X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
India Inc.: FCCB hungry - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Nov 17, 2006

    India Inc.: FCCB hungry

    With inorganic options in the overseas markets and capital expansion plans in the domestic market beckoning, Indian corporates are putting their best foot forward when it comes to arranging for the finances. While there are a plethora of options available for the same today including ADR / GDR issues, Qualified Institutional Placements, Private Equity placement, public issue and the plain vanilla bank funding, the option that seems to have been the cynosure of India Inc. is Foreign Currency Convertible Bond better known as FCCB*. As per the data released by the Reserve Bank of India (RBI), the cumulative FCCBs issued by Indian companies until 1QFY07 are to the tune of Rs 542 bn.

    The relatively attractive return on investments offered by emerging markets like India, increased international recognition of strong economic fundamentals of the Indian economy and demand for funds from Indian companies to finance the ambitious capex plans fuelled the spurt in FCCB issues over the last couple of years. It is also worth noting that while most of the issues carried zero coupon rates, conversion price of FCCBs issued by Indian companies were fairly attractive (at a considerable premium to the market price as on the date of issuance).

    What makes them popular amongst India Inc?

    • Being a hybrid instrument, the coupon rates on FCCBs are typically lower than pure debt or zero, thereby reducing the debt-financing costs.
    • FCCBs are book value accretive on conversion.
    • Save the risk of immediate equity dilution as in the case of public issues.

    What makes them popular amongst investors?

    • Guaranteed returns on the bond in the form of coupon rates
    • Ability to take advantage of the price appreciation in the stock by means of warrants attached to the bonds, which are activated when the price of the stock reaches a certain point.
    • Substantial yield-to-maturity (YTM) is guaranteed at maturity.
    • Lower tax liability as compared to pure debt instruments due to the lower coupon rates.

    The flipsides ignored...
    Despite the all the positives linked to the instrument, what gets ostensibly ignored are some of the risks that are attached to it. For one, FCCBs do not portray the real extent of leveraging and do not divulge the exact date of conversion, as there is a reasonable time period available to investors to exercise he option. Usually, the company's ability to meet the repayment obligations if the issue does not get converted into equity - is not looked into. Also, the zero coupon FCCBs fail to factor in the cost of servicing the debt (the promised yield to maturity) in case of non-conversion.

    While India Inc.'s ambitious capex plans surely make a good reading and project the economy with a superlative bias against its peers, the fact that the same may build up palpable risks for the future is a concern that needs to be looked into with disdain.

    • FCCBs are defined as a type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock. (Source: Investopedia)

     

     

    Equitymaster requests your view! Post a comment on "India Inc.: FCCB hungry". Click here!

      
     

    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    MARKET STATS