Firms have to account for FCCB premium each year

Written by Arun S | Sunny Verma | New Delhi, Jun 29 | Updated: Jun 30 2008, 06:08am hrs
Companies that have raised debt by issuing foreign currency convertible bonds (FCCBs) would have to provide for the redemption premium in their books of accounts over the life of the instrument, according to the apex accounting regulator, Institute of Chartered Accountants of India (ICAI).

The move could dent the profitability of many of the over 130 Indian companies that have raised more than $20 billion (Rs 80,000 crore) in FCCBs over the last five years. Most companies do not provide for the redemption premium on these bonds, arguing that these can always be converted into equity, thereby underreporting their true indebtedness and inflating profitability.

ICAI president Ved Jain told FE: Law is very clear. If a company has issued FCCBs, with an undertaking that they can be either redeemed with a premium or converted into shares at a later date, then the company has to account for the premium now because it is a liability.

However, most Indian companies have not accounted for redemption premium payable if the bond is not converted, which they should ideally be writing off proportionately every year.

ICAI says that auditors will have to make adequate disclosures in case a company is not writing off the redemption premium. So, the onus of fulfilling the accounting norms would lie with the auditors. Companies have also taken cover in the fact that accounting standard 30 (AS-30) that requires them to account for all future liabilitiesbecomes mandatory only from April 2011.

However, Jain says that in the absence of AS 30, another accounting standard AS 1 mandates companies to write off redemption premium on any kind of domestic or foreign convertible bond.

Companies have not been providing for redemption premium because there is always the option of converting the bond into equity, says Navin Vohra, partner (transaction advisory services), Ernst & Young.

But with the rumbling in the stock market making the conversion options less attractive, the issue of accounting the premium portion becomes more troublesome. The first batch of these FCCBs, which corporate India raised at a very high premium on the back of the big bull-run, will start coming up for redemption by October 2009.

The accounting regulators stand on the issue could be a major blow to these companies, which are yet to figure out how to service their huge debt.