India Inc has started preparing the ground for a fresh round of fund raising through a range of financial instruments, including foreign currency convertible bonds.
Over 15 listed companies have started the process of enabling fresh fund raising in the calendar year.
Approvals have been obtained from shareholders to raise funds through follow-on public offers, QIPs, ADRs, GDRs, FCCBs and the likes. Among these, the FCCB route appears to be the most sought after.
“Companies require growth capital and that's why they are planning to raise money through FCCBs,” said Mr Gopal Agarwal, Deputy CIO and Head Equity, Mirae Asset Global Investments (India).
Indian companies raised $20 billion via FCCBs between 2005 and 2007, he said.
FCCB is a convertible bond issued in a currency different from the issuer's domestic currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but offer the option to convert the bond into stock.
“This is a make-hay-while-sun-shines kind of approach,” said Mr Arun Kejriwal, founder, KRIS Research.
Ms Manish Laddha, Head- Research, Ideas 1st Research, said: “It makes sense to raise money through the FCCB route as companies are still able to save two to three percentage points in borrowing costs even after hedging and with tight liquidity conditions. It is a lucrative option.”
Crisis blow
Experts said that Indian companies usually raise between $30 million and $100 million in FCCBs, and banks and financial institutions readily subscribe to such offerings. The reason: Banks and FIs negotiate with issuers for the hedging business and make a killing by selling the converted equity at bourses.
This is why the FCCB route is still preferred by most although many have found it difficult recently to honour their redemption commitments, as they never expected the credit crisis in the first place.
“Their motive was simple: they wanted to enlarge their equity base through FCCB conversion without significant difference in their financial ratios such as EPS and P/E,” said an equity fund manager of a mutual fund.
With market prices not moving the way companies wished, due to the credit crisis, they were left with having to redeem the instruments.
With market prices not moving the way companies wanted it due to the credit crisis, the bondholders had to redeem the instruments.
As a result, an undesirable trend that has started is that promoters now price FCCBs at a paltry 10-20 per cent over the current market price, a return (for the buyer) that is far lower than what a pure debt instrument of the same tenor would yield.
“This means that the promoter does not value his company's share price. He just treats it as a piece of paper to be used for raising money,” said the fund manager.