Once-lucrative FCCBs are a bitter pill to swallow

Riding on the buoyant stock markets over the last few years, Indian corporates embraced foreign currency convertible bonds (FCCBs) as a preferred financing option. Most FCCB issuers bet on equities continuing the bullish run and bondholders exercising the conversion option prior to maturity (as opposed to redeeming the bonds), and, as a result, had not set aside adequate funds for the redemption of these bonds.

Given the current state of the economy, the scarcity of funds and the steep fall in share prices of almost every issuer, redemption, and not conversion, has become the looming reality for these corporates – turning a once lucrative financing option into a bitter pill that most issuers are finding difficult to swallow.

To address this unexpected turn of events, the Reserve Bank of India (RBI) has provided issuers with an option to prematurely buy back FCCBs at a discount, utilizing either the issuer’s internal rupee accruals (with prior RBI approval and at a minimum discount of 25% to the book value of these FCCBs) or any available foreign currency resources and/or fresh ECBs (at a minimum discount of 15% to the book value of these FCCBs).

Rohan Ghosh Roy and Juieen Nag are associates at Trilegal in Mumbai. Trilegal is a full-service law firm that advises on corporate and commercial law in India and provides commercially oriented legal advice in relation to all sectors of the economy. The firm has offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 100 lawyers, some with experience at law firms in the US, the UK and Japan.