I know a little bit about FCCB but can anyone explain a bit about this article I read in Hindu Business Line a few days back. (Business Line : Industry & Economy / Banking : RBI extends time limit for FCCB buyback)

From what I understand,

FCCB are foreign currency convertible bonds in that

1) They are bonds issued to foreign investors which are denominated in a foreign currency (like USD) and at maturity need to be paid back to those investors in foreign currency.

2) They are convertible in that they can be converted to shares at a strike price which is usually predetermined. (Something like a call option).

(Please correct if I am wrong)

But I don't understand by "The discount rates have been decreased from 15 to eight per cent for premature buyback under the automatic route and from 25 per cent to 20 per cent under the approval route."

Also this paragraph - "A decrease in discount rates will entail higher cash outflow for Indian companies,” said the Head of Research of an Indian brokerage. "But there would be higher demand for Indian FCCBs going forward as quality of Indian assets on offer would be enhanced with the said decrease in discount rates."

What is the meaning of discount rate? and what is RBI trying to do?

Here "discount rate" is the discount at which companies buyback their FCCBs.

Most FCCBs pay little or no interest.

If a company's stock falls too much and FCCB holders don't see any benefit of converting their FCCBs to shares, the FCCBs start trading at a discount to their book value.

(Book value is the original value of the debt taken by the company at the time of issuing the FCCB).

RBI specifies the minimum discount at which FCCBs can be bought back.

This minimum discount has been reduced now.

RBI must have felt that the earlier minimum discount was too high and thus was making buybacks unattractive for FCCB holders and thus has reduced the minimum discount.

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Thank you.

I also got some more clarification from

FCCB note

Hedge funds seek closure of Venus Remedies - Economic Times

and

"Well, repurchase of FCCB is applicable for FCCBs before their 'in-tenure' FCCBs. After the period is over, the company should repurchase the unconverted lot at face value plus agreed premium on redemption." - (This was also one of my doubt now cleared).

(FCCB - TimeBomb Waiting to Explode)

I am unable to understand the following:

Why would a bondholder/investor/lender (all refer to the same entity correct me if I am wrong) agree to the buyback deal at a lower discount rate? I mean why would an investor be attracted by a "lower" rate, discount rate is what issuer pays, so why would an investor want to receive less? Am I missing something here with respect to discount? I know it's a silly question to ask but please help me. Also, discount rate is same as yield. HOW?

Bondholder/investor/lender is one and the same for bonds.

The "discount" mentioned here is not the yield of the bond.

Here discount is the difference between the book value of the bond and the buyback price.

A "lower discount" means the buyback price is closer to the book value of the bond.

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