Capital Market MCQs Part 2 (FCCB, FCEB, ECB & Masala Bonds): IIBF TIRM Guide +

Are capital market instruments like FCCB. FCEB. ECB.

Masala Bonds turning your TIRM Paper 1 preparation into a confusing maze? You are not alone. Thousands of candidates sitting for the Treasury Investment.

Risk Management (TIRM) Diploma lose easy marks here. Simply because the RBI rules, FEMA guidelines and maturity conditions blur together.

This 2026 guide fixes that. It is your complete. Exam-ready breakdown of Capital Market Part 2 for the IIBF TIRM syllabus.

Every concept is explained in plain English. With comparison tables, regulatory pointers and the most expected MCQ angles. Bookmark it.

Revise it before the exam, and walk in with full confidence.

Prefer to learn by watching? This full-length bilingual session covers every concept. RBI rule and MCQ from Capital Market Part 2:

Why Capital Market Instruments Matter in TIRM Paper 1

The capital market portion of the TIRM exam is high-yield. Questions on FCCB. FCEB. ECB and Masala Bonds appear almost every cycle. And they are scoring because the answers are rule-based, not opinion-based.

For a working banker, this is not just exam theory. When a corporate client wants to raise funds abroad. You must know which instrument fits.

What RBI allows, and where the risk sits. Master these five topics. You cover both the marks and the real-world treasury desk.

What is an FCCB (Foreign Currency Convertible Bond)?

An FCCB is a bond issued by an Indian company in a foreign currency. It carries a fixed coupon. But it also gives the international investor the right to convert the debt into equity shares of the same issuing company after a set period. At a pre-agreed price.

So an FCCB is a hybrid. It behaves like debt until conversion, then becomes equity. This dual nature is exactly why examiners love it.

Key Characteristics of FCCBs

• Issued in: USD, EUR, GBP, JPY and other major currencies.
• Convertible into: Equity shares of the issuing Indian company.
• Sectoral cap: Must follow FDI policy and applicable sectoral caps.
• Minimum maturity: Typically 5 years (confirm on the latest official IIBF notification. RBI ECB framework).
• Issuance expenses: Commonly capped around 4% for public issues and 2% for private placements.
• Equity warrants: Not permitted with FCCBs.

Use-case example: Suppose a large IT firm issues FCCBs to overseas investors. After the conversion window opens. Those investors can swap their bonds for the company's shares at the agreed price. Capturing equity upside while having earned interest along the way.

Understanding FCEB (Foreign Currency Exchangeable Bond)

An FCEB looks like an FCCB, with one crucial twist. Instead of converting into the issuer's own shares. An FCEB is exchangeable into the equity shares of a different company within the same promoter group.

Picture a holding company that issues an FCEB. On exchange. The bondholder receives shares of a listed subsidiary or group entity. Not the issuer itself. That single distinction is the most tested point in this chapter.

Key Characteristics of FCEBs

• Issued in: Foreign currency only.
• Exchangeable into: Equity shares of another company in the same promoter group.
• Approval route: Routed through RBI approval, in line with the FCEB scheme.
• Minimum maturity: Generally 5 years (verify against the current official notification).
• Governing laws: FEMA and the ECB guidelines apply.

Example: A group holding company issues an FCEB that lets bondholders receive shares in one of its listed group companies. The issuer raises money; the investor gets exposure to the group entity.

FCCB vs FCEB: The Comparison Table You Need

If you remember only one table from this guide. Make it this one. It captures the single most common trap in the exam.

All About ECB Refinancing

ECB (External Commercial Borrowing) is a loan an Indian entity raises from a recognised foreign lender. ECB refinancing means replacing an existing ECB with a fresh one. Usually to cut the interest burden or extend the loan tenor.

But you cannot refinance freely. RBI sets guardrails so that borrowers do not game the system. These conditions are pure MCQ gold.

Conditions to Remember for ECB Refinancing

1. Lower all-in-cost: The new ECB must carry a lower total cost than the existing ECB.
2. Residual maturity: The new ECB's maturity cannot be shorter than the remaining (balance) maturity of the old ECB.
3. Domestic banks: Indian domestic banks are not permitted to refinance ECBs.

What are Rupee Denominated Bonds (Masala Bonds)?

Masala Bonds are Rupee Denominated Bonds (RDBs) issued overseas. Denominated in Indian Rupees. Because the bond is priced in rupees.

The foreign investor bears the currency risk, not the Indian borrower. That is the headline feature. The reason these bonds are attractive to Indian issuers.

Regulatory and Usage Details

• Issued by: Indian companies, plus REITs and InvITs registered with SEBI.
• Minimum maturity: Generally 5 years (confirm on the latest official IIBF / RBI guidance).
• Limit: Up to USD 50 million-equivalent under the automatic route. With larger amounts needing approval.
• Where issued: Outside India, and they can be listed on foreign exchanges.
• Investor base: Restricted to investors from FATF-compliant jurisdictions.

Prohibited Uses of Masala Bond Proceeds

• Real estate activity, except affordable housing and integrated township projects.
• Capital market investment.
• On-lending to entities for the restricted activities above.

The Role of Indian Banks in Masala Bonds

Indian banks can act as arrangers or underwriters for Masala Bond issues. However. They cannot hold more than 5% of the issue after six months. And they cannot invest directly in these bonds.

AD Bank Foreign Currency Borrowing Rules

Authorised Dealer (AD) Category-I banks may raise foreign currency loans. But only from approved channels and for defined purposes. Retail depositors are firmly off-limits.

Permissible Sources of FCY Borrowing

• The bank's own overseas branches or its head office abroad.
• Foreign correspondent banks.

Not allowed: Borrowing from domestic retail depositors.

Maximum Borrowing Limit

An AD bank may borrow up to 100% of its unimpaired Tier-1 capital or USD 10 million. Whichever is higher (always cross-check the current limit on the latest official RBI master direction).

Permitted Usage of Borrowed FCY Funds

• Export finance, both pre-shipment and post-shipment credit.
• Normal business operations of the bank's overseas branches.
• Lending to Indian companies holding a 51% or more stake in an overseas JV or wholly owned subsidiary (WOS).

Not allowed: Lending where the Indian company's holding in the foreign entity is only 25%.

Quick-Facts Revision Table

Use this as your last-minute revision sheet the night before the exam.

How to Study This Topic and Score Full Marks

Reading once is not enough. Capital market MCQs reward active recall and rule precision. Here is a simple, proven study plan.

1. Watch the bilingual session above once, fully, without pausing to take notes.
2. Build a one-page rule sheet from the two tables in this guide.
3. Drill the FCCB vs FCEB distinction until you can answer it in two seconds.
4. Solve practice questions daily. Take a few mock tests to lock in the rules under timed pressure.
5. Revisit free explainers in our free guides section to reinforce weak spots.
6. Self-test the night before using the quick-facts table, then rest.

Common Mistakes Candidates Make

• Mixing up FCCB and FCEB. Remember: FCCB = same company, FCEB = another group company.
• Forgetting the residual maturity rule in ECB refinancing. Assuming any new loan works.
• Thinking the Indian borrower bears the FX risk on Masala Bonds. It is the foreign investor who does.
• Assuming AD banks can take FCY from retail depositors. They cannot.
• Ignoring prohibited end-uses of Masala Bond proceeds, which are frequently tested.
• Treating limits as fixed forever. Always confirm current figures on the latest official IIBF / RBI notification.

Frequently Asked Questions (FAQ)

What is the main difference between FCCB and FCEB?

An FCCB converts into equity shares of the same issuing company. While an FCEB is exchangeable into equity shares of a different company within the same promoter group. Both are issued in foreign currency under FEMA and ECB guidelines.

Who bears the currency risk in Masala Bonds?

The foreign investor bears the currency risk. Masala Bonds are denominated in Indian Rupees. This is what makes them attractive for Indian borrowers raising funds overseas.

Can Indian domestic banks refinance an ECB?

No. Indian domestic banks are not permitted to refinance ECBs. Refinancing is allowed only when the new ECB has a lower all-in-cost. A residual maturity that is not shorter than the existing loan.

What is the borrowing limit for AD Category-I banks in foreign currency?

AD banks may generally borrow up to 100% of their unimpaired Tier-1 capital or USD 10 million. Whichever is higher. Always confirm the exact limit on the latest official RBI master direction before the exam.

Are these Capital Market Part 2 topics important for TIRM Paper 1?

Yes. FCCB. FCEB.

ECB refinancing. Masala Bonds and AD bank FCY rules are high-frequency. Rule-based topics that appear regularly in TIRM Paper 1.

They are among the most scoring areas if you revise the rules precisely.

Final Thoughts: Turn These Rules into Marks

Capital Market Part 2 looks intimidating at first. But it is actually one of the most predictable. Scoring sections of the TIRM exam. Every answer is a rule, and every rule is on this page.

Master the FCCB-versus-FCEB distinction. Lock in the ECB refinancing conditions. Remember who carries the risk in Masala Bonds. And recall the AD bank borrowing limits. Do that, and these questions become free marks on exam day.

Stay consistent, revise the tables, and keep solving MCQs. You have got this.

Download Free PDF Notes

Grab the complete PDF for offline revision: click here to download the Capital Market Part 2 PDF, which includes the session summary, practice MCQs, quick concept revisions, and the important tables and limits.

Related Guides

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Save this “capital market instruments” guide and revisit it during your revision week.

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