MUMBAI: The government and Reserve Bank of India are working on changing rules to give corporates more leeway in repaying foreign currency convertible bonds (FCCBs) that have turned into millstones in a dismal market.
With stocks of many companies trading well below the conversion price, the authorities are revisiting the rules in an environment where more foreign capital outflow could further pull down the rupee and a spate of defaults could lead to derating of Indian companies in overseas markets.
If the proposal now being considered is finally approved, Indian companies will be allowed to renegotiate the terms of repayment of these bonds, including resetting the price at which these instruments can be converted into shares at a future date, said a person with knowledge of the matter.
A convertible bond is a quasi-debt instrument that offers investors a fixed coupon or interest rate over a five-year maturity of the bonds with an option to convert them into shares at a pre-determined price, often at a premium to the market price of the issuer.
In a bull market, several companies had issued FCCBs at a steep premium, hoping that stocks would continue to surge. Today, with share prices quoting at a fraction of what they were, these issuers are struggling to redeem the bonds.
The RBI has so far allowed companies to restructure their FCCBs and refinance them by raising fresh foreign loans or new bonds and also to buy back outstanding bonds at a discount to the face value. A limited window to facilitate this was open till March this year.
But this time, with many issuers staring at defaults and seeking permission to reset the conversion price, talks are underway between the government and RBI and Sebi to allow greater flexibility to Indian companies, said the person. The FCCB rules are administered by the government.
Said a foreign banker: “It will be a great relief for Indian corporates in terms of addressing the forex issue. The question is whether the promoters will be agreeable to a lower conversion price if they believe there is an intrinsic value in their share price over and above what it is today.”