - 150 per cent higher than the prevailing stock price at the time of issuance. 3. They carried zero or very low coupons. 4. The lure for investors was the flexibility to convert them into shares if stock price moves above the conversion price. 5. On [November 15, 2008](https://website.rbi.org.in/en/web/rbi/-/press-releases/rbi-announces-further-measures-for-liquidity-management-and-improving-credit-flow-19468), RBI allowed pre-mature buyback of FCCBs through the following announcement: 1. On account of the global developments, FCCBs issued by Indian corporates are currently trading at a discount. There is a benefit to the company concerned as well as to the economy if corporates buy back the FCCB at the prevailing discounted rates. 2. In view of these potential benefits, Reserve Bank of India will consider proposals from Indian companies to prematurely buy back their FCCBs. 3. The buy back should be financed by the company's foreign currency resources held in India or abroad and/or out of fresh external commercial borrowing (ECB) raised in conformity with the current norms for ECBs. Proposals in this regard will be considered under the approval route. Extension of FCCBs will also be permitted at the current all-in cost for the relative maturity. 6. But it was not easy for companies to raise fresh ECBs or use their own foreign currencies. 7. On [[RBI_Press Release_081208_Buyback : Prepayment of Foreign Currency Convertible Bonds (FCCBs).pdf|December 8, 2008]], RBI therefore liberalised the procedure further and consider applications for buyback of FCCBs by Indian companies, both under the automatic and approval routes, and use Rupee proceeds for the same. 1. But it was not easy for companies to raise fresh ECBs or use their own foreign currencies. 8. In [February 2010](https://www.pib.gov.in/newsite/erelcontent.aspx?relid=57855), the govt. allowed companies to change the conversion price of FCCBs issued prior to 27 November 2008 1. Several companies availed of the opportunity to reset the conversion prices of their FCCBs falling due in 2011–2012 9. On [[RBI_Press Release_110704_Redemption of Foreign Currency Convertible Bonds (FCCBs).pdf|July 4 2011]] when Indian companies faced difficulty in repaying FCCBs as they matured, the RBI allowed them through an "automatic route" or simplified approval process to raise new debt, and use those new funds specifically to redeem the maturing FCCBs. 1. In its [[RBI_Report_110614_Financial Stability Report.pdf|Financial Stability Report of June-2011]], RBI highlighted that a large portion of FCCBs worth more than US$ 7 billion that are maturing by March 2013 may not get converted into equity thus requiring their refinancing at the much higher interest rates prevalent today. 2. FCCBs had been issued at high conversion prices. But share prices later fell far below those levels, rather by June 2011, over half of the issuing companies were trading at more than a 50% discount to their January 2008 prices. It was a double-whammy for issuers. 3. Issuers avoided a reduction in the conversion prices in such scenarios as it would require issuing more equity shares, leading to dilution of their holdings. 4. Thus they could only redeem or restructure them or default and face legal challenges. 5. The restructuring/defaults of overseas ECB/FCCB obligations also lead to losses to the overseas branches of Indian banks who had subscribed Credit Linked Notes (CLNs) under the FCCB issues [^1] 6. Issuers avoided a reduction in the conversion prices as it meant more equity shares to be allotted, leading to dilution of their holdings. # References 1. RBI. (2008, December 08). *Redemption of Foreign Currency Convertible Bonds (FCCBs)* \[Press Release\]. [[RBI_Press Release_081208_Buyback : Prepayment of Foreign Currency Convertible Bonds (FCCBs).pdf|pdf]] 2. RBI. (2011, June 14). *Financial Stability Report-June 2011*. [[RBI_Report_110614_Financial Stability Report.pdf|pdf]] 3. RBI. (2011, July 4). *Redemption of Foreign Currency Convertible Bonds (FCCBs)* \[Press Release\]. [Link](https://website.rbi.org.in/en/web/rbi/-/press-releases/redemption-of-foreign-currency-convertible-bonds-fccbs-24671). 4. Harun R. Khan. (2012, October 18). _Managing currency and interest rate risks – New challenges for banks & corporates_ \[Speech\]. 2nd FT-Yes Bank International Banking Summit, Mumbai. RBI. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=744) 5. RBI. (2011, July 4). *Redemption of Foreign Currency Convertible Bonds (FCCBs)* \[Press Release\]. [Link](https://website.rbi.org.in/en/web/rbi/-/press-releases/redemption-of-foreign-currency-convertible-bonds-fccbs-24671). [^1]: Harun R. Khan. (2012, October 18). _Managing currency and interest rate risks – New challenges for banks & corporates_ \[Speech\]. 2nd FT-Yes Bank International Banking Summit, Mumbai. RBI. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=744)