India Inc once again exposed to the risk of FCCBs

The perils of foreign currency convertible bonds (FCCBs) have come to haunt India Inc once again. Readers would do well to recall that these bonds had become a fad in 2006 when buoyancy in the stock markets and the lure of zero coupon rates had led to many corporates rushing to cash in on these bonds. Since then, the risks that these bonds pose have come to the fore time and again. And they are once again set to hurt the fortunes of some Indian companies. FCCBs get converted into equity shares at a predetermined price when the bonds are issued. If the prevalent share price is lower than the predetermined price then the chances of conversion get reduced and the pressure of redemption on the company mounts. This is what is happening now. Indian stock markets have been hammered in recent times as a result of which the stock prices of around 28 companies with FCCBs are lower than the agreed price. These FCCBs amount to Rs 245 bn. 25 of these 28 are most likely to face rede mption in the next financial year, which will result in an outflow of as much as Rs 330 bn. This means that they will have to ensure that there are sufficient funds at their disposal to redeem these bonds. If not, borrowing more to fund these redemptions will only increase interest costs and dampen profits. What has further made matters worse is the sharp depreciation of the rupee to a level of 52/US$ which has exacerbated the forex losses on their books and hurt profitability. No wonder then that these are trying times for India Inc. indeed!