Facing huge redemption pressure on funds raised via foreign currency convertible bonds (FCCBs), India Inc has requested the Reserve Bank of India (RBI) to allow companies to offer higher interest rates on fresh foreign currency loans or bonds, the proceeds of which will be used to pre-pay existing FCCBs.
The current norms mandate if a company wants to pre-pay FCCBs via fresh foreign loans or bonds, the new paper must be of longer maturity and carry a lower interest rate than the existing.
“Many of us don’t want to leave it till the last moment, as the situation may get out of hand. We plan things in advance, depending on the market conditions. Hence, pre-payment is often necessary. We have requested the RBI to relax the rules on lower cost. Our understanding is the RBI is taking a benign view on this request,” said a person familiar with the developments. He requested anonymity due to the sensitivity of the issue.
Industry players said in the past the banking regulator had allowed such waivers on a case-to-case basis. “Our view is the RBI should not hide behind the guidelines. The regulator must give the leeway, considering the current market conditions. Unless a higher rate is offered, no new investor will be willing to put in money,” said a senior executive of a private bank.
The regulator had recently allowed companies to raise funds through external commercial borrowings (ECBs) to refinance an existing ECB at a higher cost under the approval route.
On the refinancing of existing FCCBs via external commercial borrowings, companies have asked the central bank to reduce caps on pricing and maturity.
“If you see the ECB guidelines, depending on the size of the issue there are caps on pricing and maturity. The rules may prescribe the maturity must be of at least five years, but the company may have found investors willing to invest only for three years. Hence, we have requested companies not be constrained by regulations and some leeway be offered,” said a person working with a large corporate house.
| FCCBS MATURING IN COMING MONTHS ($ mn) | ||
| Company | Maturing on | Outstanding |
| Sterling Biotech | 16-May | 134.5 |
| Suzlon Energy | 12-Jun | 246.88 |
| JSW Steel | 28-Jun | 274.4 |
| Tata Motors | 12-Jul | 473 |
| Gayatri Projects | 3-Aug | *2,705.00 |
| Tata Steel Ltd | 5-Sep | 382 |
| Jaiprakash Asso | 12-Sep | 354.48 |
| * Japanese yen | ||
| Companies which redeemed FCCBs in Jan-Mar | ||
| Company | Matured on | |
| United Phosphorus | Jan ‘12 | |
| Era Infra | Jan ‘12 | |
| Reliance Comm | Feb ‘12 | |
| Orchid Chem | Feb ‘12 | |
| Rajesh Exports | Feb ‘12 | |
| Ruchi Infra | Feb ‘12 | |
| Kamat Hotels | Mar ‘12 | |
| The list is representative, not comprehensive Compiled by BS Research Bureau Source: Bloomberg | ||
Also, demands have been raised to allow a reduction in the conversion price because the share prices of many companies have plunged in recent months. Industry players said while the RBI had allowed that in 2010, it was withdrawn later after the Securities and Exchange Board of India had reservations.
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“We have requested that at least part of the bonds be allowed to be converted at a reduced price,” said a source. According to a latest report by rating agency Fitch, 59 Indian companies will face redemption worth $7 billion in 2012.
A senior finance ministry official confirmed that discussions were on to address problems faced by companies in servicing FCCB obligations. “We are aware of the issue. The government is not averse to addressing the problems faced by companies in making FCCB payments due to the adverse systemic scenario,” he said.
Adding that the companies were facing a tough situation they could not have perceived while taking the FCCBs, the official indicated the government might also allow them to utilise financing from domestic financial institutions in managing the obligations. He, however, pointed out the measures would be aimed at supporting companies across the board to handle the situation and not at helping individual companies.