Mumbai: The Reserve Bank of India has announced the operational guidelines of issue of Foreign Currency Exchangeable Bonds (FCEB), which gives companies the option of issuing bonds in foreign currency that can be converted into equity shares of another group company.

The guidelines will come into effect immediately.

FCEBs are bonds expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by a company and subscribed to by a person who is a resident outside India, in foreign currency and exchangeable into equity share of another company.

Companies issuing FCEBs can exchange bonds against equities either wholly or partly, or on the basis of any equity-related warrants attached to debt instruments. The bonds may be denominated in any freely convertible foreign currency.

To be eligible,  the issuing Company should be part of the promoter group of the offered company and shall hold the equity share/s being offered at the time of issuance of FCEB.

It should also be a listed company, which is engaged in a sector eligible to receive foreign direct investment and eligible to issue or avail of FCCBs or external commercial borrowings (ECB), RBI said in a release.

Companies that are not eligible to raise funds from the Indian securities market, including those that have been restrained from accessing the securities market by the SEBI, will not be eligible to issue FCEBs.

Entities complying with the foreign direct investment policy and adhering to the sectoral caps at the time of issue of FCEB can subscribe to the bonds, subject to necessary approval of Foreign Investment Promotion Board.

Entities prohibited to buy, sell or deal in securities by the SEBI will not be eligible to subscribe to FCEB.

The proceeds of FCEB can be invested in any group company of the issuer group. It can also be invested overseas by way of direct investment, including in joint ventures or wholly owned subsidiaries abroad, subject to the existing guidelines.

The promoter group companies receiving investments out of the FCEB proceeds may utilise the amount in accordance with end-uses prescribed under the ECB policy. They will not be permitted to invest the proceeds in the capital market or in real estate in India.

The rate of interest payable on FCEB and the issue expenses incurred in foreign currency shall be within the all-in-cost ceiling as specified by RBI under the ECB policy.

The issuance of FCEB will be subject to the exchange price of the offered listed equity shares and shall not be less than 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 relevant date; and

Minimum maturity of FCEB shall be five years. The exchange option can be exercised at any time before redemption. While exercising the exchange option, the holder of the FCEB shall take delivery of the offered shares.  Cash (Net) settlement of FCEB shall not be permissible.

The proceeds of FCEB shall be retained and/or deployed overseas by the issuing  companies in accordance with the ECB policy. But the issuing company should ensure that the proceeds of FCEB are used by the promoter group only and for the permitted end-uses prescribed under the ECB policy.

The issuing company should also submit audit trail of the end-use of the proceeds by the issuing company/promoter group companies to the RBI duly certified by the designated authorised dealer bank.

FCEB issue requires prior approval of the RBI under the `Approval Route' for raising ECB. The reporting arrangement for FCEB shall be as per extant ECB policy.

The scheme will come into force with immediate effect.

The government has made necessary amendments to the Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000, as amended from time to time and Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, as amended from time to time, are being issued separately, the RBI release said.