ISSUE OF FOREIGN EXCHANGE CURRENCY EXCHANGEABLE BONDS SCHEME, 2008 - AN OVERVIEW

[Mr. M. GOVINDARAJAN]

The Central Government notified the 'Issue of Foreign Currency Exchangeable Bonds Scheme, 2008' vide Notification No. G.S.R. 89(E), dated 15.2.2008.

'Foreign Currency Exchange Bond' is defined as 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. 'Issuing Company' is defined as an Indian company as defined in the Companies Act, 1956 which is eligible to issue Foreign Currency Exchangeable Bond. 'Offered Company' is defined as an Indian Company as defined in the Companies Act, 1956 whose equity share(s) shall be offered n exchange of the Foreign Currency Exchangeable Bond.

The prior approval of the Reserve Bank of India shall be required for issuance of Foreign Currency Exchangeable Bond. The Foreign Currency Exchangeable Bond may be denominated in any freely convertible foreign currency.

The eligibility conditions and subscriptions of foreign currency exchangeable bonds are as follows:

> 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;

> 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;

> An Indian Company, which is not eligible to raise funds from the Indian securities market, including a company which has been restrained from accessing the securities market by the Securities and Exchange Board of India shall not be eligible to issue Foreign Currency Exchangeable Bond;

> The subscriber to the foreign currency exchangeable bond shall comply with the foreign direct investment policy and adhere to the sectoral caps at the time of issuance of foreign currency exchangeable bond. Prior approval of Foreign Investment Promotion Board, wherever required under the Foreign Direct Investment Policy, should be obtained. Entities prohibited buying, selling or dealing in securities by Securities and Exchange Board of India will not be eligible to subscribe to Foreign Currency Exchangeable Bond.

The mandatory requirements for issue of foreign currency exchangeable bonds are as follows:

> The Issuing Company shall comply with the provisions of the Companies Act, 1956 and obtain necessary approvals of its Board of Directors and shareholders if applicable. The Offered Company shall also obtain the approval of its Board of Directors in favor of the Foreign Currency Exchangeable Bond proposal of the issuing company;

> The Issuing Company intending to offer shares of the offered company under Foreign Currency Exchangeable Bond shall comply with all the applicable provisions of the Securities and Exchange Board of India Act, Rules, Regulations or Guidelines with respect to disclosures of their shareholding in the Offered Company;

> The Issuing Company shall not transfer, mortgage or offer as collateral or trade in the offered shares under Foreign Currency Exchangeable Bond from the date of issuance of the Foreign Currency Exchangeable Bond till the date of exchange or redemption. Further the Issuing Company shall keep the offered shares under Foreign Currency Exchangeable Bond free from all encumbrances from the date of issuance of the Foreign Currency Exchangeable Bond till the date of redemption.

The proceeds of foreign currency exchangeable bond may be invested by the issuing company in the promoter group companies. The promoter group company receiving such investments shall be required to use the proceeds 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. It may be used 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. 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 Borrowing.

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 the Reserve Bank of India under the External Commercial Borrowing Policy.  At the time of issuance of such bonds the exchange price of the offered listed equity shares shall be less than the higher of the following:

* The average of the weekly high and low of the closing prices of the shares of the offered company quoted on stock exchange during the six months preceding the relevant date; and

* The average of the weekly high and low of the closing prices of the shares of the offered company quoted on a stock exchange during the two week preceding the relevant date.

The 'relevant date' for this purpose means the date on when the Board of the issuing company passes the resolution authorizing the issue of foreign currency exchangeable bond.

Interest payments on the bonds, until the exchange option is exercised, shall be subject to deduction of tax at source as per the provisions of Section 115AC (1) of the Income Tax Act, 1961. Tax on dividend on the exchanged portion of the bond shall be in accordance with the provisions of Section 115AC (1) of the Income Tax Act, 1961. Exchange of foreign currency exchangeable bonds into shares shall not give rise to any capital gains liable to income tax in India. Transfers of Foreign Currency Exchangeable Bonds made outside India by an investor who is a person resident outside India to another investor who is a person resident outside India shall not give rise to any capital gains liable to tax in India.