Uncertainty over the interpretation of the latest guidelines on re-pricing of existing foreign currency convertible bonds (FCCBs) has sent many investment bankers hurrying to their lawyers.
From the perspective of FCCB-issuing companies, the new norms will be very useful or of little use, depending on its interpretation.
The point of confusion is the two-week period preceding the launch of an FCCB issue, which is used to calculate the minimum conversion price based on an average of closing share prices. Bankers are not sure whether to consider the 14 days preceding the original issue or the 14 days before the reset of the conversion price, which companies have now been allowed to undertake. The latter would be much more useful, since it would more closely reflect current market prices and facilitate conversion to equity.
An FCCB is a type of convertible bond issued in a foreign currency which allows holders to eventually convert the bonds into equity. FCCBs can only be converted into equity if an issuer’s stock is trading at a price greater than a pre-determined conversion price, which is fixed at the time of the issue. The conversion price is usually fixed at a 30-70 per cent premium to the floor price, calculated on the basis of the two-week average of the share price.
If the market price is unable to reach the conversion price over the tenure of the FCCB, the hybrid instrument works like a bond and the issuer has to redeem the entire amount.
“There is little clarity on the issue and we are still consulting our lawyers on the interpretation,” said an investment banker with Citigroup Global Markets.
The new norms pertain to FCCBs issued before November 27, 2008. According to the old guidelines, companies had to consider the higher of the two-week average price and the six-month average price. Now, companies have been given a six-month window to reset their FCCB prices according to the two-week average price.
“The objective of the new guidelines is clearly to facilitate the conversion of FCCBs and ease redemption pressure on corporates,” said Nishikanth Das, director, debt capital markets at Standard Chartered Bank.
However, if the original date at which the FCCBs were launched is considered, the new guidelines will bring little benefit to Indian companies, since most instruments were issued during the 2007 bull run in the stock markets.
“During a bull run, the two-week average price would be higher than the six-month average price, whereas in a bear phase it would be opposite,” said an investment banker with a foreign bank.
Corporate law firms contacted by Business Standard are of the opinion that FCCBs can be re-priced according to current market prices.
“This point has not been adequately clarified. The logical thing would be to interpret it in a way that the corporate gets the benefit of a lower conversion price,” said a partner at the law firm Majumdar & Co. In other words, the reset date rather than the original issue date should be considered.
“The intent seems to be to allow the adjustment to reflect the current market price. Although it is not 100 per cent clear, our interpretation is that the new conversion price would be linked to the reset date,” said a lawyer with Nishith Desai Associates.
