Mutual funds are considering buying Foreign Currency Convertible Bonds (FCCBs) of Indian companies that are trading at discounts of 30 to 40 per cent to their face value on the assumption that these bonds can deliver good returns in two to three years, when they mature.
“We are looking at the FCCB market and will consider buying these bonds which promise higher yields. We are doing the homework to understand the market,” said Nilesh Shah, DMD and CIO, ICICI Prudential Asset Management Company (AMC).
Another fund manager with a large AMC, who didn’t wish to be quoted, said that he will definitely consider buying these bonds. The AMC already holds stocks of many of these companies or is familiar with most of them.
AMCs can invest $7 billion abroad, and $300 million per AMC, but investments are way below these levels. Most equity schemes can invest 35 per cent of their assets abroad and there are schemes that invest only in overseas equity.
What’s holding them back is that they are not very sure if they can buy these bonds. “There’s no clarity on this,” said A Balasubramanian, CIO, Birla Sun Life.
Shah said mutual funds are allowed to invest in investment-grade foreign securities, but he is not sure whether FCCBs fit in. “It’s a grey area”, he said.
| DISCOUNTED BARGAINS (Some FCCBs and their conversion price) | |||
| Name of company | Conversion* | Mkt price^ | % change |
| Subex | 446.20 | 32.25 | -92.77 |
| Amtek Auto | 613.70 | 54.60 | -91.10 |
| First Source Solu | 128.60 | 13.17 | -89.76 |
| Tata Motors | 1266.70 | 154.10 | -87.83 |
| Tata Motors | 950.40 | 154.10 | -83.79 |
| JSW Steel | 1361.50 | 226.55 | -83.36 |
| Jubilant Org | 588.90 | 112.60 | -80.88 |
| Jaiprakash Assoc | 365.90 | 84.25 | -76.97 |
| Tata Steel | 935.00 | 217.90 | -76.70 |
| M&M | 1180.50 | 292.95 | -75.18 |
| Price in Rs * Effective conversion price ^ As on December 12, 2008 Source: Edelweiss Research | |||
And there lies the problem. “If mutual funds need to invest in only AAA-rated instruments, there may be no Indian company with an ‘AAA’ foreign currency rating overseas,’’ said Krishnan Sitaraman, head, fund services, Crisil.
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A Sebi circular, dated September 26 last year, said mutual funds could invest in “foreign debt securities in the countries with fully convertible currencies, short-term as well as long-term debt instruments with rating not below investment grade by accredited/registered credit rating agencies”.
Analysts said the circular implies that mutual funds can invest in debt instruments with ratings not below investment grade (BBB & above) though it doesn’t mention FCCBs anywhere. If mutual funds were to buy them, it’s better to get an approval from Sebi, they said.
India’s sovereign rating is in the “BBB category” (some agencies give BBB+ while some others put in –BBB). There will be some Indian companies whose debt instruments will have a rating of BBB, making them eligible for mutual funds to buy.