India Inc smitten by reset clause in FCCB floats

Indian foreign currency convertible bond (FCCB) issues now increasingly have a clause for reset of conversion price. Reset clause has been a differentiating feature of several Indian FCCB issues in the last few months.

Reset of conversion price has been in vogue in Taiwan since the island nation's dollar convertible issues flourished on the back of technology-led expansion in the late 1990s, as lower-cost component and hardware makers tapped the market to finance growth.

Normally, the reset clause is for lowering the conversion price on one or more specified dates based on the underlying share price on the reset date or an average share price over a number of days. The conversion price reduction is typically limited, or subject to a floor, as otherwise the issue could become infinitely dilutive.

A downward revision adds value for investors if the underlying share price underperforms. For the issuers, resets increase the marketability of a new deal and also the eventual probability of conversion into equity.

Resets support a deal by offering potential extra downside value to investors, and by raising the probability of eventual conversion for issuers, said Luke Olsen, a strategist with London-based Barclays Capital, which has been highly active in the Indian FCCB issuances. In 2005 so far, all its mandates for overseas borrowings have been for FCCBs.

The Indian FCCB issues containing downward reset clauses include Amtek Auto ($150 million), Gujarat Heavy Chemicals ($70 million), Jindal Stainless ($50 million), Maharashtra Seamless ($75 million) and Sterling Biotech ($50 million).

Some resets operate in either direction, allowing conversion price to be reset up or down from prevailing levels. Glenmark's two issues of $50 million and $20 million have provision for resets either way.

The resets in the Bharti Televentures' 0 per cent 2009, $115 million issue and Mahindra & Mahindra's 0 per cent 2009, $100 million issue, however, are not 'standard' resets. The resets in these two cases are rather mechanisms that enable the issuer to entice holders to convert early.

The floor for the resets has been set at the par value of their shares. In a report on Indian FCCB issuance, Barclays Capital said the number convertible issues with reset clauses would rise as more bonds come to market.

FCCB issuances from India are witnessing vigorous activity since the beginning of 2005. Indian companies have raised $2.42 billion through FCCBs and the amount is expected to rise to $5 billion by the end of the year.

India's FCCB market has grown rapidly to become the rising star of Asia. Until recently, Indian companies primarily tapped the domestic market for funding, but a soaring equity market and a robust credit story "� backed by strong agricultural and industrial production "� have driven foreign investors' appetite for Indian exposure to unprecedented levels.

Indian companies are now taking advantage of this demand, and favourable rates, to issue in the international debt market.