Lack of sellers thwarts India Inc's FCCB buyback bid

Indian corporate houses are way behind the $50-million ceiling set by the Reserve Bank of India (RBI) for them to repurchase their foreign currency convertible bonds (FCCB) through internal accruals.

Investment banking experts say that finding a seller at the right price is a challenge before companies planning to repurchase their bonds.

“FCCB is not a highly liquid market,” said Sanjay Bhandarkar, Managing Director, N M Rothschild & Sons (India), a global investment banking firm. “Supply of people willing to sell the convertibles at the current low prices is less,” he said.

According to the Bombay Stock Exchange (BSE) data, only five companies have so far exercised the repurchase option since RBI approved such buybacks in December 2008. Mobile service provider Reliance Communications has re-purchased the maximum $35 million worth of FCCBs in two trenches. Delhi-based pharmaceutical company Jubilant Organosys has so far purchased the second-largest $11.1 million worth of such bonds. Besides, Radico Khaitan, Moser Baer and Mahindra & Mahindra have bought back $10 million, $4 million and $3.5 million worth of FCCBs respectively.

“Any buyback of high amounts would push the bond price, making the repurchase costlier,” said Sanjay Bansal, Managing Director of Ambit Corporate Finance.

Companies’ requirement of cash for other business purposes in a period of economic slowdown could also pose a challenge to their high-value buyback ambition.

FCCBs are usually issued to banks, hedge funds or covert investors. They eventually resell it to other such buyers. Tracing a willing seller and negotiating for the right price is the challenge.

According to BSE announcements, there are 13 companies that have received the approval from their respective boards to buy back their convertible bonds. They are now in the process of searching a seller and negotiating the price. The apex bank has kept the window for the repurchase open till March 31.

According to an estimate, over 200 Indian firms have taken this route in around three years to raise funds. Companies expected bond-holders to convert them into equity. But with the downturn in the global equity market, these bonds are now priced much higher than a company’s stock price.

If not converted, companies would have to repay the debt at the time of maturity, which would increase the financial burden of the cash-strapped firms. This is the reason corporate houses want to buy their bonds back.