Government May Simplify Norms On FCCB Conversion

One major issue that has daunted the Indian equity markets is Foreign Currency Convertible Bonds (FCCBs). In the recent past, we have seen many counters plunging on the bourses when the bonds near the conversion period. The reason behind this has been the additional liability coming onto the company if the current market price is lower than the conversion price.

Most of the lenders tend to avoid conversion if the prices are way below the conversion price. Once this is avoided, the companies need to repay the bond holders along with the interest cost. This puts an additional burden on their financials. With the impact of the depreciating rupee, the situation only worsens. to Bloomberg data, there are 47 companies with outstanding FCCBs worth USD 4.7 billion. What’s worse is that most of the debt is un-hedged. So, the ill effects could be fairly strong for the companies that have borrowed in USD and whose shares prices have plunged significantly below the conversion price.

Now, the government is carrying out a comprehensive review of rules governing FCCBs and depository receipts in order to align the rules with the New Companies Act and to cater to the needs of Indian companies and foreign investors.  The Finance Ministry has said that, “It has been decided to constitute a committee to review the scheme comprehensively, keeping in view the new company law and the recent legislations in the financial markets, the current state of the macro economy and the financial markets, the needs of the Indian companies and foreign investors and the need for simplification and legal clarity of the scheme”.

We, at Dalal Street Investment Journal, are of the opinion that new norms may be helpful for companies. We would not be surprised if the government provides some leeway in terms of an extended repayment schedule. Though not a big move, it would provide some solace to companies which are due for conversion in FY14. More clarity would emerge as and when the government announces measures. Till then, a prudent strategy for investors would be to avoid such stocks.