Global hedge funds and offshore investors are closely tracking the response of Corporate India, the judiciary and financial market regulators as 16,000 crore of convertible bonds sold by local top 500 companies come up for repayment by March 2012. With some Indian firms trying to wriggle out of their commitments, overseas bondholders are beginning to question the creditworthiness of India Inc. They are also anxious to figure out whether Indian courts will uphold creditors’ rights. The Reserve Bank of India had raised concerns about high overseas borrowings in its recent Financial Stability Report. Shares of many companies are trading at a fraction of the price at which Foreign Currency Convertible Bonds (FCCBs) are to be converted into shares. If prices recover, investors can convert the bonds into equity shares. That looks unlikely. If prices don’t recover, the companies can redeem the bonds by paying off investors. That appears impossible given the stretched balance sheets of many companies. Then, companies will have to issue fresh bonds in lieu of the old ones, negotiating a new set of conditions — revised conversion price, extended tenure and reset interest rates. Most companies worth their salt will try to work out some solution either by raising fresh money to redeem the FCCBs along with redemption premium or by restructuring the bonds. This is because they know a default or legal tussle would blacklist them in the foreign market. It will also downgrade their credit rating. That’s why the companies, whose stocks are trading at a discount to the conversion price, are already in talks with investors, says Ashutosh Maheshwari, head of investment banking at Motilal Oswal. Assam Company and Suzlon are two such examples. “We are looking at restructuring our outstanding FCCBs,” says Sanjay Sharma, finance head of Assam Company, whose FCCBs worth $32 million will mature in November. Offshore Investors Watching Closely .
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The stock of the Kolkata-based tea company has been hovering at around15, a good 48% discount to the conversion price of 28.75 that the company had fixed when it issued bonds in 2006. The Suzlon spokesperson says the company does not foresee any problems with FCCBs. Suzlon’s $300 million worth FCCBs will mature in June and October next year. The Suzlon stock is quoting at 50% discount to the conversion price. Reliance Communications has the largest chunk of outstanding FCCBs worth $925 million (about 4,150 crore). These bonds are unlikely to be converted into equity shares when they mature in March, as the stock is trading at 86% discount to the conversion price of . 661. RCOM will try to raise bank loans to repay bondholders, says a person close to the company. That will add to the company’s ballooning debt burden of 35,000 crore. RCOM did not comment on the issue. “Offshore investors are watching how India Inc behaves. If pragmatism prevails over greed, then invariably restructuring will work,” says H Jayesh, founder-partner of law firm Juris Corp. At the same time, there is a lingering fear that this could easily turn into a minefield of disputes. “We fear some Indian promoters will neither agree to convert at a lower price — as it will dilute their stake, nor repay the money,” says a bondholder, who had subscribed to FCCBs of a handful of companies in 2007. Akil Hirani, managing partner of legal firm Majmudar & Company, expects some bondholders to have disagreements with the promoters on revision of the conversion price, leaving them with no option but to take legal recourse against the companies. If the companies want investors to give heavy discounts, the matter is likely to go to courts, according to Huzefa Nasikwala, managing partner, Nasikwala Law Office. “Agree to a conversion at a realistic price and most investors will effectively extend the maturity period by a few years, if not more,” is what Juris Corp’s Jayesh advises companies. A month ago, a Singapore-based hedge fund, 3 Degrees Asset Management, moved the RBI against Karur KCP Packagings, a Tamil Nadubased cement bag maker. Karur KCP had raised $10 million in April 2006 through FCCBs bearing a 2% interest rate and conversion price at 75. The bonds were due to expire on April 27, 2011. Backed by majority of the bondholders, the tenure of the security was extended by another 10 years and coupon was cut to zero. The hedge fund has alleged fraud and manipulations in the company’s exemption scheme. The foreign fund is planning to initiate legal proceedings against the issuer. Two years ago, US-based hedge funds DE Shaw and Citadel Investment Group had filed a winding-up petition against Chandigarh-based Venus Remedies after the company defaulted on an FCCB issue. However, the matter was resolved last year. Beginning 2006, FCCBs captured the imagination of promoters of Indian companies who exploited it as the cheapest source of finance. It was a simple bet: the stock market will continue to rise and issuers will not be driven to a point where they will have to pay back the money; once the stock of the issuing company touches a pre-agreed price (conversion rate), the bonds will be converted into shares. The bet backfired as the stock market dipped — the bellwether Sensex has fallen 15% this year — and the stocks are struggling at a fraction of the conversion price. Some small and mid-caps are now trying different ploys to hold back payment. A few have entered into messy court feuds, one of the firms has allegedly falsified accounts to overstate losses and moved the BIFR while another has taken refuge in complaints by local investors. Bonds worth 31,500 crore are due for redemption by March 2013, according to a Crisil Research study of S&P CNX 500 and BSE 500 companies. Of this, Rs 16,000 crore of bonds will mature by March 2012. Market participants say the numbers could double if all mid and small-cap companies are taken into consideration. Among the top 500 companies, it looks like 70% of outstanding bonds may not be converted, says Crisil’s Koparkar. Of this, the “real worry” is bonds worth 2,000 crore, he adds. But the figure is at least 5,000 crore if all small and mid-cap stocks are taken into account, says a bondholder, not wanting to be named. Three years ago, some companies defaulted in paying FCCB investors. The bondholders, in turn, took them to courts. The list included Wockhardt. Its bondholders had filed a winding up petition against the company.
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