FCCB route takes backseat

Overseas borrowings through foreign currency convertible bonds (FCCBs) by Indian companies took a backseat in 2006-07. Sixty nine domestic firms raised $5.31 billion this year compared with $5.71 billion in 2005-06.

The decline is due to the lukewarm response of overseas investors as almost 80 per cent non-Sensex stocks posted over 50 per cent negative returns compared to their May 10 levels.

The FCCBs issued in 2005-06 to overseas investors at hefty premiums are trading at huge discounts but also the promoters are compelled to reset the conversion price.

The Securities & Exchange board of India (Sebi) discourages listed companies issuing equity abroad while permitting them to raise funds through qualified institutional placements (QIPs). As many as 21 companies took advantage of that and mopped up $1 billion from foreign institutional investors (FIIs), financial institutions and mutual funds through the QIP route.

Although 50-odd companies have made plans to raise a combined $2 billion through the FCCB route, they are waiting for the stock markets to revive so the issues can get attractive premiums in conversion.

With the rise in interest rates internationally, the yield to maturity on FCCBs has increased to 8-9 per cent from 3-5 per cent a year ago.

Zicom Securities, which has proposed to raise $35 million through FCCBs, is willing to wait for a while.

The promoters said they would go for fund expansion through internal accrual and consider an FCCB issue later.

Also, other small and medium companies are planning to delay their FCCB issues.

The FCCB data according to the announcements by companies to the Bombay Stock Exchange and National Stock Exchange show that they plan to use FCCB proceeds for modernisation of existing facilities, new projects and import of capital goods. However, there have been instances of companies raising money overseas for acquisitions. For instance, Jubilant Organosys ($200 million), Amtek Auto ($250 million) and Subex Azure ($180 million) mobilised funds to finance overseas acquisitions as well as rupee expenditure.

Reliance Communication raised $1 billion through FCCBs to part-finance its $2.5 billion plan to expand coverage to 15,000-20,000 towns.

McNally Bharat Engineering raised $7 million. A greater part of the ECB borrowings "" 63 per cent "" was used as project finance and to modernise capacities while 20 per cent was used to import capital goods.

Among the other big FCCB borrowers, Adani Enterprises and Reliance Natural Resources raised $250 million each, Jubilant Organosys and Mahindra & Mahindra $200 million each and Aurobindo Pharma raised $150 million.