Window for premature buyback extended till March, with liberalised terms; RBI review notes lacklustre equity markets.
RBI has also relaxed the minimum discount conditions, especially for small-ticket redemptions. For the automatic route, the minimum discount has been reduced to eight per cent from the earlier 15 per cent. The automatic route is applicable to companies which have foreign currency funds. A company can pay bondholders out of fresh external commercial borrowing (ECB), raised in conformity with the current ECB norms
Companies with no funds in foreign currency but intending to prepay FCCBs out of internal accrual would need RBI approval. While the cap on redemptions stays at $100 million, discount levels have been reset.
Redemptions have to be at least a tenth below book value for deals below $50 mn. For larger deals of sizes between $50 mn and $75 mn, the discount has to be 15 per cent or more. RBI has mandated a minimum discount of 20 per cent of book value for redemption values over $75 mn. Earlier discount limits were 25 per cent for deals below $50 mn, of 35 per cent for deals between $50 mn and $75 mn, and 50 per cent for deals worth $75-100 mn.
In its financial stability report released earlier this month, RBI said it expected several companies which had raised money through FCCBs to face severe funding problems in the next two years due to lacklustre equity markets. The problems, it had added, “may not remain confined to their industries”.
More From This Section
FCCBs were popular instruments during the bull run in the equity markets between 2005 and 2008. Rising stock prices allowed companies, including many mid-caps, to raise hybrid capital using convertible instruments. In those three years, 201 overseas convertible issues raised close to Rs 72,000 crore, according to Prime Data Base. The conversion price on such bonds was 25-150 per cent higher than the prevailing stock price at the time of issuance and they carried zero or very low coupons.
FCCB proceeds were meant for overseas acquisition (19 per cent) and import of capital goods (16 per cent), in line with returns filed by the companies. RBI expected about 45 per cent or Rs 32,000 crore of these bonds to be up for redemption during financial year 2012-13. Two-thirds of this may not get converted into equity shares, as the current stock prices of issuing companies were significantly below their conversion prices, RBI said.