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The brighter side of FCCBs - Views on News from Equitymaster
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  • Apr 9, 2009

    The brighter side of FCCBs

    FCCB buyback - A profitable option for cos.
    Foreign currency convertible bonds or FCCBs have emerged as perfect case of market anomaly - turning out to be a boon for some Indian companies while at the same time being a bane for others. FCCBs have displayed how things can completely reverse in a span of few months. When FCCBs were first issued by Indian companies way back in 2003, the move was greeted with much enthusiasm. This was a way to garner cheap capital to expand businesses. As for the investors/bondholders, this provided a fast route to participate in the India growth story. As such, issuing FCCBs was considered a win-win situation for both the borrower and the lender. However, with the <>stock markets crashing, stock prices went far below the conversion prices for the FCCBs (at which they were to be converted into equity shares) making it difficult to convert the bonds.

    However, as per a business daily, there is a brighter side to this story. Some Indian companies are set to lock in huge capital gains by buying back the FCCBs. These companies that have mobilised funds through the FCCBs for expansions and overseas acquisitions are sitting pretty on huge cash piles. As per reports, a total of 158 Indian companies which have outstanding FCCBs, had mobilised US$ 16.5 bn between 2004 and 2008. They are currently facing redemptions worth US$ 13.5 bn and have liquid cash worth US$ 16.2 bn, making it very viable for them to buy back the same.

    RBI's attempts to fuel credit in vain
    Despite the RBI's several attempts to pump liquidity into the banking system and encourage banks to lend more, the central bank's monetary measures seem to have not delivered the requisite results. The RBI has cut both the repurchase (repo) rate and the cash reserve ratio (CRR) by 2.5% and 4% respectively since October 2008. However, heavy government borrowing and fears of slippages in asset quality have left the policy measures redundant as banks have chosen to incrementally park the surplus funds with the RBI.

    The yield on the benchmark 10-year G-Sec has risen by 1.7% in 2009 and is expected to steepen as the government aims to increase its borrowing to a record Rs 3.6 trillion. The banks (except few PSU entities) have been reluctant to bring down interest rates and spur their credit growth. As a final recourse, the RBI is contemplating to impose a ceiling on the excess funds it receives under the daily liquidity-adjustment facility to temper surging bond yields and signal reticent banks to lend more.



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