India Inc may tap overseas mkts with exchangeable bonds

NEW DELHI: Exchangeable bonds, the debt/equity instrument announced in Budget 2007, will allow domestic companies to tap overseas markets, albeit in conformity with the FDI sectoral caps set by the government.

The quasi-equity instrument allows companies that have cross-holdings in subsidiary companies, or a company to unlock the value of its holding in the subsidiaries without diluting its stake immediately. Foreign currency covertible debentures (FCCB), which also allows conversion of debt into equity (in the same company) also has to follow FDI caps in the respective sectors.

Indian companies, which are now on a huge mergers and acquisitions spree, are working on proposed EB offers that would be floated once the finance ministry issues the guidelines. The draft guidelines which are under discussion within the finance ministry, Sebi and RBI, indicate that companies will have the option of floating EBs both to domestic and overseas investors.

In the case of foreign investors, companies issuing the EBs will have to take into account the applicable sectoral FDI cap. For instance, if a holding company were to issue bonds which would have the option of being converted into equity of a subsidiary telecom company, the parent company will have to take the FDI cap in the telecom sector into account.

In other words, the conversion of these bonds (debt) into equity should not breach the 74% FDI cap in the telecom subsidiary. “A company issuing EBs to foreign investors need to take into account sectoral FDI caps,” a government source said. The guidelines will also spell out details about the minimum coupon rate and tenure of these EBs.

A large number of companies like Tatas are planning to make use of the instrument and are awaiting issue of guidelines by the government. In most of the developed and developing economies, EBs is a popular instrument for companies to raise capital. Finance minister P Chidambaram had announced the scheme of EBs in Budget 2007.