Floor price rule hits small cos with lower FCCB premium
The government’s guidelines on pricing of FCCBs and GDRs has hit companies’ fund-raising plans.
By TNN |
MUMBAI: The government���s guidelines on pricing of FCCBs and GDRs has hit companies��� fund-raising plans. The reset clause that protects investors against share price falls may also be on its way out due the technical problems of structuring it in the pricing.
Take two cases. Case 1: The Sebi formula price is Rs 130 and the market price is Rs 100.
For an FCCB issue, the company has to get a minimum premium of 30% to reach the floor price of Rs 130. Since no conversion can happen below the floor price, there is downward protection to the investor if the price slips below Rs 130. Hence, no reset clause. Here in the absence of a reset clause, investors in all likelihood will be unwilling to pay a decent premium. For a reset clause, the company has to get a premium higher than 30%.
Case 2: If the Sebi formula price is Rs 90 and the current market price is Rs 100, and the company gets a 30% premium, the conversion price is Rs 130. Here a reset clause is possible because if the market falls below Rs 130, and as long as it stays above Rs 90 (the floor price), the investor has the right to convert the shares at the lower price.
This is indicative of the fact that an FCCB issue (like a GDR) will sail through in a rising market, but it will be difficult when the market is bad.
The new rule on FCCBs is more likely to hit the smaller corporates, which commanded low premium and had to use sweeteners like a reset clause.
According to investment bankers, GDR pricing is determined through a book-building route and it will make it difficult to price the issue at higher than current average price. ���Instead of taking action against some of the corporates which have used the overseas issue, the move by the government will have an adverse impact on the market,��� said a senior banker.
Some of the big ticket FCCB issuances this year were HDFC ($500m), Tata Power ($200m), Tata Chemicals ($150m), Bharat Forge ($120m) and Amtex Auto ($120m). FCCB is a quasi-debt instrument, which is convertible into equity shares of the company at the option of the investor, at a specified strike rate. The interest component in the FCCBs is generally lower than the external commercial borrowing market and it has to be paid mostly at the end of the tenure.
Take two cases. Case 1: The Sebi formula price is Rs 130 and the market price is Rs 100.
For an FCCB issue, the company has to get a minimum premium of 30% to reach the floor price of Rs 130. Since no conversion can happen below the floor price, there is downward protection to the investor if the price slips below Rs 130. Hence, no reset clause. Here in the absence of a reset clause, investors in all likelihood will be unwilling to pay a decent premium. For a reset clause, the company has to get a premium higher than 30%.
Case 2: If the Sebi formula price is Rs 90 and the current market price is Rs 100, and the company gets a 30% premium, the conversion price is Rs 130. Here a reset clause is possible because if the market falls below Rs 130, and as long as it stays above Rs 90 (the floor price), the investor has the right to convert the shares at the lower price.
This is indicative of the fact that an FCCB issue (like a GDR) will sail through in a rising market, but it will be difficult when the market is bad.
The new rule on FCCBs is more likely to hit the smaller corporates, which commanded low premium and had to use sweeteners like a reset clause.
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Indian corporates have raised just over $2bn through FCCB issuance in this calendar year, as against a total issuance of around $2.25bn in the calendar year ���04. Bankers expect another $500-750m of issuance in the calendar year. However, except for a few big corporates most of the issuance in the market this year has been by mid-tier and smaller corporates. According to investment bankers, GDR pricing is determined through a book-building route and it will make it difficult to price the issue at higher than current average price. ���Instead of taking action against some of the corporates which have used the overseas issue, the move by the government will have an adverse impact on the market,��� said a senior banker.
Some of the big ticket FCCB issuances this year were HDFC ($500m), Tata Power ($200m), Tata Chemicals ($150m), Bharat Forge ($120m) and Amtex Auto ($120m). FCCB is a quasi-debt instrument, which is convertible into equity shares of the company at the option of the investor, at a specified strike rate. The interest component in the FCCBs is generally lower than the external commercial borrowing market and it has to be paid mostly at the end of the tenure.
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