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.
Indian Stock Market News, Equity Market and Sensex Today in India | Equitymaster
Investing in India? Get Equitymaster Research  
India Inc has its debt woes too 
(Wed, 17 Feb Pre-Open) 
There is plenty of newsprint being devoted to the debt problems of Greece these days. Probably more than what the Dubai and US fiscal problems ever 'enjoyed'. But what deserves more attention of Indian investors is the debt problem being faced by India Inc.

Indian companies that embarked on ambitious plans for expansion and acquisition during the heady days of 2006-07, did so on the back of leverage. The smarter ones raised foreign currency denominated debt that was convertible into equity at later dates. In financial terms, these are termed as foreign currency convertible bonds or FCCBs. FCCBs are essentially a type of convertible bond issued in a foreign currency. Bond holders get paid interest in foreign currency and also have the option to eventually convert them into equity. The conversion price is fixed when the bond is issued.

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 also book value accretive on conversion. More importantly, they save the risk of immediate equity dilution as in the case of public issues.

Banking on these positives, Indian companies raised US$ 23 bn worth of FCCBs between 1997 to 2008 (as per Bloomberg). In 2010 alone, US$ 2.8 bn worth of FCCBs are due for redemption or conversion into equity shares. However, the tempered sentiments in the stock markets have dealt a blow to the steep valuations of the FCCB issuing companies.

Incidentally, the current stock prices of the issuers are a fraction of their FCCB conversion prices. During the bull run, FCCBs were typically priced at a premium of 30% to 70% over the stock price. Since then, financial performance has slipped and share prices have readjusted to the valuations for lower growth outlook in the wake of economic slump. The companies now run the risk of having to pay for the redemption of the FCCBs despite inadequate cash flows.

But as in most other cases, the government is once again at its job of bailing out ambitiously leveraged firms. It has allowed companies to reprice their FCCBs. Companies are allowed to negotiate with investors if their scrips are trading below the conversion price. The negotiation can be based by pricing the FCCBs at their two-week average stock prices.

We believe that here again the government is setting the wrong example by letting companies get away with their disastrous capital planning. While the bailout may certainly be of temporary interest to the shareholders, the chances of such mistakes being repeated only multiply.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

View all commentaries | Archives  RSS
Read the latest Market Commentary


Equitymaster requests your view! Post a comment on "India Inc has its debt woes too". Click here!


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


Aug 16, 2017 (Close)