The Finance Minister in his Budget Speech 2007-2008, had announced to put in place an enabling mechanism to permit Indian companies to unlock a part of holding in group companies for meeting their financing requirements by issue of Exchangeable Bonds.

Pursuant to the announcement made by the Finance Minister, Government have since notified a Scheme on 15th February, 2008 for Issue of Foreign Currency Exchangeable Bonds. The salient features of the Scheme are as follows:

(i) Foreign Currency Exchangeable Bond "is a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed to by a person who is a resident outside India in foreign currency and exchangeable into equity share of another company, to be called the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments.

(ii) The Issuing Company shall 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 Foreign Currency Exchangeable Bond.

(iii) The Offered Company shall be a listed company which is engaged in a sector eligible to receive Foreign Direct Investment and eligible to issue or avail of Foreign Currency Convertible Bond or External Commercial Borrowings.

(iv) The investment under the scheme shall comply with the Foreign Direct Investment policy as well as the External Commercial Borrowing Policy requirements. 

(v) The proceeds of Foreign Currency Exchangeable Bond can be invested by the issuing company in the promoter group companies and shall be used in accordance with end uses prescribed under the External Commercial Borrowings policy. The promoter group company receiving such investments will not be permitted to utilize the proceeds for investments in the capital market or in real estate in India. 

(vi) The proceeds of Foreign Currency Exchangeable Bond can also be invested by the issuing company overseas by way of direct investment including in Joint Ventures or Wholly Owned Subsidiaries subject to the existing guidelines on Indian Direct Investment in Joint Ventures or Wholly Owned Subsidiaries abroad.

(vii) The rate of interest payable on Foreign Currency Exchangeable Bond and the issue expenses incurred in foreign currency shall be within the all in cost ceiling as specified by Reserve Bank of India under the External Commercial Borrowings policy.

(viii) At the time of issuance of Foreign Currency Exchangeable Bond the exchange price of the offered listed equity shares shall be as per FCEB Scheme.

(ix) The minimum maturity of the Foreign Currency Exchangeable Bond shall be five years for purposes of redemption. The exchange option can be exercised at any time before redemption. 

(x) The proceeds of the Foreign Currency Exchangeable Bond shall be retained and/or deployed overseas in accordance with the policy for the proceeds of External Commercial Borrowings.

(xi) The Tax treatment on Exchangeable Bonds would be as per FCEB Scheme.

(xii) The full text of the Notification of the Scheme will be available on the website of Ministry of Finance (www.finmin.nic.in). 

Foreign Currency Exchangeable Bonds enable promoter firms to raise foreign funding exchangeable into listed group equity under FDI and ECB conditions. The Scheme permits promoter-group Indian companies to issue Foreign Currency Exchangeable Bonds to non-resident investors, exchangeable into equity of a listed group company; issuance, exchange pricing, and tax treatment follow the FCEB Scheme. The Offered Company must be listed and eligible under FDI and ECB policies. Proceeds must comply with FDI and ECB requirements, may be invested in promoter group companies for permitted end uses (excluding capital market and real estate investments in India), or used for overseas direct investment under existing outbound guidelines. Interest and issue costs must observe the ECB all in cost ceiling, and bonds have a mandatory minimum maturity with an exchange option exercisable prior to redemption.