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An open letter to the CFOs

May 7, 2009

Dear CFOs, We very well know that quite a few of you who have helped your respective companies raise money through the FCCB route may be too busy trying to tie up financing so that the bonds could be redeemed. Indeed, the current financial crisis must have taken even the most meticulous of you by surprise. Never in your dreams would you have imagined that an economy that had been chugging along at record speed would in such a short span of time start stuttering. Even more shocking would have been the sudden disappearance of money that only some time back was yours for the taking by the bucketfuls. However, bygones are bygones. Precious little could be done about it. The focus from now on should be on cleaning up the mess and coming out of the current turbulence with minimum damage.

To be frank, even we were taken by surprise. When you guys lined up to raise funds through the FCCB route, we were all ears. After all, even we had to make the changes in our excel models. The entries were very simple. The FCCB money raised sits on the balance sheet as debt and after a couple of years, gets converted into equity. And since most of them carry hardly any interest charges annually, we didn't even bother about the interest expenses. The realization that the quasi debt instruments that FCCBs are could turn into real debt, involving repayment obligations did not even register on our minds.

Secondly, we did not carefully examine the purpose of the fund raising. While some of you, with directives from your ultra ambitious CEOs went on make expensive acquisitions with the money, others were a little more cautious and used it for brownfield/greenfield expansion. We do not have any problems with company making acquisitions. But when it is done in an environment where asset prices are hitting the roof and where balance sheets are being over leveraged, then it indeed calls for a great degree of caution. Those of you using the funds to expand capacities seem to be relatively better off. Because you guys are atleast building some asset on the ground, the cash flows from which could be used to repay the debt. But people using the money to make leveraged acquisitions are indeed flirting with danger. Acquisitions made at exorbitant valuations take that much longer to break even and if the economic scenario worsens the way it has done recently, recovery could be even further away. The end result? A precipitious decline in share prices, much to the chagrin of most of you.

If only you had known that the money that you are raising may not convert into equity and instead, remain as debt. Worse still, you may now have to dilute your equity to raise the necessary funds for repayment. Doing it in the current depressed environment will lead to bigger dilution of shareholder equity.

Here's hoping that you take these lessons to heart and do not repeat the mistake in the future. Always plan for the worst no matter how low the odds. As Mr. Warren Buffett points out that any number multiplied by zero is zero. A small mistake could wipe out a string of successes. As far as we are concerned, we have indeed taken the lessons by heart and hope to make them a part of our framework.

Best Regards,

Team Equitymaster

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