Explain the advantages and disadvantages of Foreign Currency Convertible Bonds.

Advantages of FCCBs (i) The convertible bond gives the investor the flexibility to convert the bond into equity at a price or redeem the bond at the end of a specified period, normally three years if the price of the share has not met his expectations. (ii) Companies prefer bonds as it leads to delayed dilution of equity and allows company to avoid any current dilution in earnings per share that a further issuance of equity would cause. (iii) FCCBs are easily marketable as investors enjoy the option of conversion into equity resulting into capital appreciation. Further investor is assured of a minimum fixed interest earnings. Disadvantages of FCCBs (i) Exchange risk is more in FCCBs as interest on bonds would be payable in foreign currency. Thus, companies with low debt equity ratios, large forex earnings potential only opt for FCCBs. (ii) FCCBs mean creation of more debt and a forex outgo in terms of interest which is in foreign exchange. (iii) In the case of convertible bonds, the interest rate is low, say around 3–4% but there is exchange risk on the interest payment as well as re-payment if the bonds are not converted into equity shares. The only major advantage would be that where the company has a high rate of growth in earnings and the conversion takes place subsequently, the price at which shares can be issued can be higher than the current market price.