Unhedged FCCBs under RBI lens

The Reserve Bank of India (RBI) has raised concerns over companies keeping unhedged their foreign currency exposures accrued from the issue of Foreign Currency Convertible Bonds (FCCBs).

The central bank's worries are rooted in the fact that share prices of most of the companies, which issued FCCBs, fell sharply from their May rate, and, as a result, the funds raised are expected to remain as debt in records and may not be converted into an equity.

Market sources said the RBI had asked banks to furnish the monthly data on the unhedged positions of the companies, which had raised funds through FCCBs and external commercial borrowing instruments.

Statistics showed that Indian companies had raised over $9 billion through FCCB issues since January 2004 and over $7 billion since January 2005.

Meanwhile, banking sources said most of the companies had not taken forward the cover for funds raised through FCCB issues. This, they said, posed a serious exchange rate risk amid an uncertain rupee outlook.

A company hedged itself against the foreign currency risk by taking forward the cover by paying a premium in rupees. The spot rupee has been depreciating since the beginning of the current financial year.

It has fallen from Rs 44.61 per dollar in the beginning of April to Rs 46.70 per dollar now. Shares proposed for FCCB issue conversion are becoming dearer with the premium rising between 25 per cent and 200 per cent.

Most of the FCCB issues had set the conversion price at around 30 per cent premium to the price of the underlying shares prevailing then.

The upside in the equity market is range-bound and, therefore, does not provide any incentive to investors in FCCBs while converting into equity. So, the entire outstanding stock of FCCBs remains as a foreign currency debt.

Hoping the equity market to remain buoyant, many companies, including small and medium sector units, raised FCCBs in the last financial year. Many investors exercised the convertibility option and swapped the debt into equity when the capital market was booming.

According to market dealers, most of the companies believed that the rupee might appreciate in future and there was no point in paying a premium since rupee interest rates have also firmed up.

To avoid building up of the open foreign currency position, banks are insisting on their clients for a cover on their foreign currency loans even before the sanction is granted. Even with an uncertain outlook on the rupee, most of the companies prefer to keep an open position that pay a premium.