FCCB redemption to hit India Inc harder due to weak Re

Excerpts from India Business Hour on CNBC-TV18 Watch the full show »

Rs 52,000 crore - that's the staggering amount India Inc will have to shell out as bond holders redeem foreign currency convertible bonds (FCCBs), report CNBC-TV18's Sajeet Manghat and Shruti Rajkumar. To make things worse, the declining rupee is not doing anything to soften the blow.

The money borrowed four-five years ago from the foreign currency convertible market is coming up for redemption and India Inc is staring at a bill of a whopping USD 10 billion.

Most of these FCCB issues were at zero coupon rate and since the conversion price was calculated based on 20% annual return (CAGR) to the then-market price, it has totaled to double the then-market price.
 
But with a declining global economy, and the rupee depreciating nearly 17% this calendar year alone, India Inc has its back to the wall.

Brokerage firm Edelweiss estimates that redemption worth nearly Rs 33,000 crores is expected in the next 12-18 months.

It says the rupee depreciation has led to aggregate unrealized cumulative mark-to-market losses of Rs 6,320 crore on outstanding FCCBs.

While RBI has allowed re-financing of FCCBs and even buybacks, the brokerage believes that at an average refinancing cost of 12%, profits before tax of many companies will take a 11% hit.

It also says that companies which may agree to lower the conversion price if they are unable to redeem these FCCBs are staring at an equity dilution of nearly 29%.

What's worse, 60% of the total FCCBs maturing have been raised at rupee-dollar rate of less than 42, implying a cumulative MTM loss of 25% at the current exchange rate.

The situation could get worse when IFRS becomes mandatory, since MTM losses will then have to be passed through the income statement instead of the current practice of capitalizing the exchange loss on FCCBs to the carrying cost of fixed assets.

Some argue that IFRS is still a few years away, but everyone agrees that FCCB redemption is not.

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