FCCBs affected by liquidity management measures in India

The bull run witnessed by the Indian stock markets over the last few years saw several companies tapping finance by issuing foreign currency convertible bonds (FCCBs). News reports estimate such issuances at almost US$20 billion. Among the many victims of the current credit crisis are Indian companies that have such FCCBs outstanding on their balance sheets.

With the recent bloodbath on the stock markets, the stocks of many issuers of FCCBs are trading at values significantly below the contracted conversion price. The exercise of conversion options seems unlikely in this environment and the redemption of these FCCBs, therefore, seems imminent.

For several companies, the redemption amounts payable from these trades will result in a further strain on already stretched cash flows and profitability. For companies that do not have the necessary funds to meet their redemption liability, raising finances could be a challenge given the present liquidity situation of many financial institutions.

Karan Singh is a partner and Ameya Khandge is a counsel at Trilegal in Mumbai. Trilegal is a full-service law firm that advises on corporate and commercial law in India and provides commercially oriented legal advice in relation to all sectors of the economy. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 100 lawyers, some with experience at law firms in the US, the UK and Japan.