By the second half of 2005, FCCBs had become very popular: between October 2005 and May 2006, when the equity markets went into a tailspin, 67 companies raised a total of $6.244 billion (Rs 29,346.8 crore at today's rate). Unfortunately for companies, the dollar has gained against the rupee in the past few months and the US Federal Reserve has taken an interest-hardening stance.
..."The real impact is on pricing," adds Gunjan Shah, Partner, Amarchand Mangaldas. "Zero coupon bonds are not marketable anymore." New issues, then, are happening at higher interest rates and redemption premia, making them far less attractive. The worst-hit are small cap (market capitalisation) companies that raised the maximum amount possible, 25 per cent of their market value at that point. They issued FCCBs at prices close to their peak prices and at a significant conversion premium of between 30 per cent and 40 per cent; with prices having corrected by around 20-30 per cent, the conversion premium has zoomed.
Arun Natarajan is the Founder of Venture Intelligence, which tracks private equity and venture capital in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.