More than half of the outstanding foreign currency convertible bonds (FCCBs) issued by Indian companies, which are due for maturity by March 2013 are currently ruling significantly below their conversion prices. Due to this, they may not get converted into equity shares, said a report issued by rating agency CRISIL.
FCCBs worth around Rs 31,500 crore, issued by Indian corporates, are nearing their maturities by March 2013. Of these, FCCBs worth Rs 22,000-24,000 crore may not get converted into equity shares, as the current stock prices of issuing companies are significantly below their conversion prices, said the CRISIL report.
Companies have the option to either redeem FCCBs or reset their conversion price downwards to make conversion attractive.
An analysis by CRISIL Research indicates that bonds worth Rs 20,000-22,000 crore could be either redeemed or see a downward revision in their conversion price, based on the analysis of the capital structure, promoter holding, parent company support, profitability and cash flows.
Interest burden
Refinancing FCCBs with fresh debt will increase the interest burden of companies as most of the FCCBs carry very low or zero coupon rate. Companies that revise their conversion price downwards could witness a sharp dilution in their equity, which will lead to further decline in their share prices, said the report.
On the other hand, companies with outstanding FCCBs worth Rs 1,500-2,000 crore, which have a weak financial performance and low promoter holding, will find it tough to meet their repayment obligations.
According to the report, a large number of FCCBs were issued during 2006 to 2008 period when the stock markets were buoyant and the conversion prices were set at a steep premium to the then prevailing prices. Although the stock markets have largely recovered, after the decline seen post the global financial crisis in 2008, the share prices of many of these companies with outstanding FCCBs have continued to remain depressed.