Foreign currency convertible bonds or FCCBs that helped Indian pharma companies in growth and acquisitions during the bull run, have become a serious concern post the slide in their share prices.

Here is a transcript of Sriram Iyer’s comments on CNBC-TV18. Also watch the accompanying video.

Maturing FCCBs have posed problems across sectors and Indian pharma is no exception. According to estimates, India Inc issued close to USD 20 billion of FCCBs in the last few years.

Burden of FCCB:

With conversion prices soaring well above the current share value; companies will either have to look for fresh debt at higher interest rates or reset the conversion clause diluting promoter holdings.

Pharma companies that had raised FCCBs recorded a notional forex related loss in their books. This year, Ranbaxy has booked losses to the tune of Rs 585  crore, Jubilant recorded Rs 282 crore, Aurobindo recorded Rs 159 crore, while Orchid and Wockhardt booked Rs 140 crore and Rs 112 crore respectively.

Redemption date, cash flow and share prices determine the depth of the problem for these companies. Experts say Wockhardt and Aurobindo Pharma top the list of vulnerability. The USD 110 million FCCB raised by Wockhardt is slated for conversion in September 2009 at Rs 486 against the current price of around Rs 95. It seems unlikely for its shares to rise to the conversion price and neither its cash flow generation for the next year appears very healthy.

Aurobindo's FCCBs mature in 2010-2011 and its current market price is a tenth of the set conversion price. Despite a strong performance in 2007, the company's shares rose up to about Rs 800, as against the set conversion price of rs.1014. Thanks to the huge capex incurred in the last couple of years, its cash flows have remained negative and the future looks as bleak.

Sun Pharma has already converted its fccbs while lupin's shares float higher than the conversion rate.

Experts believe that for Ranbaxy and Jubilant it may be a relatively easier ordeal.