Dollar Bonds
The investor in the bonds further stand to gain only if the dollar/rupee exchange rate is over the rate mutually agreed earlier. That is, in nominal rupee terms, the investor gets more rupees for the (fixed) dollars he has received as interest.
Prime investors in such dollar interest denominated bonds could perhaps be the FIIs who need to make periodical dollar repatriation. They would essentially be taking a rupee-based loan exposure whereas the returns would be denominated in dollars thereby avoiding any exchange risk.
As a spin off, the proposal could lead to a market in forward quotes of beyond one year as companies raising loans seek to lock in their exchange rate. Per contra, there would be companies with long term forex inflows that would seek to hedge their positions.
However, the stipulation that the exchange control department of RBI will have to approve each and every transaction could turn out to be a dampener.
To start off, the union finance ministry has apparently given an in-principle nod to Neycer India and its group company, Stiles India, to issue FCD's where the interest rates would be specified in dollar terms. The proposed instrument will be a ten year paper with a conversion price of Rs 18 which is 50 per cent higher than the current price of Rs 12. The interest rate has not been fixed so far. Incidentally both these companies have been referred to the Board for Industrial and Financial Reconstruction (BIFR) with huge accumulated losses and debt liabilities. The choice of sick companies is suspect. An FII or even an overseas investor may not be inclined to invest in companies where even local investors fear to tread.
Perhaps there could be some activity in the market for sick companies once venture capital funds set base here. Such funds may find it lucrative to arrive at pre-determined rate (the rate of conversion for FCDs), at which they would get eventual control over the company. Once that step is accomplished, investors could either sell the company or realise their investment through asset stripping.