Steer clear! Top firms sleepless over rupee weakness as FCCBs worth $1b maturing

A sharp drop in the rupee against the US dollar is giving sleepless nights to a class of company promoters, who had borrowed money through foreign currency bonds (FCCBs) that are due for redemption now.

Data from corporate database Ace Equity shows as many as 35 companies have outstanding FCCBs worth $1 billion, which are going to mature by the end of March 2017.

Since the beginning of this financial year, the local currency has slipped over 3 per cent to 68.26 till November 21, according to the data available with the Reserve Bank of India (RBI). The rupee was quoting at 66.24 against the dollar on April 4.

Market watchers say a sharp drop in the rupee can bring in an extra burden on the companies that had raised funds through FCCBs.

FCCB is an instrument used to raise funds by issuing debentures denominated in other currencies such as the dollar.

Companies whose FCCBs are maturing on November 30 include Alembic Pharmaceuticals, Elecon Engineering, Garden Silk Mills and Johnson Controls-Hitachi Air Conditioning.

Rajesh Cheruvu, Head of Equities, Sanctum Wealth Management, said: “The recent spurt in the dollar index has primarily increased the probability of a Fed rate hike. The dollar index has risen sharply ever since Fed Chair Janet Yellen’s testimony to the US Congress, where she had clearly indicated the strong possibility of a Fed rate hike.”

On further movement of the rupee, Abhishek Goenka, Founder and CEO of India Forex Advisors, said: “We expect the weakness in the rupee to continue over the next three months. It could test the 70.50 level in the near term.”

Besides the above-mentioned companies, FCCBs of KEI Industries, Wanbury, BEML, Gati, GOL Offshore, Gujarat Borosil, ISGEC Heavy Engineering, Murli Industries, NRB Bearings and Shakti Pumps will also mature by December-end.

Others like Astec Lifesciences, Clutch Auto, Graphite India, Havells India, Ruchi Infra, Gujarat State Fertilizers & Chemicals, Vedanta and Vakrangee are among other companies whose foreign currency convertible bonds will mature during the first quarter on the next calendar year.

These convertible bonds are issued mostly by listed companies in the overseas market. FCCBs usually carry a clause that gives bondholders the option to convert the bonds into shares midway. If the share price of the company trades below the issue price, the companies are required to repay the borrowed amount. As the repayment of the raised amount has to be done in dollars, the liability of the company increases when the rupee rises.

Sanjiv Bhasin, EVP-Markets, IIFL, said, “The pressure is immense on companies that had raised money through FCCBs, as shares of most of these companies are trading lower. FCCBs are to be repaid in dollars. So collateral risk is an obligation. I don’t see the rupee moving higher over the next four to five months.”

Among major issues, the FCCBs of Vedanta and Marico are due to mature by the end of March 2017, while those of GOL Offshore will mature by December-end. These companies had raised around $0.59 billion through FCCBs.