Indian companies that raised large sums of foreign funds to finance growth and acquisition plans during the bull run in the stock markets are in a Catch 22 situation. The conversion price of their foreign currency convertible bonds is several times higher than their current market prices.

This leaves them with two options. One is to reset the price at current market price, a move that could dilute promoter holdings (since it would entail issuing more equity shares). The other is to redeem the bonds, which could increase debt obligations that are already substantial in some cases.

The maturity of many of the FCCBs is expected to start in October 2009 and peak in 2010-11. Most analysts say the market is unlikely to recover so significantly over the next two years that market prices will match the conversion prices.

In some cases, the outstanding amount on account of FCCBs is higher than or around the current market capitalisation of the companies concerned (see table). For instance, Hyderabad-based Subex Auzure raised $180 million (Rs 846 crore) in 2007 to finance the acquisition of Azure. The company's market capitalisation as of September 30 was Rs 298 crore (Rs 2.98 billion).

Should the management decide to re-set the conversion price and link it to the current market price, the company's equity would be diluted. If it decides to repay these bonds, the redemption amount with interest would be around Rs 1,150 crore (Rs 11.5 billion). The company has already raised debt of around Rs 1,050 crore (Rs 10.5 billion).

The $110 million FCCB raised by pharmaceutical major Wockhardt is slated for conversion in October 2009 at Rs 629.80 against a current price of around Rs 155. If the company chooses to redeem the bonds, it will have to pay $140 million or Rs 658 crore (rs 6.58 billion). The company already has a debt obligation of around Rs 3,000 crore (rs 30 billion).

Firstsource, which is being put on the block by its promoters ICICI Bank [Get Quote], had mopped up $275 million through FCCBs, for which the conversion rate is Rs 128.60 against its current share price of around Rs 28.

The outstanding amount at the time of conversion is Rs 1,292 crore (Rs 12.92 billion) against a current market capitalisation is Rs 1,222 crore (Rs 12.22 billion). If these bonds are redeemed, the company will have to repay around Rs 1,800 crore (Rs 18 billion). With debt of Rs 1,300 crore (Rs 13 billion), the company will face an uphill task redeeming the bonds.

Similarly, the conversion price for companies such as Aurobindo Pharma [Get Quote] and Ranbaxy are Rs 732 and Rs 908 against the current price of Rs 277 and Rs 255 respectively and both have significant debt obligations.