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CS Professional · Strategic Management and Corporate Finance · Foreign Funding - Institutions

Which statement about the accounting and balance-sheet position of an FCCB before conversion is correct for the issuing Indian company?

Before conversion an FCCB is a debt liability of the issuer. Because interest and redemption are payable in foreign currency, the company bears exchange rate risk, and the bond becomes equity only when holders actually convert it into shares.

  1. AIt is a debt liability until converted, and the foreign currency liability is exposed to exchange rate movementsCorrect
  2. BIt is treated as equity from the date of issue, so exchange rate changes do not matter
  3. CIt is a contingent asset until conversion
  4. DIt is treated as share application money pending allotment, with no interest burden

Explanation

Until holders exercise the option, the FCCB is a borrowing carrying coupon and redemption obligations in foreign currency. A rupee depreciation raises the rupee cost of servicing and repaying it. It becomes equity only on conversion, so treating it as equity from issue is wrong.

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