India Inc goes slow on FCCB route

MUMBAI: Fewer Indian companies are raising money through FCCBs this year, even as overseas investors jostle for shares of domestic firms that are benefiting from the economic growth here. Managements are shying away from raising funds through this instrument, fearing an outcome where bonds are not converted into shares in event of a stock market fall like in 2008, in-vestment bankers and consultants said.

Companies have raised about Rs 5,200 crore through convertible bonds so far this year (till October) against Rs 32,000 crore in 2007, the highest ever, according to Prime Database. Initial and follow-on public shares fetched companies Rs 57,000 crore in 2010 (till October) compared with Rs 45,000 crore in 2007, it said. “Companies have realized the extent of liabilities involving FCCBs,” said A Murugappan, executive director, ICICI Securities

FCCBs give holders the option to convert bonds into shares at a pre-fixed date and price. If the stock price exceeds the agreed price, the holder converts the bond into shares. If it doesn’t, the company returns the capital and interest rate to the holder. Stock markets plunged starting early 2008, driving down the prices way below the conversion level and forced companies to repay FCCBs holders. In some cases, liabilities were sizeable as firms didn’t expect the market to fall.

“Many FCCB issuers have had to struggle to refinance these instruments when stock prices plunged and expected conversions did not take place,” V Venkataramanan, ED, KPMG

FCCB liabilities for the 50 companies is about Rs 40,000 crore, out of which Rs 22,000 crore worth of redemptions is likely by 2011-12 , Edelweiss Securities said in a report in April. Companies are also uncomfortable about the impact of currency movements on earnings during the tenure of the bond, consultants said.

“The accounting rules relating to foreign currency convertible notes are not friendly from a corporate perspective, and consequently, foreign exchange fluctuations over the past few years, driven by financial market conditions resulted in volatility in reported quarterly earnings of listed companies,” said N Venkatram, Partner, Deloitte Haskins & Sells. Investors’ response to fresh convertible bond issues of Indian companies has been mixed so far. Though companies, at the time of the issue, are setting a conversion price at a 30-50 % premium to the stock price, investors are not attracted by this.

“Investors are wary about buying every other FCCB, unlike in 2007, as many of those are still trading way below the conversion price and are not liquid either,” Mr Murugappan said. “However, there will be demand for quality paper.”

Nipun Goel, head of investment banking-India, Nomura Financial, said, “The markets for FCCBs in Asia have opened up. We believe that select high quality Indian firms will likely reevaluate FCCBs as a funding source, given that the markets seem to be more receptive.” Source: ET