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Foreign Currency Convertible Bond (FCCB) Defined, How It Works

When you're thinking about investing in bonds, it's important to know the different types and how they work. Most bonds offer a fixed interest (known as a coupon), which is paid regularly, usually every six months or once a year. At the end of the bond's term (called tenure), you get back the original amount you invested. These key features, interest rate, duration, and payment schedule, help you plan your income and understand the level of risk involved.

Among the many types of bonds available, one stands out for its unique structure: Foreign Currency Convertible Bonds (FCCBs). These are issued in a foreign currency and offer a mix of steady income and the option to convert into company shares, giving investors a balance of security and growth potential.

What Are Foreign Currency Convertible Bonds (FCCBs)?

Imagine a multinational company planning to expand its business in another country. To raise the money needed, it might choose to borrow not in its own currency, but in a widely used foreign currency like US Dollars or Euros. This is where FCCBs, or Foreign Currency Convertible Bonds, come into play.

FCCB full form is Foreign Currency Convertible Bonds. These are special types of bonds issued by companies in a foreign currency. At first, they function like regular loans—you earn a fixed interest (called a coupon), usually between 8% and 14%*, and the company repays the full amount when the bond matures, typically after five years.

But here’s what makes FCCBs stand out: they come with a built-in option for investors. If you want, you can convert the bond into shares of the company at a pre-decided price. So, while you’re earning steady interest like a regular bondholder, you also have the chance to become a shareholder if the company performs well.

This mix of fixed returns and potential equity upside is what makes FCCBs a unique and flexible investment choice.

How Do FCCBs Work?

Imagine you invest in an FCCB issued by an Indian multinational in US Dollars. You receive regular coupon payments in dollars, and at maturity, you get your principal back in dollars—unless you choose to convert the bond into shares of the company.

  • Coupon payments are made at fixed intervals, providing a steady income stream.
  • Tenure is fixed, often around five years, after which the bond matures.
  • The conversion option allows you to exchange your bond for equity shares at a predetermined rate if you believe the company’s stock price will rise.
  • Some FCCBs come with put options, allowing you to redeem the bond early, or call options that let the issuer redeem the bond before maturity.

This structure offers flexibility: you can enjoy a fixed income or participate in the company’s growth by converting to equity.

Key Features of FCCBs

Foreign Currency Convertible Bonds (FCCBs) are a popular way for Indian companies to raise funds from international investors. They come with a unique set of features that make them attractive to both issuers and investors. 

  • Issued in Foreign Currency: The entire process—from raising funds to paying interest and returning the principal—is done in a foreign currency, often making borrowing more affordable for companies.
  • Lower Coupon Rates: Since investors have the option to convert their bonds into equity, companies can offer lower interest rates compared to regular bonds.
  • Convertible into Equity: One of the biggest attractions is the ability for bondholders to convert their investment into company shares at a set price, giving them a chance to benefit if the stock performs well.
  • No Collateral Required: FCCBs are unsecured, so companies don’t need to pledge any assets. This gives them more flexibility.
  • Active Trading: These bonds are usually listed on international exchanges, making it easier for investors to buy or sell them when needed.
  • Regulatory Compliance: FCCBs must meet strict guidelines from the RBI and SEBI, which helps protect investors and ensures transparency.

FCCBs offer a flexible and globally accepted way for companies to raise capital while giving investors a mix of income and potential equity growth. Their unique structure makes them a valuable tool in cross-border financing.

Advantages of FCCBs for Investors and Issuers

FCCBs are designed to work well for both sides—the companies that issue them and the investors who buy them. For those looking to invest in bonds, FCCBs offer a flexible option that provides benefits to both parties. Let’s break down how each group gains from this unique financial tool.

For Companies Issuing FCCBs

  • Cost-effective Financing: FCCBs often carry lower coupon rates than traditional loans or bonds, reducing interest expenses.
  • Debt-to-Equity Conversion: When bonds convert to equity, the company’s debt burden decreases, improving its balance sheet.
  • Exchange Rate Benefits: Currency fluctuations can sometimes reduce the effective cost of debt.

For Investors

  • Fixed Returns with Upside Potential: Investors receive fixed coupon payments and can convert bonds into equity to benefit from capital gains.
  • Diversification: FCCBs allow investors to invest in foreign currency-denominated bonds, spreading currency and market risks.
  • Stable Income: The coupon provides predictable income, typically between 8% and 14%*.

Regulatory Framework and Redemption

The Reserve Bank of India (RBI) regulates FCCBs under the External Commercial Borrowings framework. Key rules include:

  • Minimum maturity of five years.
  • Call and put options exercisable only after five years.
  • No issuance without attached warrants.
  • Issue expenses capped at 4% of the issue size.
  • Restrictions on raising new FCCBs close to maturity of outstanding bonds.

Redemption can occur either through conversion into equity or repayment of principal and interest in foreign currency. For large issues, special RBI approval may be required.

Tax Implications for Investors

Interest payments on FCCBs are subject to a 10% tax deduction at source (TDS). If investors convert bonds into shares, this conversion is not treated as a capital gain event. Transfers of FCCBs between non-resident investors also generally avoid capital gains tax. These tax provisions make FCCBs attractive to certain categories of investors.

Additional Read - What are tax-free and tax-saving bonds How can they help you save taxes

Why Consider Investing in FCCBs?

For investors seeking to invest in bonds, FCCBs offer a compelling blend of steady income and growth potential. They are especially suitable for those who want exposure to foreign currency assets and the possibility of equity participation without immediate stock market risk.

Bondbazaar enhances this experience by offering a wide selection of bonds—including FCCBs—across government securities and corporate bonds. Investors can earn attractive fixed returns ranging from 8% to 14%*, with the convenience of buying and selling bonds at the click of a button on a real-time, SEBI-regulated platform. Bonds are held in demat form, and all payments flow directly into the investor’s account, ensuring transparency and ease.

Conclusion

FCCB full form is Foreign Currency Convertible Bonds, and they offer a unique blend of steady income and growth potential. These hybrid instruments pay regular interest like traditional bonds but also give investors the option to convert them into shares of the issuing company.

While FCCBs come with some risks—such as currency fluctuations and the issuing company’s performance—they are regulated by RBI and SEBI, which helps protect investors. When chosen carefully, they can be a valuable part of a diversified investment portfolio.

If you’re looking to explore FCCBs or other types of bonds, Bondbazaars make the process simple. With expert support, a smooth digital experience, and access to over 10,000 bonds without any account opening or brokerage fees, you can invest with confidence.

Understanding how FCCBs work helps you make smarter investment choices—and brings you one step closer to your financial goals.