Cos repay FCCB buyers, stay off equity conversion

Written by Pradip Kumar Dey | Mumbai | Updated: Nov 7 2011, 10:10am hrs
Many companies have chosen to repay their foreign currency convertible bond (FCCB) holders at the premiums promised rather than allow them to convert the bonds into equity shares. This shows that despite the slowdown, the major chunk of Indian corporates still do not find FCCB redemption pressures unbearable. They would rather repay investors than surrender their equity at throwaway prices.

Of the 24 companies whose bonds are ready for conversion during January-October, 15 have repaid their bond holders while the rest have either converted bonds to shares or chosen a mix of repayment and conversion. Companies that raised the money through FCCBs in 2005 and 2006 have come up for conversion now.

Shares of several FCCB issuers are trading 67-80% below the conversion price on the Bombay Stock Exchange.

Companies have chosen to repay the cheaper money from investors with high-interest loans to avoid investor fury and legal rows. Indian companies had raised cheap foreign currency debt with an option for bond holders to convert into shares at a fixed price or repay debt with a fixed interest rate.

In 2009, the Reserve Bank of India allowed Indian companies to raise foreign debt to buy back some of the bonds that were traded in foreign exchanges and later extended it to March 31, 2012.

Investors who owned bonds of Mahindra & Mahindra, Tata Motors, Ranbaxy Laboratories, Vardhman Textiles and Videocon Industries have either partially or fully converted to shares. Other companies have repaid money.

The principal of unconverted FCCBs have to be repaid which a few of these companies may not be in a position to do, raising the fear of default, says Ambareesh Baliga, COO, Way2Wealth Brokers.

Cloth-maker Vardhman Textiles, which raised $60 million on February 14, 2006 purchased $1 million from bond holders and failed to convert the rest into equity shares before the deadline on February 17, 2011, as its share price traded well below the conversion price of Rs 423.25. On Friday, Vardhman shares closed at Rs 215 on the BSE. Outstanding FCCBs of $59 million could not be converted into equity shares within the specified period, the company informed the BSE on February 18, 2011.

Some companies issued shares to bondholders after conversion. Videocon converted 24,250 FCCBs out of the total of 1.05 lakh in two tranches before the conversion date promised to investors.

It converted 10,350 FCCBs at Rs 448.59 apiece and later converted 13,900 FCCBs. On Friday, Videocon shares closed at 175.10 on BSE. The conversion price is far above the current price, says Vikas Khemani, president, institutional equities, Edelweiss Capital. It makes sense to go for redemption than conversion. Now, the companies will have to look for funding.

Reliance Communications, India's second largest mobile telephony by subscribers, paid to its FCCB investors Rs 2,250 crore ($500 million) before the conversion date even as its share price fell to Rs 83, well below the conversion price of Rs 480.68.

Wherever the discount to the conversion price is high in the given current market condition, the probability of conversion is low in the near future. said Ramanathan K, CIO, ING Investment Management.