Redemption fund for FCCBs to bail out India Inc

Manojit Saha / Mumbai Jun 29, 2012.

Great News for Suzlon Energy Ltd, Country Club India Ltd, etc. 

The government and the Reserve Bank of India (RBI) are in discussions to create a fund to bail out companies facing headwinds in foreign currency convertible bond (FCCB) redemptions. According to RBI estimates, $4-5 billion FCCBs are coming up for redemption in the current financial year.

According to central bank sources, discussions are on with the finance ministry and banks. “The idea is to create a fund and also a line of credit from banks to companies,” said a source familiar with the developments. Though the size of the fund is yet to be decided, the effort is the fund should be able to take care of at least half the resource needs.

According to bankers, the creation of a separate fund will also take away some pressure on the rupee. “There are two ways in which FCCBs could be redeemed. One is raising funds through another FCCB, a very difficult proposition in this market. The other is, companies come to banks for dollars and pay an equivalent amount of rupees. Banks raise the dollars from the market. By creating a separate dollar window for the purpose of repaying FCCBs, companies will not have to come to the market. So, the pressure on the rupee will be curtailed to some extent,” said a senior official from a public sector bank.

The central bank has noted that companies raising foreign funds are not fully providing for those. In addition, corporate entities that raise long-term fixed-rate foreign currency funds expect the investor will exercise the option embedded in FCCBs and convert it into equity. The attitude, they say, needs to be changed. While the attraction of FCCBs is the lower interest in foreign markets, the woes of the companies have aggravated due to the weakening of the rupee. If the rupee depreciates, the conversion thresholds increase, or the cost of debt goes up.