Embedded redemption premium and 36 per cent depreciation in five years will realise forex losses worth Rs 6,720 crore
The rupee’s depreciation of 9.36 per cent against the dollar in the first quarter of the current financial year is expected to increase India Inc’s mark-to-market (MTM) losses on foreign currency loans by over Rs 11,000 crore in April-June.
Adding to the MTM losses, Rs 17,810-crore foreign currency convertible bonds are outstanding for redemptions in 2012-13. Embedded redemption premium and 36 per cent depreciation during the past five years will realise forex losses worth Rs 6,720 crore in 2013, according to a study by Edelweiss Research.
In the year ended March 2012, when the rupee had depreciated from 44.59 to 50.88, a fall of 14.11 per cent, 162 listed companies had made a provision of Rs 14,976 crore in their profit and loss (P&L) accounts for losses on foreign currency fluctuations.
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Forex losses in 2011-12 (Rs crore)
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“Payment towards interest payable during the year and any repayment of principal will have to be provided to P&L during the year,” said Venkatraman Vishwanath, partner, accounting advisory services at KPMG India.
The real impact of the rupee’s depreciation could be much higher if all companies provide for MTM losses on long-term external commercial borrowings (ECBs) and foreign currency bonds.
The balance sheet data culled from Capitaline-Plus revealed that 270 listed companies have had foreign currency loans worth Rs 300,000 crore, and a 9.35 per cent depreciation in the rupee alone could increase the MTM provisioning by around 30,000 crore.
|Options available with companies on accounting of forex exposure|
However, pursuant to the Companies (Accounting Standards) Amendment Rules, dated December 29, 2011, the companies are adjusting foreign exchange losses on long-term foreign currency loans in balance sheet till the applicable loan period.
The government has extended the applicability of the rules to up to March 31, 2020. Accordingly, the companies are exercising the option and adjusting exchange gain/loss to the balance sheet.
For example, Reliance Communications Ltd, part of the Anil Ambani-led Reliance Group, for the year ended on March 2012, added Rs 1,749 crore of exchange differences on long-term borrowing to the cost of capitalised assets. Further, the company has accumulated foreign currency variation of Rs 470 crore on other long-term foreign currency monetary items, which are to be amortised over balance period of loans.
Though companies can amortise the losses on loans due to currency fluctuations over the balance period of loans, the realised interest on foreign currency borrowing has to be accounted in the P&L account. The Mukesh Ambani-led Reliance Industries Ltd has provided Rs 683 crore as finance cost and applicable loss on foreign currency transactions and translation.
Going forward, the rupee is likely to appreciate from the current levels, which could bring some relief to the companies having forex exposure.
According to Goldman Sachs, India’s current account deficit seems to have peaked. The banking giant’s global economic research report on India’s capital account says: “We remain positive on Indian rupee on medium-term bases and for the next three months, Indian rupee may trade around Rs 53 a dollar.”
Japan’s Nomura said in its report Indian rupee would appreciate from here and by December the rupee could reach 54.6 per dollar.
It is also s fact that borrowing money from overseas market is no more cheaper. Naresh Takkar, managing director of rating agency ICRA, said: “With volatility in the currency markets and increase in credit spreads due to risk averseness, the incremental cost of such funds on a fully hedged basis are comparable or actually higher than borrowing from domestic market.”
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