The Hindu Business Line : IOC mulls FCCB issue

FORTUNE 500 oil major Indian Oil Corporation Ltd may come up with a foreign currency convertible bonds (FCCB) issue. "We are examining the option of issuing FCCBs which can be later converted into equity. When fully converted, the equity will get diluted by 5 per cent," a senior IOC official told Business Line.

One of the factors prompting the management to consider the FCCB offering is the strengthening of the rupee. Several investment bankers have already lined up before IOC to sell the FCCB idea.

Incidentally, IOC recently made a presentation to investment ratings company Moodys where they said they would like to issue 5 per cent fresh equity by 2007.

According to the IOC official, the company is also looking at the possibility of `exchange bonds'. Here, at the time of redemption of bonds, the equity offered could be that of IOC's holding in GAIL (India) Ltd or Oil and Natural Gas Corporation (ONGC). IOC has a 9.62 per cent stake in ONGC and a 4.8 per cent holding in GAIL. ONGC, on the other hand, has a 9.11 per cent stake in IOC and a 4.82 per cent holding in GAIL.

GAIL, meanwhile, has a 2.4 per cent stake in ONGC.

In the case of an FCCB issue, IOC is also debating the timing of the float. Since the bonds have to be serviced in foreign currency, IOC is wondering whether or not to wait for its naphtha cracker unit at its Panipat refinery unit to go on stream. The naphtha cracker unit will provide petrochemical products, whose exports will provide the foreign exchange to service the FCCB bonds. The cracker unit is scheduled to be commissioned in 2007.

Interestingly, late last year, when a decision was awaited on the public offerings of ONGC and GAIL, IOC also proposed a public offering to reduce its debt obligations. At the last moment, the Government decided not to go through with the IOC offer.

IOC has an average debt maturity of five years and the cost of debt is below 6 per cent. The return of capital is slightly higher than the weighted average cost of capital of around 11 per cent. During this fiscal, IOC issued a bonus of 1:1.

The Government holds 82.03 per cent in IOC with the rest held by financial institutions, public and ONGC.

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