The panicky times in the Indian capital markets have resulted in subdued fund-raising through equity instruments, such as IPOs (initial public offerings), FPOs (follow-on public offers), rights issues and QIPs (qualified institutional placements). To compensate the subdued nature of equity instruments, Indian companies have flocked towards the debt instrument of ECBs (External Commercial Borrowings).
During the calendar year 2011, companies have raised about $30 billion through ECBs. That?s significantly higher than calendar year 2010 when the fund raising through ECBs was at $22 billion, a 33% more than the fund raising in 2010, Jagannadham Thunugunta, strategist and head of research, SMC Global Securities Limited.
Even in terms of number of ECB issues, the calendar year 2011 has seen 810 issues, which are significantly higher than the calendar year 2010, when there were only 672 ECB issues. Many Indian corporates have accessed ECBs as the interest rates on ECBs is about 5% to 6% cheaper than the interest rates on rupee denominated domestic loans. However, rupee depreciation by 21% during the calendar year 2011 has made this ECB route unattractive, as Indian borrowers will need to create huge provisions for mark-to-market forex losses.
According to him, one more instrument which has lost sheen during the calendar year was FCCBs (Foreign Currency Convertible Bonds). During the calendar year 2011, the total fund raising through FCCBs was $0.84 billion or $840 million. This is lower than the calendar year 2010, when the fund raising through FCCBs was $1.55 billion. Hence, the fall through FCCBs instrument is lower by 46%.
Even in terms of number of FCCBs, there is a decline in the calendar year 2011. The number of FCCB issues has fallen to 10 during the calendar year 2011, in comparison to 13 in the calendar year 2010. This decline in FCCBs is largely due to the fact that FCCBs are often seen as proxy equity instruments.
With the ongoing panic in equity markets, the spillover had affect on FCCBs as well. Further, as several FCCB issuances happened in 2006 and 2007 are clearly created severe panic on the Indian corporates, as their share prices trading below the conversion prices. Rupee weakness is an additional pressure point for FCCBs as well. This has made Indian corporates shy away from this instrument of FCCBs, he pointed out.
FCCBs are hybrid instruments with combined characteristics of equity and debt. In good times, FCCBs give the combined advantages of equity and debt. But, in bad times, FCCBs give the combined disadvantages of equity and debt, he said further.
