Companies go easy on FCCBs for now

Market mayhem may lead to drop in conversion premiums.

The recent volatility in the equity market and the fall in BSE Sensex has had a ripple effect on the issue of foreign currency convertible bonds (FCCBs) from India.

According to investment bankers, Indian companies may no longer enjoy the run of high conversion premiums. Some firms have even delayed the issues they had planned earlier.

Several Indian FCCB issues in 2005 and in the first four months of 2006 were aggressively priced, with conversion premiums as high as 50-70 per cent. The conversion premium in FCCB issues is normally in the range of 20-30 per cent.

"The (overseas) investors have in their minds the overheating of the Indian equity market. Because of this, there is a bit of conservative approach right now," said Ravindra Kumar, country head (India), wholesale banking, ING Vysya Bank.

Indian companies would now be less aggressive in fixing the conversion premiums, said another banker. A lower conversion premium means a company going in for an FCCB issue now would have to issue more shares for raising a given amount of funds than, may be, till a month back.

Companies planning to raise funds through convertibles are therefore putting a temporary pause on FCCB issuance, as they wait for the markets to stabilise in the hope of better valuations.

"Larsen & Toubro, Tata Steel and several other companies which were getting ready to issue FCCBs would now be reviewing their plans," said an investment banker with a foreign bank.

The FCCB market has slackened since the Indian equity market entered a phase of sharp correction. The first quarter of 2006 had seen the highest ever amount of $2.60 billion being raised through issue of FCCBs. The previous highest was $1.44 billion in the third quarter of 2005.

In 2005, 13 FCCB issues from India had conversion premiums of 50 per cent or more, while the figure was seven for the first four months of 2006.