Why in the news
State Bank of India’s board cleared a plan to raise as much as $3 billion in foreign currency bonds during FY2025-26. The news is a good prompt to revise how foreign currency convertible bonds (FCCBs) work.
SBI’s plan
- Instrument: senior unsecured notes.
- May be issued in single or multiple tranches.
- Route: public offer or private placement.
- Currency: USD or other major foreign currencies.
About FCCBs
- A hybrid instrument: a convertible bond issued in a currency other than the issuer’s home currency.
- Pays regular coupons and returns principal at maturity, like an ordinary bond.
- Holders may convert it into equity shares at a fixed, pre-agreed rate.
- Popular with multinational firms; subscribers are often hedge funds, foreign nationals and arbitrage investors.
Why companies issue them
- Access to foreign capital pools.
- Lower borrowing cost when issued where interest rates are low.
- Debt falls if bonds convert into shares.
- Preference for markets with stable currencies and economies.
Mechanics
| Feature | Meaning |
|---|
| Coupon | Paid periodically in the foreign currency |
| Conversion | Into equity at a preset conversion price |
| Call option | Issuer can redeem early |
| Put option | Bondholder can redeem early |
Pros and cons
| Advantages | Risks |
|---|
| Cheaper capital because of the equity element | Exchange rate risk: adverse moves raise repayment cost |
| Currency arbitrage if rates move favourably | Conversion risk: weak share price means cash repayment |
| Investors can gain from share price rise | Regulatory and political risk abroad; dilution for existing shareholders |
Exam angle
- FCCB nature: debt plus equity hybrid in foreign currency.
- Call option favours the issuer; put option favours the holder.
- SBI’s plan: up to $3 billion in FY2025-26.