Firms may have to redeem part of $5.7 bn FCCBs

With the fall in BSE Sensex, the conversion premiums for over $5 billion worth of foreign currency convertible bonds issued by India Inc are shooting up.

Shares proposed to be issued on conversion of the FCCBs are becoming dearer, with the premiums rising anywhere between 25 and 200 per cent.

Sixty-nine companies raised $5.711 billion in 2005-06 through FCCBs, with the strike rate of converting the bonds into equity shares at a premium between 15 and 75 per cent over the prevailing market price.

With stock prices having fallen between 25 and 50 per cent since mid-May, the premiums to conversion prices have soared, given that most of the FCCBs were issued in the second half of 2005-06 when the BSE Sensex was moving northwards.

The conversion of as many as 35 FCCB issues may be in jeopardy on account of the widening of the conversion premium.

If they are not converted, corporations that have issued the FCCBs will have to redeem the bonds. In that case, they will have to bear the interest cost as well as the cost of depreciation of the rupee, as these are dollar-denominated bonds.

"It is too early to speculate on this as there is time - between three and five years - for conversion of the bonds into shares. If the share prices do not rise by that time, it is likely that some of the firms will face redemption pressure," said a senior banker.

Of the 69 FCCB issues, 26 proposed convert bonds into shares at a premium of over 30 per cent each, while 43 proposed conversion between 15 and 29 per cent each. The conversion premium for 24 FCCBs increased by over 100 per cent each, while the premiums were up between 15 and 90 per cent for 11 others.

The current market prices for nine FCCBs are below conversion prices, while 25 others witnessed a decline in conversion premium, as their current market prices are higher than the prices at the time of the FCCB issue.

The list of FCCBs that have witnessed widening of the premium includes Welspun Gujarat Stahl Rohren, Bilcare, Adlabs Films, Uttam Galva Steel, Bharat Forge, Hikal, Aarti Drugs, Marksans Pharmaceuticals, Punj Lloyd, Monnet Ispat, Sterling Biotech and HDFC.

HDFC, for example, issued $500 million worth of FCCBs in September 2005. The bonds were proposed to be converted into shares at Rs 1,399 apiece, at a modest premium of 4.62 per cent to its prevailing price of Rs 1,337 per share.

With the prices of HDFC shares ruling at Rs 1,141 now, the conversion premium has increased to 22.61 per cent.