Circular No. [F. NO. 9/3/2009-ECB]

What this is

Circular No. [F. NO. 9/3/2009-ECB] was issued by the Central Board of Direct Taxes on 15 February 2010. Its subject is Circular/press Note.

What it does

Opens a six-month window for companies to revise the conversion price of foreign currency convertible bonds issued before 27 November 2008, to the price arrived at under the pricing norms introduced by the press note of that date, which had aligned the scheme with the Securities and Exchange Board of India's norms for qualified institutions placements. The window runs from the date of this press note. Revision is subject to three conditions: the issuing company must ensure that the revision and the consequent issue of shares do not breach the foreign direct investment limit; it must obtain the approval of its board and of its shareholders; and it must enter into a fresh agreement with the bondholders renegotiating the conversion price. The revision may be effected only after the approval of the Reserve Bank of India. The amendment to the scheme of 1993 comes into force immediately.

Why it was issued

Companies had made representations seeking permission to bring the conversion price of bonds issued before the new pricing norms into line with them, and the Government examined the matter with the Reserve Bank of India and the Securities and Exchange Board of India in view of the problems the companies faced.

Who it reaches

• Indian companies with foreign currency convertible bonds issued before 27 November 2008
• Holders of such bonds asked to renegotiate the conversion price
• Companies close to their foreign direct investment ceiling

The instrument, as the Board published it

CIRCULAR/PRESS NOTE
INCOME-TAX ACT
Amendment to the "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993"
PRESS NOTE [F. NO. 9/3/2009-ECB], DATED 15-2-2010
A scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipts Mechanism) was notified in 1993 (hereinafter referred to as "the scheme") to allow the Indian Corporate sector to access global capital markets through issue of Foreign Currency Convertible Bonds (FCCBs)/Equity Shares under the Global Depository Receipt Mechanism (GDR) and American Depository Receipt Mechanism (ADR). The scheme has been amended from time to time since then.
2. In order to bring the pricing norm under the scheme in alignment with the pricing norms for Qualified Institutions Placements (QIP) issued by Securities and Exchange Board of India (SEBI) the Government amended the pricing norms under the scheme, vide Press Note dated 27th November, 2008.
3. Government has received representations from companies seeking permission to revise the conversion price of FCCBs issued prior to 27th November, 2008 (i.e., the date when the new pricing norms came into effect) to the conversion price as per new pricing norms. The matter was examined by the Government in consultation with RBI and SEBI. In view of the problems being faced by companies, it has now been decided by the Government to provide a window of 6 months under the scheme to interested companies to revise their conversion price as per new pricing norms. This will be effective from the date of issue of this Press Note. The revision of conversion price of FCCBs would be subject to the following conditions :—
(i) The issuing company shall ensure that the revision of price and consequent issue of shares may not breach FDI limit;
(ii) The issuing company shall take approval from its Board as well as from its shareholders;
(iii) The issuing company shall enter into a fresh agreement with the FCCB holders in terms of renegotiation of the conversion price.
4. The company will be permitted to revise its conversion price after getting the approval of the Reserve Bank of India.
5. The above amendments in FCCBs policy will come into force immediately.
Nnn

What to watch

• The window is six months from the date of the press note and is confined to bonds issued before 27 November 2008.
• All three conditions must be met, and the foreign direct investment limit is tested on the shares that would come out of the revised price, not on the present holding.
• Board and shareholder approval is not enough — the Reserve Bank of India's approval must come before the revision is given effect.
• A fresh agreement with the bondholders is required, so the revision cannot be made unilaterally.

Where you meet it

When examining a pre-2008 convertible bond whose conversion price was reset, and the approvals and limits behind that reset.

← Circular No. 2/FT&TR/2010  ·  Circular No. 1/FT&TR/2010 →