Rupee fall may make India firms’ foreign loans costlier by $5 bn

Rupee fall may make India firms’ foreign loans costlier by $5 bn

New Delhi: The falling value of rupee may make the foreign loans availed by the Indian companies this year costlier by an estimated over 25,000 crore (about $five billion), if the current currency valuations persist, experts have warned.

The corporates had been increasingly tapping overseas loans, mostly in the US dollar, till a few months ago to save costs arising out of higher interest rates and liquidity constraints within the country, but the subsequent fall in the rupee value has negated the benefits, experts believe.

A sharp fall of about 17% in the value of rupee -- from near 44-level against the US dollar at the start of 2011 to below 51-level currently -- has made the cost of repaying these foreign loans costlier by a similar margin.

For example, an Indian company would now need to pay an amount of about 5,134 crore (based on current rupee value of 51.34 per US dollar) towards the principal amount to a bondholder of $1 billion, while a similar loan amount would have been worth about 4,400 crore at the beginning of 2010, a banker said.

Adding to the woes of the companies, the shares of the companies having issued FCCBs have fallen sharply since the time of their issuance, thus making it unattractive for the bondholders to convert their loans into equity.

As per the estimates, FCCBs worth about $10 billion are due for redemption in the next 12-18 months and over 80% of these bonds might not be converted into shares, said an official with a private sector bank advising some companies on restructuring on their foreign loans.

The possibility of such a scenario increases the risk of loan default by their issuer companies, he added.

SMC Global Securities’ Strategist and Head of Research, Jagannadham Thunuguntla, said that the additional burden due to the rupee depreciation so far this year could be of 25,200 crore for the Indian companies on their ECBs worth about $30 billion raised this year.

Ashika Stock Broking’s Research Head (Equities) Paras Bothra said that the liabilities for the companies having raised these loans a year ago could be about 10 per cent and above on the principal amount, if the their loans mature in the current situation.

Even if the loans have not yet reached their maturity periods, the interest burden could take a toll on the companies, as a sharp depreciation in rupee value would lead to a significant increase in the interest outflows, Bothra added.

Many corporates tapped the ECB and FCCB routes due to lower interest rates in overseas markets, as against those prevailing in the Indian banking system, and expectations for rally in Indian stocks till a few months ago.

However, a sharp plunge in the stock market, coupled with falling rupee value, have made the situation difficult for them.

Last Friday, more than 300 companies saw their share prices hitting the lower circuits (lowest permissible limit for the day), while over 100 stocks dipped to record lows, primarily on concerns over defaults in ECB/FCCB redemptions.

The experts said that the share prices have also fallen on concerns that the companies having significant exposure to the foreign loans might also have to also book mark-to-market losses (the losses based on current value of their loans) in their quarterly profits.

The entities having raised such overseas loans this year include Reliance Industries, NTPC, Mundra Port and SEZ, Indian Oil, Bharat Aluminium, Air India, GAIL, Adani Power, JSW Steel, Aircel, Tata Tele, Idea Cellular, Suzlon, IDFC, REC, Indian Railway Finance Corp, M&M and BPCL, as per RBI data.

However, some of these companies might have redeemed these bonds.

In the month of September, more than 100 companies tapped overseas loans totalling over $2.36 billion including Mundra Port raising $100 million for its ports business, Gujarat State Petroleum Corporation raising $150 million for its new project, Essar Power ($100 million for its power plant) among others.