Market crash: Crisil warns of Rs 24,000-cr FCCB redemption crisis

Leading research firm Crisil has warned that the continuing fall in the equity markets will put tremendous pressure on India Inc to redeem their FCCBs worth around Rs 24,000 crore.

"Around Rs 22,000-24,000 crore worth of foreign currency convertible bonds (FCCBs) are unlikely to get converted to equity shares out of the Rs 31,500 crore worth instruments issued by domestic companies, as the present stock prices of these issuing companies are significantly below their conversion prices. These are nearing their maturities by March 2013," Crisil Research said in a note today.

Over 80% of the Rs 31,500-crore FCCBs, which work out to be around Rs 24,000 crore, issued by the S&P CNX 500 and BSE 500 firms are trailing below their conversion prices (as on May 3, 2011), possibly resulting in investors opting for redemption of their bonds rather than converting them into equities, it warned.

A large number of FCCBs were issued between 2006 and 2008, when the markets were buoyant, and were issued with steep conversion premium to the then stock prices. Although stock markets have largely recovered since the global financial crisis in 2008, share prices of many of these companies with outstanding FCCBs still remain depressed.

"The Nifty, (which was at 5,565 on May 3, 2011) is only down close to 10% from its highs of 6,287 (on January 8, 2008). However, share prices of many these companies (comprising 57% of outstanding FCCBs due for redemption by 2012-13) are still trailing at a discount of over 50% to their market price of January 8, 2008," observed Crisil Research Industry & Customised Research Head Prasad Koparkar.