Strategic Management and Corporate Finance · Foreign Funding - Institutions

Foreign Currency Convertible Bonds (FCCB): Features, Conversion and Risks

Updated 11 October 2026 · Fact-checked

A Foreign Currency Convertible Bond (FCCB) is a bond issued by an Indian company in foreign currency to non-residents. It pays a fixed coupon and can be converted into the company's ordinary shares, or redeemed in foreign currency if not converted. To answer questions, cover features, conversion, pricing, conditions and risks.

Understand Foreign Currency Convertible Bonds (FCCB)

A Foreign Currency Convertible Bond (FCCB) is a debt instrument. An Indian company issues it abroad, it is denominated in a foreign currency, and the holder has an option to convert it into the company's ordinary shares. Until conversion, the holder is a lender. After conversion, the holder is a shareholder.

Why do companies use it? Because of the conversion option, investors accept a low coupon, usually far below a straight foreign loan. The company gets cheap foreign money. It also gets future equity without a fresh issue. Investors get safety of a bond plus a chance to share in the share price rise.

The framework is the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, read with FEMA rules. Issue proceeds are foreign exchange, so FEMA and RBI norms for such borrowing also apply. Exact conditions have changed over time through amendments and the current framework. In an exam, state the principles and say they are subject to the prevailing rules.

FCCBs carry risks. If the share price stays below the conversion price, holders do not convert and the company must repay the principal, often with a redemption premium, in foreign currency. Rupee depreciation raises that cost. If holders convert, existing shareholders are diluted and the EPS falls.

FCCB is often compared with ECB. An ECB is a plain foreign-currency loan or bond with no conversion into equity. An FCCB has the equity option, so it is a hybrid. This is the core difference to write in answers.

Key rules to remember

Conversion ratio: Conversion ratio = Face value of bond ÷ Conversion price; Gives the number of shares per bond. Use the same currency for both, converting at the agreed rate.
Conversion premium: Conversion premium (%) = (Conversion price − Current market price) ÷ Current market price × 100; Shows how much above the market price the conversion price is fixed at issue.
Conversion value: Conversion value = Conversion ratio × Current market price per share; Compare with the bond's value as a straight bond. If conversion value is lower, holders usually prefer redemption.
Rupee cost of redemption: Rupee outflow = Foreign currency amount (principal + premium) × Exchange rate at redemption; Shows currency risk. A weaker rupee raises the rupee outflow.
Nature of instrument: FCCB = Foreign currency bond + Option to convert into ordinary shares; A hybrid: debt until conversion, equity after conversion.

How to solve Foreign Currency Convertible Bonds (FCCB) questions

Use this order for theory and numerical questions on FCCBs.

1Define the FCCB in one line: foreign currency bond, issued by an Indian company to non-residents, convertible into ordinary shares.
2Name the framework: the 1993 Scheme with FEMA and RBI rules, and say conditions are as currently prevailing.
3List the features: foreign currency denomination, low coupon, conversion option, maturity, redemption, listing abroad.
4For numericals, compute the conversion ratio from face value and conversion price, then the conversion value at the given market price.
5Compare conversion value with redemption value to decide whether holders convert or redeem.
6Convert foreign amounts to rupees at the exchange rate stated in the question.
7State advantages and risks, tailored to the question: cost, dilution, currency and redemption risk.
8Conclude with a clear practical view for the company.

Quickest way: Convert-or-redeem check

When to use it: Use for short numerical questions asking what holders will do or what the company pays.

Write the face value, conversion price and market price.
Conversion ratio = face value ÷ conversion price.
Conversion value = ratio × market price.
If conversion value is above redemption value, holders convert; otherwise they redeem.
Multiply any foreign currency payout by the exchange rate to get rupees.

Common mistakes in Foreign Currency Convertible Bonds (FCCB)

Treating FCCB as the same as ECB.
Both are foreign-currency borrowings, so they look alike.
Fix: Point out the conversion option. FCCB can become equity; a plain ECB is only debt.
Saying FCCB is purely debt or purely equity.
Students focus on one stage of its life.
Fix: Call it a hybrid: debt before conversion, equity after it.
Ignoring currency risk on redemption.
Students focus on the low coupon and conclude that FCCBs are cheap.
Fix: Add that principal and premium are repaid in foreign currency, so rupee weakness raises the real cost.
Mixing currencies in the conversion ratio.
Face value is in dollars while the conversion price is in rupees.
Fix: Convert to one currency at the stated exchange rate before dividing.
Forgetting dilution when listing advantages.
The advantages feel one-sided.
Fix: Always add that conversion increases shares and can reduce EPS and shareholder control.
Quoting rules as fixed limits from memory.
The framework has been amended often.
Fix: State principles, and say the issue is subject to the prevailing FEMA and RBI rules.

Worked examples

Example 1

An Indian company issues an FCCB of face value US$ 1,000. The conversion price is ₹ 400 per share and the exchange rate fixed for conversion is ₹ 80 per US$. The market price at conversion is ₹ 500. Find the number of shares per bond and the conversion value in rupees.

Show the solution

Face value in rupees = 1,000 × 80 = ₹ 80,000.
Conversion ratio = 80,000 ÷ 400 = 200 shares per bond.
Conversion value = 200 × 500 = ₹ 1,00,000.

Answer: Each bond converts into 200 shares, worth ₹ 1,00,000 at the market price, against ₹ 80,000 face value.

Example 2

Using the same bond, the redemption value is US$ 1,200 and the rupee exchange rate at maturity is ₹ 85 per US$. The market price at that time is ₹ 350. Will the holder convert or redeem, and what is the company's rupee outflow if redeemed?

Show the solution

Conversion ratio = 200 shares per bond.
Conversion value = 200 × 350 = ₹ 70,000.
Redemption value in rupees = 1,200 × 85 = ₹ 1,02,000.
Redemption value is higher than conversion value, so the holder redeems.

Answer: The holder redeems, and the company pays ₹ 1,02,000 per bond. Share price is below the conversion price, so the conversion option is unused.

Exam tips

Open every theory answer with a one-line definition that includes the words foreign currency, convertible and ordinary shares.
Expect a short note or a differences question such as FCCB vs ECB. Prepare a four-point comparison.
For advantages and risks, use two headed lists. Include low cost, equity without immediate dilution, currency risk and redemption pressure.
In numericals, show currency conversion as a separate line so marks for method are secured.

Practice questions from Foreign Funding - Institutions

Foreign Currency Convertible Bonds (FCCB): frequently asked questions

What is an FCCB in simple words?

It is a bond an Indian company issues abroad in foreign currency. The holder can convert it into the company's ordinary shares or take repayment at maturity.

What is the difference between FCCB and ECB?

Both are foreign-currency borrowings. A plain ECB is only a loan or bond repaid in cash, while an FCCB has an option to convert into equity shares. Because of this option, FCCBs carry a lower coupon.

Why is the FCCB coupon low?

Holders get the right to convert into shares and benefit if the share price rises. They accept a lower interest rate in return for this option.

What are the main risks of an FCCB?

The main risks are currency risk, redemption pressure if the bonds are not converted, and dilution of existing shareholders on conversion. The company bears all three.