Foreign Currency Convertible
Bonds (FCCBs) offer a unique
opportunity for overseas investors to gain exposure in the Indian
equity market. With changing economic fundamentals, dynamics in FCCBs
are changing too—opportunities matching risks. This analysis of FCCBs issued
by Indian companies looks into the buyback procedure undertaken by
Indian companies in 2009 and the overall structure of outstanding FCCBs so far.
Towards the end of 2008, the global economy had succumbed to
recession-ary trends, and after the collapse of Lehman Brothers, financial
meltdown meant historic slump in equity market and real estate market and
burgeoning debt at both micro and macro levels. Growing unemployment and sharp
reduction in demand led to a further cut in output. Tackling the domestic as
well as foreign debt was one of the main priorities for the central banks. Till
then, Indian companies had raised FCCBs up to $17 mn to fund domestic
capex. The downward spiral in equity market has resulted in all the issues being
`out of money' (i.e., conversion price less than current market price). Though a
majority of the issues are maturing from 2011 onwards, uncertainty regarding
domestic and, especially, global economy means, in case of `non-conversion',
large capital outflow by way of payment for those issues. Furthermore,
dwindling revenue and profits mean increasing burden on Indian companies with
regard to payment of such overseas loan. As these FCCBs were trading at
huge discounts, the RBI allowed Indian companies to buy back those at the
prescribed discount limits. Broadly, two alternatives were available. The
companies were allowed to buy back those bonds either by using their own
internal accruals, especially foreign revenues (cash flows), or by taking fresh ECB
(External Commercial Borrowings). The buyback window, which was
extended twice, remained open till December 31, 2009.
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