India Inc looks at China as FCCB crisis looms large

After cheap toys, consumer goods and other manufactured products, cheaper loans could be the next major Chinese import into India, and the credit may go to a potential FCCB crisis looming large over Indian corporates.

In the next one and half years, close to 100 Indian companies need to repay an estimated Rs 33,000 crore (over $7 billion) of loans they had raised by issuing FCCBs (Foreign Currency Convertible Bonds) and they are scurrying around for cheaper resources to meet these repayment obligations.

The Chinese banks may emerge as the big winners as a host of Indian companies have begun exploring possibility of getting cheaper loans from China to meet their other costlier foreign borrowing obligations and ward off a red mark on their creditworthiness, a senior banker said.

The FCCBs have been a widely preferred loan instrument for Indian companies borrowing money from overseas markets, especially during 2006 and 2008 when the stock markets were on a high and allowed the companies to easily tie-up loans which were low-cost, but had equity as a convertible.

As the name suggests, the lenders can convert these bonds into equity if the debt is not repaid upon maturity, which is generally five years or more.

The companies which issued FCCBs in 2007-2008 include 3i Infotech, Subex, Sterling Biotech, Country Club, JSW Steel, Tata Motors, Rolta, Educomp, Jaiprakash Associates, Tata Steel, Great Offshore, Suzlon, Firstsource, Pidilite, GTL Infra, Bartronics, Kinetic Engineering, Aban Offshore, Moser Baer and Hotel Leelaventure.

However, share prices have fallen sharply since 2008 for many of the companies that had issued FCCBs to raise loans and their stocks are currently trading way below the conversion price fixed at that time.

This has put the borrowers and also the lenders in a spot, as the companies cannot risk defaulting on the FCCB redemption payment and the bondholders would not convert the bonds into shares at a price way above the current levels.

There is another option that allows the companies to reset the conversion price, but this generally leads to a decline in the company's share price as it is seen as an inability on the part of the borrower to meet its payment obligations.

Still, a lot of companies have recently reset their FCCB conversion prices at the cost of their share prices and these include Suzlon, Spicejet and Gitanjali Gems.

A vast majority of the companies are, however, looking for other resources to redeem their FCCBs.

With loans having become expensive in India and most of the Western markets already having been tapped, the companies are approaching investment banks to explore the possibility of tying up funds from Chinese banks, another banker said.