FCCB Full Form | What is the Full Form of FCCB
FCCB Full Form - Foreign Currency Convertible bond
Full Form of FCCB
- FCCB stands for Foreign Currency Convertible Bond.
- It's a special type of bond which is issued by a corporation in a currency different from its domestic currency usually with tenure of 3-7 years.
- It's a superb instrument for a corporation to boost foreign capital.
- It's generally issued by listed companies within the overseas to boost money in foreign currency.
- FCCB may be a mixture of debt and equity instrument.
- Like all other bond, it makes regular coupon and principal payments till the required date after which it are often converted into equity at a pre-agreed price.
- The companies generally issue FCCB within the currency of these countries where interest rates are usually low or the economy is more stable than their home country.
- What makes FCCB a stimulating investment option for the investors is that it comes with a clause that permits bondholder to convert the bonds into shares at a predetermined price on expiry of specific duration.
- Thus, the FCCB holder has the choice of redeeming their investment or converting it into equity after the required duration.
Let us know it with the following example
- A company "XYZ" issues FCCBs with the subsequent details:
- Issue Price : Rs. 2000
- Coupon rate : 4%
- Maturity term : 3 years
- Convertible into equity shares @ Rs. 1600 per share.
- An investor subscribes to 4 such bonds, therefore the total amount invested would be 8000.
- As per the features of the bond, the bondholder is entitled to receive 4% coupon rate for 3 years and has the choice of conversion into equity @ Rs. 1600 per share.
- If the bondholder chooses to convert the bond into shares, he would be entitled to five (8000/1600) shares. Else, he can redeem the invested amount.
- Thus, on maturity, after three years, the investor will have two options: He can either claim full redemption of the quantity or get the bonds converted equity shares @ Rs. 1600.
- The choice made by the investor depends on the market value of the share on the date of conversion.
- Suppose the share of the corporate "XYZ" is trading at Rs. 1000 which is less than Rs. 1600. Then the investor would choose the complete redemption of his bonds and may buy 8 shares (8000/1000) with that money from the market rather than 5 which he would have received on conversion.
- Let us to consider another scenario; the share is trading at Rs. 2000. In this case, the investor will benefit by getting the bonds converted into 5 shares whose current market price would be Rs. 10000 (2000x5).
- So, on the day of maturity, the investor will plan to choose full redemption if the conversion price is higher (1600>1000) than the current market value of the share and can choose conversion if the conversion price is a smaller amount than the market value of the share (1600<2000).