FCCB enigma...

Foreign currency convertible bonds are losing their shine. Let us see this through an example of Subex Azure. During the year 2006-07, the company issued FCCBs aggregating to US$ 180 million to institutional investors. The bonds carry an initial interest rate of 2% per annum and are redeemable by March 9, 2012. If not converted into equity, conversion of the bonds into equity shares can happen at the option of the bondholders at any time after 18th April 2007 with a conversion price being Rs 656.20 per share. Now, the 52 week high of the company is Rs 135 . Let us take a look at various options which can unfold:

1) CONVERSION:- Given its low market price, this seems unlikely to happen.

2) REDEMPTION:- Its Cash & Bank balancea t FY08 end was Rs 9.28 Crores. Its PBIT for the FY08 is down to Rs 48 crores from Rs 55 Crores. Hence, for redemption to happen it has either to go for equity dilution or take more debt.

3) BUYBACK OF FCCBs:- According to new guidelines issued by RBI on Decenber 6, 2008; buyback of FCCBs can be funded using rupees. The foreign currency required to purchase the FCCB can be obtained from the RBI. However, the facility is availabke only when the company is able to buy the FCCB at a discount equal to or more than 25%. RBI has put another condition that buyback has to be funded from internal accruals only.