The reason behind the preference is financial institutions' insistence that the promoters of new projects must raise equity as a precondition to access the institutional funds. Unable to raise equity with no projects in sight, corporates are opting to float FCDs to be converted into equity after 18 months to two years. On their part, banks and institutions are ready to pick up the FCDs "selectively" as they ensure steady returns even when the project has not gone on stream.

Haldia Petrochemicals leads the pack. It is already in the market seeking to raise close to Rs 200 crore through a two-year convertible debenture offering a coupon of 16 per cent. The list of others ready to float FCDs over the next few weeks includes Noida Toll Bridge, Varun Shipping and South Asian Petrochemicals.

South Asian Petrochemical, being setup in Haldia in West Bengal, has been billed as the largest PET plant in the world. The promoters-the Dhanukas of Calcutta-are setting up the 100 per cent export oriented unit in collaboration with a German company. The capacity of the plant in 140 tonnes annually.

The company is planning to issue FCDs maturing in two years and carrying a coupon of about 14 per cent. It will privately place the instrument with banks and institutions.

"The company is in no position to raise equity capital for the greenfield project but the financial institutions, led by the Industrial Development Bank of India (IDBI) have refused to disburse funds... By floating the FCDs, the promoters will be able to fulfil the conditions laid down by the institutions. The FCD holders will also be able to get some return when the project is on its way to completion," a merchant banking source said.

Nodia Toll Bridge will enter the market with a combination of deep discount bonds and FCDs while Varun Shipping is planning a rights issueas well as FCDs.

"FCDs are making a comeback as financial institutions have tightened lending norms for greenfield projects by insisting that they (the promoters) must bring in equity before funds are lent to them.''

``Unlike in the early '90s when corporates used to float IPOs for greenfield projects, now investors will not touch an equity issue with no sign of the project.The FCD is the right solution," said a merchant banker. Sources said the FIs which have been hit hard by growing non-performing assets are refusing to lend funds unless the equity portion is tied up by the promoters. "But who will subscribe to any equity issue before the project has gone on stream?

What the promoters are now doing is to issue fully convertible debentures and then after a few years-whenever the project goes on stream-an equity issue will be made and the FCDs will be converted into equity," sources said. In this way the FI ensures that there is some return on their investments.

"We will selectively subscribe to theFCDs. If it is a viable project and the promoters are not able to raise equity, we will certainly help them out (by picking up FCDs)," said a senior executive of a term-lending institution.