NEW DELHI: The government on Friday allowed firms to issue foreign currency exchangeable bonds (FCEBs) to unlock the value of their holding in group companies. The norms governing tax treatment and eligibility for FCEBs are on the same lines as foreign currency convertible bonds (FCCBs).
In the case of FCCBs, bonds can be converted to the equity of the issuing firm. In the case of FCEB, bonds can be converted into equity of a group company. As a result, payment of interest on FCEBs would be subject to payment of withholding tax. Funds raised through FCEBs cannot be invested in the capital market, but can be used for overseas expansion.
The new instrument would provide corporate groups more flexibility to raise funds abroad as they can leverage value of holding of a company in group firms too. The new norms laid down by the government for FCEBs incorporate all the restrictions applicable on external commercial borrowing (ECB) as well as foreign ownership in Indian companies.
This indicates the government's resolve to keep capital inflows moderate. The tax treatment and the overall interest rate ceiling on the new bonds will be the same as those specified by RBI for overseas borrowing, the government said in a statement late on Friday.
The rate of interest payable on such bonds and the issue expenses incurred in foreign currency shall be within the cost ceiling specified by RBI under the ECB policy. For borrowings with an average maturity of 3-5 years, the overall cost ceiling is 150 basis points over 6-month LIBOR, RBI guidelines say. For borrowings over five years, the cost ceiling is 250 basis points over 6-month LIBOR.
FCEB is a bond expressed in foreign currency with the principal and interest payable in foreign currency. Foreigners, NRIs and overseas entities are eligible to subscribe to these bonds, which can be converted into equity shares of a group company (called the 'offered company'). The 'issuing company' shall be part of the promoter group of the 'offered company' and shall hold the equity shares being offered at the time of issuance of the bond.
The 'offered company' should be a listed company engaged in a sector eligible for FDI and is eligible to issue or avail of FCCBs or ECBs. The investment under the scheme shall comply with the FDI and ECB policy requirements. Utilisation of ECB proceeds is not permitted for on-lending or investment in capital market or acquiring a company in India.
In the case of FCCBs, bonds can be converted to the equity of the issuing firm. In the case of FCEB, bonds can be converted into equity of a group company. As a result, payment of interest on FCEBs would be subject to payment of withholding tax. Funds raised through FCEBs cannot be invested in the capital market, but can be used for overseas expansion.
The new instrument would provide corporate groups more flexibility to raise funds abroad as they can leverage value of holding of a company in group firms too. The new norms laid down by the government for FCEBs incorporate all the restrictions applicable on external commercial borrowing (ECB) as well as foreign ownership in Indian companies.
This indicates the government's resolve to keep capital inflows moderate. The tax treatment and the overall interest rate ceiling on the new bonds will be the same as those specified by RBI for overseas borrowing, the government said in a statement late on Friday.
The rate of interest payable on such bonds and the issue expenses incurred in foreign currency shall be within the cost ceiling specified by RBI under the ECB policy. For borrowings with an average maturity of 3-5 years, the overall cost ceiling is 150 basis points over 6-month LIBOR, RBI guidelines say. For borrowings over five years, the cost ceiling is 250 basis points over 6-month LIBOR.
FCEB is a bond expressed in foreign currency with the principal and interest payable in foreign currency. Foreigners, NRIs and overseas entities are eligible to subscribe to these bonds, which can be converted into equity shares of a group company (called the 'offered company'). The 'issuing company' shall be part of the promoter group of the 'offered company' and shall hold the equity shares being offered at the time of issuance of the bond.
The 'offered company' should be a listed company engaged in a sector eligible for FDI and is eligible to issue or avail of FCCBs or ECBs. The investment under the scheme shall comply with the FDI and ECB policy requirements. Utilisation of ECB proceeds is not permitted for on-lending or investment in capital market or acquiring a company in India.
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