In a move welcomed by much of corporate India, the Reserve Bank of India (RBI) is to consider applications for refinancing of foreign currency convertible bonds (FCCBs) under the automatic route. The RBI’s AP (DIR series) circular No.1 of 4 July, which announced the move, states this is “to provide a window to facilitate refinancing of FCCBs by the Indian companies who may be facing difficulty in meeting the redemption obligations”.
A popular instrument
FCCBs provide benefits for both issuers and bond-holders. Issuers see FCCBs as low cost debt with a minimal coupon value as compared to other debt instruments. Holders of FCCBs value them for their convertibility into equity, guaranteed returns and also for their redemption option in case conversion into equity is not desirable. Consequently, many Indian companies raised capital through FCCBs during the bull-run period of 2006-2008.
However, due to the global slowdown and declining stock markets, it is unlikely that many FCCB holders will want to convert their FCCBs into equity shares on account of the low market value of the shares, which in some cases would have dipped below the FCCB’s conversion price. Several FCCBs issued during 2006-2008 will soon be up for redemption. But to do so, Indian companies may need to pay hefty amounts and may need to raise funds if they do not have adequate reserves.
The RBI, which recognizes the redemption pressures faced by Indian companies, had previously permitted the buy-back of FCCBs at discounted rates. The 4 July circular creates new avenues for affected companies to access capital or restructure their obligations through refinancing or restructuring of FCCBs.
Conditions for refinancing
The circular permits Indian companies to refinance existing FCCB commitments through fresh foreign currency loans subject to the following conditions:
(a) Fresh external commercial borrowings (ECBs) or FCCBs must be within the stipulated average maturity period and applicable all-in-cost as per the ECB guidelines;
(b) Amount of the fresh ECBs or FCCBs must not exceed the outstanding redemption value at maturity of the outstanding FCCBs;
(c) Fresh ECBs or FCCBs must be raised within the six months that precede the maturity date of the FCCBs proposed to be refinanced;
(d) Purpose of the fresh ECBs or FCCBs must be clearly mentioned as “redemption of outstanding FCCBs” in form 83 at the time of obtaining a loan registration number;
(e) End-use of funds must be monitored by the designated authorized dealer – category I bank;
(f) ECBs / FCCBs beyond US$500 million for the purpose of redemption of the existing FCCBs will be considered under the approval route; and
(g) ECBs / FCCBs used for the purpose of refinancing the existing outstanding FCCBs will be reckoned as part of the limit of US$500 million available under the automatic route under the existing ECB policy.
The circular states that restructuring of FCCBs involving a change in the conversion price is not permitted. However, a restructuring proposal that does not involve a change in the conversion price may be considered by the RBI under the approval route.
Buy-back of FCCBs
On 8 December 2008 the RBI permitted the buy-back of FCCBs under the automatic route. This was subject to certain conditions, which included that it be done at a minimum discount of 15% of the book value and that it be financed either out of foreign currency funds held in India or abroad or out of ECB proceeds. The RBI also permitted the buy-back of FCCBs under the approval route, out of internal accruals and subject to conditions including a minimum discount of 25% of the book value.
This buy-back window, which was initially till 31 March 2009, was extended first to 30 June of this year and will now be available until 31 March 2012. Accordingly, Indian companies are permitted to buy back FCCBs at a minimum discount of 8% on the book value under the automatic route, as against the previous limit of 15%. Under the approval route, Indian companies can buy back FCCBs at a minimum discount of 10% to 12% on the book value against the earlier discount of 25%.
The various avenues made available to meet FCCB redemption obligations – refinancing, restructuring, and buy-back – will provide much needed relief to issuers. It will also enable companies to use the most favourable options depending on the specifics of each case.
Ameya Khandge (Ameya.Khandge@trilegal.com) is a partner at Trilegal in Mumbai where Emily Ray is a senior associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad and has over 140 lawyers.
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