Move follows lobbying by companies as current market levels are way below conversion prices Mumbai/New Delhi: The government has allowed companies to reprice their foreign currency convertible bonds (FCCBs) on par with qualified institutional placements (QIPs) and allowed them to negotiate with investors at a time when many of their scrips are trading below the conversion price.

The government’s move came in the wake of companies lobbying the government for a relaxation in norms as current market prices in many cases are way below the FCCB conversion price. Typically, in such a case, holders would want to redeem bonds instead of converting them into shares, thereby putting pressure on financials.

Companies can now base the minimum price of their FCCBs at their two-week average, which will bring it closer to the market price. This will benefit companies that issued such bonds before 27 November 2008, when the government aligned the FCCB and QIP pricing.

Companies which want to change the conversion price can do so within six months, a government statement said.
“This will give relief to FCCB issuers,” said Jagannadham Thunuguntla, head of equity at Delhi-based SMC Capitals Ltd. “It will give them flexibility in renegotiating terms with their investors.”

According to Bloomberg data, Indian companies have raised some $23 billion (Rs1.07 trillion today) in FCCBs from 1997 to 2008. Anecdotal evidence from investment bankers suggests that some of this debt has been bought back or redeemed. For instance, Housing Development Finance Corp. Ltd has converted some 80% of its issue, according to a spokesperson. Mint could not get accurate data of redemptions or conversions so far.

In 2010 alone, some $2.8 billion is coming up for redemption or conversion into equity.

“It’s a big change as most FCCBs were issued at a time when prices were high,” Akil Hirani, managing partner of corporate law firm Majmudar and Co., told Mint.

An FCCB is 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.

According to an investment banker, who did not want to be named as he is not authorized to talk to the media, in the case of some companies with outstanding FCCBs, the current market price is a fraction of the conversion price. FCCBs are usually priced at a premium of 30-70% over the prevailing market price of the share and many companies accessed this easy mode of financing in the bull run of 2003-2008. Since then, financial performance has slipped and share prices have declined in the wake of the economic slump.

“If you reset the price, there is a higher chance that these can be converted,” said S. Subramanian, head of investment banking at Enam Securities Pvt. Ltd.

However, a lower conversion price means more dilution and in order to safeguard existing shareholders, the government has attached conditions to any move to reprice outstanding FCCBs. The issuing company would have to get the approval of its board as well as shareholders. Two other conditions are linked to repricing. First, that companies need to make sure prevailing foreign direct investment norms are not breached once the bonds are converted into equity. Second, they would have to enter into fresh agreements with FCCB holders over the conversion price. The deal would have to be cleared by the Reserve Bank of India.

According to the finance ministry release, the relaxation of FCCB pricing norms came in the wake of companies lobbying the government and also to bring pricing norms in sync with those for qualified institutional placements.

Mutual funds industry, too, saw an upbeat year, signalling return of investors to financial markets.

Foreign institutional investors (FIIs) made a record investment in the Indian equity market in 2009, surpassing the 2007 inflows, says Economic Survey 2009-10. Even assets under management of the mutual funds industry touched a record high, indicating revival of investor interest in the financial markets.

Net FII investment in the equity market was at Rs 83,424 crore in 2009, compared to net inflow of Rs 71,486 crore in 2007 and net outflow of Rs 52,987 crore in 2008, the Survey says. Even the number of FIIs’ registration was the highest at 1,706, compared to 1,594 in 2008. However, net FII investment in the debt market declined to Rs 4,563 crore, from Rs 11,772 crore in 2008.

Record inflow in the equity market also has had an impact on the stock market with the NSE Nifty index rising by 76 per cent during the year, compared to fall of 52 per cent in 2008, the Survey says. Overall market capitalisation of stocks in 2009 at Rs 33,14,447 crore could not touch the peak of Rs 35,22,527 crore in 2007.

In the mutual funds industry, assets under management at Rs 6,65,146 crore surpassed the high of Rs 5,49,936 crore in 2007. Assets under management in 2008 were at Rs 4,13,365 crore. The share of income and debt oriented schemes was 54.2 per cent (47.7 per cent in 2008), for equity schemes it was 26.3 per cent (23.9 per cent).