RBI again allows premature FCCB buyback till June 2010

Source:fc: Sneha Shah Mar 29 2010

Companies struggling with battered market price and resultant heavy debt on account of non-conversion
of foreign currency convertible bonds (FCCBs) have been provided another opportunity to extinguish the debt at a discount.

The Reserve Bank of India (RBI) on Monday ag­ain allowed premature buyback of FCCBs on a case-to-case basis till June 2010.

The FCCB buyback facility was introduced in 2008 when convertible bo­nd prices had plummeted due to the global credit crisis and was subsequently extended till December 2009.

“In view of representations made by the issuers of FCCBs, it has been decided to consider applications, under the approval route, for buyback of FCCBs until June 30, 2010,” RBI said in a notification issued on Monday evening.

The FCCB window op­ened by the RBI till December 2009 was left nearly unutilised by companies. Not more than $500 million of the total $10.9 billion outstanding bonds were bought back by companies.

A senior investment banker with a foreign bank, who did not want to be identified, said convertible bo­nds are trading well above par unlike last year and with strong growth and equity market performance, the reintroduced buyback facility is likely to remain un­utilised.

During the global credit crisis triggered by the collapse of global investment bank Lehman Brothers, convertible bonds issued by Indian companies were trading at up to 50 per cent discount. After the considerable recovery and stability in the market, bond prices have risen and, as a result, FCCB holders are unlikely to be willing to sell their investments at a discount, the banker said.

Buyback of FCCBs will make sense only if they were available at a substantial discount as otherwise it is best to wait till maturity.

RBI has retained the conditions attached for buyback of FCCBs during earlier round. Companies wanting to prematurely buy back their existing FCCBs are required to use either internal accruals, cash reserves or raise fresh funds overseas.

Companies such as Hotel Leela Venture, Tata Motors, Reliance Communications, Bhagyanagar India, 3i Infotech, Man Industries, Sical Logistics, Simbhaoli Sugars had repurchased their redeemable bonds in tranches last year.