FCCB: luring those who eye cheap money from abroad

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: as the issue costs are lower. It is a less time-consuming option due to lower regulatory approvals which need to be procured. For example, there is no requirement of prior approval of the preliminary placement document before the issue of specified securities. Also, no pre-issue filing with Sebi is to be done. FCCB also has restrictions as far as end-use of money raised is concerned. Therefore, QIP may prove to be a more viable option for medium-sized companies to raise capital as they do not have global presence.

However, there is a cap on the funds that can be raised through QIP in a financial year and is linked to the net worth of the issuer company. There is no such restriction in case of FCCB subject to approvals. Hence, FCCB/GDR remains a viable option for raising funds on a large scale. The option of FCCB also depends upon factors like issuer company’s overseas branding and capex plans, YTM, forex risk, liquidity in the overseas market etc.

What are the cues domestic investors must take when a company issues an FCCB?

Companies go for FCCB issues with an intent of raising cheap money abroad. The interest payments on FCCB is much lower than that is prevailing in domestic market or on other loans or bonds. The need of companies to have a global presence or a capex plan abroad also lure them to this option. If the conversion happens, the company gains higher leverage as debt gets reduced and equity is enhanced upon conversion. However, this might be totally opposite if the share prices are not favourable and conversion does not happen. Such a situation could jeopardize the debt equity ratio of the company as the company might have to raise further debt to redeem the bonds and make interest payments. The dilution of ownership happens once the shares are converted. This reduces the earning per share (EPS).

Studies say that FCCBs work good in a bullish market, but not in a bear one? What is your opinion?