RBI allows refinance for FCCB redemptions

Amid difficulties faced by Indian companies to repay loans taken under Foreign Currency Convertible Bonds (FCCBs), the RBI today allowed refinancing for its redemption by allowing firms to raise fresh overseas borrowing under the automatic route.

RBI has decided to allow the Indian companies to refinance or restructure the outstanding FCCBs issued by them.

"Indian companies are permitted to raise fresh External Commercial Borrowings (ECB)/FCCB as per the extant ECB guidelines under the automatic route to refinance their outstanding FCCBs," it said in a notification.

It, however, said the amount of fresh ECB/FCCB should not exceed the outstanding redemption value at maturity of the outstanding FCCBs.

"The fresh ECB/FCCB shall not be raised six months prior to the maturity date of the outstanding FCCBs," RBI said, adding that the purpose for raising the loans have to clearly mentioned while obtaining the registration number from the central bank.

The notification further said: "ECB/FCCB beyond USD 500 million for the purpose of redemption of the existing FCCB will be considered under the approval route... ECB/FCCB availed of for the purpose of refinancing the existing outstanding FCCB will be reckoned as part of the limit of USD 500 million available under the automatic route as per the extant norms."

The latest notification comes after the RBI had raised serious concern about FCCBs of Indian firms.

As per an estimate, FCCBs worth about Rs 31,500 crore, issued during the 2006-08 bull run, are coming up for redemption by March, 2013.

"During the period from 2005 to 2008, large amounts were raised through FCCBs by many Indian companies with elevated conversion premia. Most of them are nearing maturity by March, 2013. Estimates show that a very large portion of these FCCBs may not get converted into equity," RBI had said in its Financial Stability Report June, 2011.

"... Thus requiring their refinancing at much higher interest rates prevalent today," it had said.

But shares of many of these companies, accounting for more than half of the outstanding FCCBs, are trading at a discount of more than 50% to their January, 2008 prices, it said.

The apex bank had further added that greater access of domestic corporates to external commercial borrowing (ECBs) has resulted in increased currency mismatches.

Only last week, the apex bank had extended the time limit for buyback of FCCBs issued by companies by nine months to March 31, 2012.