Firms launch FCCB blitz

70 firms raised a record $4.59 billion via the FCCB route.

Seventy Indian companies have raised a record $4.59 billion (Rs 21,000 crore) through foreign currency convertible bonds (FCCB) so far this year. This is 86.6 per cent higher than the $2.46 billion raised in 2004.

The offerings could have been much higher at $7.56 billion (Rs 34,600 crore) had their 22 companies that had proposed to issue $2.97 billion worth of FCCBs actually gone ahead with the plan during the current year.

Large FCCB proposals that are pending are from Ranbaxy ($1.50 billion), Havell's India ($ 225 million), Rolta and Mascon Global ($150 million each).

The firming up of global interest rates may have prompted a few companies to wait at the turnstiles. "The FCCB window will not remain open for ever as interest rates are rising," said an investment banker.

"Besides, the previous scarcity value of the Indian paper is being filled by new supply. However, there will be rewards for a select group of quality issuers," he added.

The spate of FCCBs this year exemplifies Indian companies' eagerness to "dollarise" their balance sheets at a time when overseas interest rates are relatively low and the rupee is strong against the greenback.

Seventy-odd Indian companies have tapped the FCBB route in 2005 to meet their working capital requirements, execute expansion plans, set up new projects and make overseas acquisitions. A large portion of the mobilised funds "" $2.66 billion ""will be used for new projects and modernisation and expansion programmes planned by 41 companies.

As many as 7 companies collected $547 million for overseas acquisitions, 4 mobilised $741 million for raising working capital while all others collectively garnered $640 million for various requirements.

FCCBs are foreign currency (usually dollar-denominated) bonds that, in addition to offering a return on yield, also offer investors the option of converting their principal investment into equity at pre-decided prices.

Prices are decided when instruments are issued. These are to be redeemed within 3-5 years after being converted into ADRs or GDRs. These bonds will be listed at various international stock exchanges.

Amtek India, Bajaj Hindusthan, Bharat Forge, Jaiprakash Associates, Jubilant Organosys and Lupin issued FCCBs of $100 million each. Nagarjuna Construction ($120 million), Indian bulls ($130 million), Amtek Auto, Tata Chemicals and United Phosphorus ($150 million each), Sterling Biotech ($175 million), Tata Power ($200 million) and HDFC ($500 million) were the other large FCCB issuers.

Unlike debt, FCCB does not require any rating, nor any covenant like securities or cover. It can be raised within a month while pure debt takes longer to raise.

Another advantage of FCCBs is that because the coupon is low and usually payable at the time of redeeming instruments, the cost of withholding tax is also lower for FCCBs compared with other external borrowing instruments. Withholding tax is payable at a rate of 25 per cent of the coupon.