Experts believe that the Reserve Bank of India’s decision to increase the limit for premature buy-back of foreign currency convertible bonds (FCCBs), using Indian currency, to $100 million from $50 million earlier would have limited impact.
According to them, the biggest hindrance is the unavailability of sellers and a scarcity of funds with Indian companies. An analyst has estimated that around 185 companies issued FCCBs worth $20 billion from 2004-05 to 2007-08. Out of this, FCCBs worth about $13 billion are still outstanding, while the balance got converted into equity. A large chunk of these FCCBs are due for maturity in 2012.
RBI allowed the premature buy-back of FCCBs in December as the stocks of these companies were trading much lower than the price set for these bonds to be converted into equity. The companies would have to repay the amount at the time of maturity with the redemption premium if it is not converted into equity.
These bonds are trading below their par value even now. But sellers are not ready to sell and the companies are also short of funds to buy back the bonds.
“FCCBs are an illiquid market; it is hard to find a seller and harder to convince them to sell,” said Sanjay Sakhuja, chief executive officer of Ambit Corporate Finance, a Mumbai-based investment banking firm.
The companies can also buy back these bonds using their foreign currency reserves, or through fresh borrowing in foreign currency for which there is no limit. But raising funds in foreign markets has become very difficult after the credit crunch.
“It will benefit only those who have enough cash from internal accruals; and there are not many companies who have that,” said Sridhar Chandrasekhar, head of research at credit rating agency Crisil. “The impact of this (RBI’s change) is going to be very limited,” he said
Reliance Communications repurchased FCCBs worth $40 million at a discount of about 52 per cent. Now it plans to buy back the outstanding $950 million FCCBs.
Most of the companies have, so far, not been able to utilise the $50-million limit. Noida-based Jubilant Organosys is the only company which has utilised the $50-million ceiling stipulated by the RBI. It has, in fact, bought back FCCBs for a total of $59.4 million, which means it has also utilised its ECB resources.
According to Crisil, companies are under the risk of paying a hefty premium of Rs 40,800 crore – about 17 per cent of their net worth, if these bonds are not converted into equity. This would also bring down their profit by 11 per cent as they will have to raise an equivalent amount as debt.
