FCCB issuers may be given buyback option

Promoters or issuers of foreign currency convertible bonds (FCCBs) may be allowed to buy back the bonds if they go in for prepayment.

Also, promoters are likely to be allowed to utilise the unused portion of the foreign currency-denominated borrowings parked overseas. This could also be utilised to meet the redemption pressure after the bonds mature.

Under the existing guidelines, prepayment of foreign currency debt up to $ 400 million is allowed with the permission of the Reserve Bank of India. But buyback of the bonds is not allowed. Utilisation of the unused portion of foreign currency borrowings for prepayment or payment of debt obligations is also not allowed.

The move, which is being considered by the government in consultation with RBI, will help reduce the pressure on outflow of foreign exchange.

By utilising the unused portion of the debt raised earlier, promoters will not have to worry about arranging foreign currency for prepayment or payment at a time when dollar funds are scarce globally and the foreign currency reserves of India are also waning, the sources said.

Such option could also be available to funds raised as external commercial borrowings, only if they are in the form of bonds.

FCCBs, mostly raised through bonds, have suffered sharp erosion in prices. Sources explained that buyback is a cheaper option as promoters will have to pay the full coupon (interest rate on the face value) and principal amount if they wait for the bonds to mature.

Some major Indian companies have already sought RBI’s permission to prepay their obligations towards FCCBs. The general aversion towards emerging market assets has widened the spread over such foreign currency denominated bonds issued by Indian companies, which has led to a fall in bond prices. (A spread is the premium over the interest rate benchmark, which in case of foreign currency borrowing is LIBOR or the London interbank offered rate.)

Foreign investors also do not see any opportunity to convert such bonds into equities since the prices of Indian shares have fallen sharply compared to the conversion price of the bonds into equity. “In such a scenario, the best option is to allow the promoters or the issuers of such bonds to buy it back. Besides, most Indian companies are left with unused funds parked overseas,” said a source close to the development.