FCCBs: Improving options for redemptions

In a move welcomed by much of corporate India, the Reserve Bank of India (RBI) is to consider applications for refinancing of foreign currency convertible bonds (FCCBs) under the automatic route. The RBI’s AP (DIR series) circular No.1 of 4 July, which announced the move, states this is “to provide a window to facilitate refinancing of FCCBs by the Indian companies who may be facing difficulty in meeting the redemption obligations”.

A popular instrument

FCCBs provide benefits for both issuers and bond-holders. Issuers see FCCBs as low cost debt with a minimal coupon value as compared to other debt instruments. Holders of FCCBs value them for their convertibility into equity, guaranteed returns and also for their redemption option in case conversion into equity is not desirable. Consequently, many Indian companies raised capital through FCCBs during the bull-run period of 2006-2008.

However, due to the global slowdown and declining stock markets, it is unlikely that many FCCB holders will want to convert their FCCBs into equity shares on account of the low market value of the shares, which in some cases would have dipped below the FCCB’s conversion price. Several FCCBs issued during 2006-2008 will soon be up for redemption. But to do so, Indian companies may need to pay hefty amounts and may need to raise funds if they do not have adequate reserves.

Ameya Khandge (Ameya.Khandge@trilegal.com) is a partner at Trilegal in Mumbai where Emily Ray is a senior associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 140 lawyers.