Time for FCCB buyback scheme extended

New date March '13 RBI tweaks norm to facilitate process as many firms face payment default

The Reserve Bank of India (RBI) today has extended the tenure for buyback of foreign currency convertible debentures (FCCBs) by Indian companies till March 2013.

It also revised the norms for pricing of buyback transaction. The buyback value of FCCBs “shall be at a minimum discount of five per cent on the accreted value,” RBI said. Earlier, the buyback pricing was linked to book value. The buyback value of FCCBs would be at a minimum discount of eight per cent on book value.

Upendra Kulkarni, executive director, Fortress Financial Services Ltd, said: “The change in reference point (to accreted value) will help to make the process realistic.”

RBI will now consider buyback proposals of companies under the approval route. According to a Standard & Poor’s report, the slump in stock markets across the world and the fall in the value of the rupee are hurting Indian companies that have FCCBs maturing in the rest of 2012. More than half of these companies would have to restructure the bonds to avoid a default on payment, S&P said. “A tepid global economy has slowed FCCB issuers’ revenue and profit growth, dragged down their stock prices, and left them less able to service debt,” said Standard & Poor’s credit analyst Vishal Kulkarni.

For some Indian companies, issuing FCCBs during the stock market boom of 2006-2008 seemed like a bright idea. But it’s now turning into a nightmare.

The bonds are usually dollar-denominated, and have a fixed maturity date and low interest rate (zero per cent in many cases). Investors have an option to convert the bonds on maturity into equity shares at a predetermined price. This strategy helped the companies get low-cost foreign currency loans for acquisitions abroad or expansion. Issuers and investors expected India’s stock market to continue to rise and the price of the companies’ stocks to exceed the conversion price when the bonds matured. At that point, bondholders could have converted their holdings to equity and the issuers wouldn’t have had to repay them in cash.

This all seemed to make sense until the 2008 financial crisis led to a recession and pummelled world stock markets. With India’s stock market still in a slump, investors don’t want to convert the $5 billion in FCCBs that will mature in the rest of 2012 into stock that’s worth 20-90 per cent less than the conversion price.

Instead, they want their money. The steep 30 per cent drop in the value of the rupee against the dollar over the past two years is exacerbating the problem. The result is many FCCB issuers might have trouble finding funds to repay bondholders — and those that can’t will face payment default.