Nod For Fcds With $ Denominated Interest

The Union finance ministry has given its in-principle nod to the industry ministry's recommendation that companies be allowed to raise funds overseas through a new hybrid financial instrument comprising primarily of rupee-denominated fully convertible debentures (FCDs) where the interest rate will be dollar denominated.

According to highly placed sources, the finance ministry's endorsement has, however, come with the condition that the Reserve Bank of India must approve such a financial instrument before it can be formally cleared by the government.

The move has come in the wake of two applications submitted to the Foreign Investment Promotion Board (FIPB) by two sick companies -- Neycer India Ltd and, its group company, Stiles India Ltd -- both of which have been referred to the Board for Industrial and Financial Reconstruc-tion (BIFR) with huge accumulated losses and debt liabilities.

 

The industry ministry had recommended these proposals in view of the fact that, although the two companies need a large amount of funds to effect a turnaround, the traditional debt and public equity routes are not available to them.

The two applications have been pending with the FIPB for nearly two months pending a final clarification from the finance ministry. Neycer and Stiles, two major manufacturers of ceramic wares, had earlier obtained permission from Department of Economic Affairs to issue 10.5 per cent rupee denominated 10-year FCDs in which the interest rate was rupee denominated.

Thereafter, these companies approached the FIPB with a request that they be allowed to go in for interest rates that would be specified in US dollar term.

They also sought permission to convert these FCDs into equity at a price determined on the date of approval while conforming to the pricing formula prescribed by the Securities & Exchange Board of India (Sebi).

According to Neycer's proposal, the principal part of the FCD is to be mandatorily converted into equity at the agreed price of Rs 18 per share within 10 years.

This is at a 50 per cent premium over the prevailing market price of Rs 12, and is also much above the Sebi dictated price.

Projections show that the conversion price would be at a premium even after taking into consideration the net present value of the interest on the debenture. Hence, according to the industry ministry, this hybrid proposal will be better than an equity issue priced at the Sebi formula, or even a GDR issue which follows the current market price.

The exchange rate at which the principal is proposed to be converted to equity would be frozen at the rate prevailing on the date on which the funds under the FCD floatation are received.

Thus, according to the proposal, the proposed FCD would not carry any obligation to repay the principal amount.

The industry ministry argues that the instrument so devised will score over a straight forward external commercial borrowing (ECB) in as much as it will not carry any exchange rate risk and in the final analysis not contribute to the country's external debt burden.The move has come in the wake of two applications submitted to the Foreign Investment Promotion Board by two sick companies Neycer India and its group company Stiles India