FCCBs are debt instruments issued in a currency other than the issuer's domestic currency, with an option to convert them into equity shares of the issuer company.
Companies can raise foreign currency funds at attractive rates. While FCCBs are similar to bonds as they make regular coupon (interest) payments, they also give the bondholder an option to convert the bond into stock.
With the economy doing well, mid-sized companies are raising funds through this mechanism.
Some of the companies that recently raised funds through the FCCB route include Mumbai-based 3i Infotech, Rolta India, Tulip IT, Moser Baer and Subex Azure.
There are several reasons why IT companies prefer the FCCB route rather than qualified institutional players, or global depository receipts or American depository receipts.
However, the most crucial factor is that companies can offer these bonds at a premium.
Most of the companies set the conversion price of these bonds in the range of 10-50 per cent.
For instance, Moser Baer's FCCBs are issued in two tranches, whereby the first tranche of $75 million has a conversion rate of 25 per cent. The second tranche of similar amount is at a conversion rate of 40 per cent.
Rolta India, the company providing GIS solution and engineer designing solutions issued 1,500 FCCBs and raised $150 million (Rs 600 crore) a month back.
Says Hiranya Ashar, director finance and CFO, "In FCCB the company is able to capture premium over the current market price however GDRs are generally issued at a discount to the current market price."
The other reason is that unlike with IT majors, medium-sized IT companies do not have huge cash reserves to fund acquisitions and expansion.
Ashwin Mehta, senior research analyst, Ambit Capital says: "Dilution of equity does not happen immediately but only comes through at a later stage in the case of FCCBs. Besides, most companies are issuing zero coupon bonds and thus the interest burden is absent or low."
3i Infotech, IT solution and services company, has raised close to $230 million through four issues of FCCBs.
Amar Chintopanth, executive director and CFO, 3i Infotech says, "FCCBs are a good way of raising funds if one is able to balance the debt and equity ratio.
For companies the most important aspect of issuing FCCBs is the conversion of the bonds into shares. And if these bonds are not converted into equity the company should be in a position to repay the same.
However, companies do not foresee any such problem.
Chintopanth says, "We have issued till date four FCCBs raising funds close to $230 million. Almost 50 per cent of the first two issues have been converted to equity."
Ashar too agrees, "Yes, it is a concern but then there are mechanisms to raise money and repay the investors through external commercial borrowings, internal accruals or QIPs."
