The Hindu Business Line : Riding on convertibles in global markets

EVEN those who dreamed up the best-selling Indica at Tata Motors or the stylish Scorpio at M&M would have hardly imagined that foreign investors would fiercely undercut one another to own their "convertibles". These companies recently sold some of the highest priced foreign currency convertible bonds (FCCBs) in the international market.

A convertible bond is a debt instrument that can be converted into equity shares at a predetermined price. An investor is assured a low interest rate but can make a pile if the company's shares perform well on the exchanges.

Tata Motors recently completed one of the most successful convertible bonds issues ever in Asia. International investors settled for a negative one per cent yield or 17.5 per cent conversion premium on five-year, zero-coupon bonds worth $100 million, the first tranche of the company's recent $400-million FCCB issue.

At a conversion premium of 60 per cent, its $300-million second tranche of seven-year bonds was the priciest bond issue in Asia this year. The conversion rate works out to Rs 780.40 per share. The issue was oversubscribed eight times.

Mahindra & Mahindra sold convertible bonds worth $100 million last week. The oversubscribed issue comprised zero-coupon, five-year bonds that could be converted at Rs 647.05 a share or a 37 per cent premium to last Friday's closing price on the BSE.

Mr Bharat Doshi, Executive Director, M&M, said, "The success of the issue shows that good Indian shares can command a premium in international markets. It is both confidence in the company and confidence in the Indian stock market."

Year to date, Tata Motors share has gained more than 210 per cent and Zee Tele shares have risen nearly 93 per cent. M&M has risen 325 per cent year on year.

The stunning performance of the stock market over the past one and half year and the strength of the rupee have helped whet international investors' appetite for Indian paper and reduce the cost of borrowing for Indian companies.

According to an investment banker who helped sell one of the convertible bond issues, "It would have been difficult for these companies to get such a premium from domestic investors. Sophisticated investors abroad are better placed to take the risk of the stocks performing well."

"If we were to raise the same money from the domestic markets, it could have cost us as much more as 300 basis points," said one issuer.

Media company Zee Telefilms that sold convertible bonds worth $100 million followed the Tatas in the international market. It set a conversion premium of 35 per cent to Rs 146.10, the closing price on April 21. The highest Zee shares have touched in the past 52 weeks is about Rs 175 per share.

Before the Tatas and Zee, Reliance Energy raised $178 million at zero coupon with a conversion price set at Rs 1,007 or 30 per cent premium, Bharti Tele raised $100 million through zero-coupon 5-year bonds convertible at Rs 232 or a premium of 40 per cent and Ashok Leyland sold $100 million 0.5 per cent FCCBs convertible at Rs 335 or a premium of 21.6 per cent.

A private fund manager told Business Line that the astonishing premia that foreign investors are willing to pay for Indian bonds could perhaps be an indicator of which way the stocks of high-performing companies are headed.

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