It is boom time for corporate India. In 2005, Indian companies have raised $17.1 bn from overseas financial markets through a mix of overseas equity issuances, debt and Foreign Currency Convertible Bonds (FCCBs). India's FCCB market size grew by 71% to $3.9 bn, from $2.4 bn in 2004. Unlike in the past, FCCB issues are not restricted to large-cap firms; even mid-cap and small-cap companies are opting for FCCB issues for their growth plans. The majority of the ECB loans are utilized to refinance the past loans, remaining are the FCCB borrowings. S Manikutty, IIM Ahmedabad, says, "India as a country has gained a lot of respect in the investing community abroad. So, while only large firms could dream of FCCB earlier, now it is possible even for mid-size firms to be able to tap these markets." Foreign investors are channeling the international liquidity towards the Indian markets.
India bucked the trend when the number of FCCBs issued from the country almost tripled to 61 issues in 2005 from 22 issues in 2004. Most of the Indian issuances are listed and traded on the Singapore or Luxembourg stock exchanges. Some of big ticket FCCB issuances this year were HDFC ($500 mn), Ranbaxy ($400 mn), Tata Power ($200 mn), Tata Chemicals ($150 mn), Bharat Forge ($120 mn), Amtek Auto ($120 mn), Tata Motors ($100 mn) and L&T ($100 mn). Among the major issues likely to hit the market are Jet Airways ($500 mn), M&M ($200 mn) and McDowell ($250 mn).
It is the low interest rates coupled with quicker approvals in the global markets that are luring the companies to opt for FCCB issuances. Foreign investors have been showing a strong appetite to invest in the FCCBs because of strong economic fundamentals and quality earnings of Indian companies.
FCCBs are quasi-debt instruments, which are convertible into the company's equity shares on the option of the investor at a specified strike rate. There is no payout if the company has gone in for a zero coupon convertible bond. Interest rates are generally much lower than the bond issuances and it has to be paid only at the end of the tenure. The yield to maturity (YTM) for FCCBs normally ranges between 4% and 7%, while small companies have higher YTM. Companies price their issues at premiums anywhere between 30-70% compared to equity markets. An FCCB issuance can be priced at a significant premium to the market price of the share, an option not available under an ADR or a GDR. This holds true also for rights or follow on issues. Sankarshan Basu, Professor, IIM Bangalore, says, "The advantages are basically the convertibility for the bond issues, making it an easier route to access equity if one so desired, as well as the fact that the currency risk was not being thrust upon the subscribers to the bond issue."
|
