Indian companies that issued foreign currency convertible bonds (FCCB) before 27 November 2008 have been given some leeway in resetting their conversion price.
The minimum conversion price allowed for these firms earlier was the higher of the six months’ average price or the last two weeks’ average price. Now, these companies can use the last two weeks’ average price as the minimum conversion price.
Companies for whom the six months’ average price was higher at the time of FCCB issuance will benefit, as they can now reset their conversion price at a lower level. But the benefits from this aren’t likely to be far-reaching. The majority of FCCB issues happened in a rising market between 2003 and 2007, where the last two week’s price was normally higher than the six months’ average price.
Having said that, there are certainly some companies for whom the six months’ price was indeed higher than the two-week price. After all, the government’s notification allowing the price revision came after it was approached by such companies. For these firms, the price revision window offers another alternative to manage their balance sheet.
Many Indian companies are staring at the prospects of ending up with huge debt because their FCCB conversion price is far higher than the current market price. Of course, things have improved considerably in the past year, thanks to the rally in equities.
Besides, the central bank had also allowed companies to buy back bonds at a discount. Some companies, such as Firstsource Solutions Ltd, used this alternative well, but by and large, the buyback option hasn’t been used well by Indian companies. The price revision window, similarly, can be expected to benefit a few companies.
Take, for instance, Bharat Forge Ltd, some of whose FCCB bonds are due this April. In April 2005, when it had issued the bonds, the six-month average price was considerably lower than the two-week average. According to a banker, firms would also have to get bond holders to agree to a lower conversion price. While this should be easy for fundamentally sound companies, it would be especially difficult for companies whose fundamentals aren’t strong and whose are shares are illiquid. This would make an exit extremely difficult for investors.
Needless to say, given the predicament many Indian firms are facing owing to their large FCCB dues, the fact that the price revision window benefits some firms is welcome news.
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