16 Capital gains on transfer in the context of foreign currency exchangeable bonds

16.1 In 1992, the Government allowed established Indian companies to issue foreign currency convertible bonds (FCCB), with special tax regime for non-resident investors, so as to encourage the flow of foreign exchange to India.

16.2 The Government has now allowed established Indian companies to issue foreign currency exchangeable bond (FCEB). These are bonds expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency. The FCEBs differ from FCCBs in as much as the latter can only be converted into shares of the issuing company, whereas FCEBs can also be converted into or exchanged for the shares of a group company. With a view to providing a level playing field to FCEBs, amendment in the Income-tax Act has been carried out to provide that the conversion of FCEBs into shares or debentures of any company shall not be treated as a ‘transfer’ within the meaning of Income-tax Act. Further subsection (2A) of section 49 of the Income-tax Act has been amended to provide that the cost of acquisition of the shares received upon conversion of the bond shall be the price at which the corresponding bond was acquired.

16.3 Applicability: These amendments have been made applicable with effect from 1st April, 2008, and will accordingly apply in relation to assessment year 2008-09 and subsequent assessment years.

Extract from Explanatory Notes to The Provisions of the Finance Act, 2008 vide circular no. 1/ 2009, dated 27th Mar, 2009.

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