The Hindu Business Line : ‘FCCB issuances this year slowing down’

Mumbai, Sept. 11 There has been a slowdown in the number of FCCB (Foreign Currency Convertible Bonds) issuances by Indian corporates in this calendar year, particularly in the last one and a half months. The reasons for this would be the volatility in the global market and the restriction imposed by the Reserve Bank of India on ECBs (External Commercial Borrowing), said bankers.

Ms Chanda Kochhar, Executive Director, ICICI Bank, said, “FCCBs are not that popular a source as they were last year because of the way the markets have moved. When there is volatility in the market, FCCBs are the first instruments to freeze.”

Mr Prakash Subramanian, Head, Capital Market, Standard Chartered Bank said that there has been a reduction in the volume of FCCB issuances in the last one and a half months, after the restriction on ECBs.

Most FCCB issuances would now require the RBI approval, as they fall under the ECB window, he said.

There has been a fall in fresh FCCB issuances because of the turbulence in the global equity market which has been volatile and the concern in the credit market, said Mr Ajay Mahajan, Group President, Financial Markets and Private Banking, YES Bank.

FCCB is a mix between a debt and equity instrument.

It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder or the investor the option to convert the bond into stock. These types of bonds are attractive to both investors and issuers.

The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company’s stock, by converting the bond into stock.

Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the issuers, thereby reducing the issuing company’s cost of funding.

The number of FCCB deals since March this year and the values are given in the accompanying table. Of the two deals in August, one was the Tata Steel issuance which was worth $ 875 million.

Even the premia to the local currency, of the issuances, has come down from 50-60 per cent to 30-35 per cent this year, Mr Subramanian pointed out.