The Reserve Bank of India (RBI) is considering a proposal to allow companies another six months to buy back or prepay their Foreign Currency Convertible Bonds (FCCBs). The deadline for the original buyback scheme ends on March 31.
Of the 156 companies that raised money through FCCBs — which are a mix between a debt and equity instrument raised in a foreign currency — nine companies have exercised a premature buyback option after RBI announced the scheme in December 2008.
Those exercising the option include Mahindra & Mahindra, Reliance Communications, Tulip Telecom, Moser Baer, Jubilant Organosys, Radico Khaitan, Hotel Leela, Pidilite Industries and Uflex. Together, these firms have bought back bonds worth $240 million (around Rs 1,200 crore) at a discount of 30 to 50 per cent on the face value.
Sources close to the development said RBI had observed that many companies were finding it difficult to raise money overseas to fund the buyback programme owing to tight liquidity conditions and the high cost of funds. They added that RBI may even consider extending the facility for companies for the entire new financial year 2009-10, since some of them are short of internal accruals to finance the buyback programme.
According to the scheme RBI announced in December, a company can buy back FCCBs out of rupee resources if there is a minimum discount of 25 per cent on the book value. The central bank also stipulated that the resources for the buyback have to be drawn from the company’s internal accruals. Companies were also allowed to raise additional proceeds through external commercial borrowings to finance the buyback.
The decision to allow buybacks was triggered by the sharp erosion in FCCB prices. The general aversion towards emerging market assets has widened the spread over such foreign currency-denominated bonds issued by Indian companies, which has led to a fall in bond prices. A spread is the premium over the interest rate benchmark, which in the case of foreign currency borrowings is Libor or the London interbank offered rate.
Foreign investors also do not see any opportunity to convert such bonds into equity, since the prices of Indian shares have fallen sharply compared to the conversion price of the bonds into equity. In such a situation, the best option is to allow the promoters or the issuers of such bonds to buy these back, which is cheaper than waiting for the bonds to mature and paying the full coupon (interest rate on the face value) and principal amount.