The Foreign Currency Convertible Bond Crisis: Counting Chickens Before They Hatched

In the market liberalization era in the 1990s, Indian corporates required foreign capital to fuse with the globalized market. The Indian Central Government and Central Bank — the Reserve Bank of India initiated impromptu schemes to permit External Commercial Borrowings (ECBs). In this paper, the author focuses on one such ECB instrument — Foreign Currency Convertible Bonds (FCCBs). The author explains the concepts behind FCCBs, advantages and disadvantages for issuers and investors, the regulatory framework and associated taxation and redemption policies. However, when world markets were devastated by the economic downturn, Indian companies did not remain completely insulated. They had neither envisaged a bearish market nor redemption of their FCCBs. This conundrum was exacerbated when companies could not service their debt. This paper analyses this crisis and the solutions that have been and could be resorted to by companies and provides an insight into the measures taken by the Reserve Bank of India. Subsequently, it elucidates the current scenario with examples from the Indian market to show how companies are trying to alleviate themselves from such plight.The author then concludes how the short sightedness, partly by the corporates and partly by regulators led to such a crisis. This paper seeks to make suggestions to circumvent such a catastrophe again.