The Telegraph
Since 1st March, 1999
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Foreign investors bite the bond bait

Mumbai, March 9: Leading domestic companies are offering overseas investors foreign currency bonds that could be later converted into equity. This is a two-pronged move to help the companies raise cheap debt for expansion and retain lenders as their shareholders.

Foreign investors are biting the bait as they expect the bonds to yield interest at a fixed rate during their tenure and generate profits when converted into shares.

“This is an emerging trend,” UTI Bank’s chief dealer (money and forex) R.V. S. Sridhar said. “Foreign investors are betting that share prices of these companies will gain substantially accruing attractive gains for them in the future,” he added.

Indian companies rarely adopted the global depository receipt (GDR) route or offered foreign currency convertible bonds (FCCBs) after the late eighties and nineties when many firms raised overseas funds through these channels.

Market analysts said only two Indian companies issued convertible bonds in 2003 even as firms in the Asia-Pacific region raised a huge corpus by similar means.

Indian Hotels, the leading hotel chain from the Tata group, became the first company to issue convertible bonds in 2004. It raised $150 million from the European markets.

Reliance Energy also raised Rs 805 crore ($178 million) recently to fund its huge expansion plans.

Reliance Energy’s FCCB issue is one of the largest from the country. The bonds are proposed to be converted at a 30 per cent premium to the prevailing share price. Analysts predict a figure of Rs 1,000 per share after five years when the bonds mature.

Also waiting on the sidelines is Tata Motors which may raise a sum of around $500 million (Rs 2,250 crore) from overseas markets.

Subhas Chandra’s Zee Tele has proposed to raise long-term funds up to $100 million by issuing convertible bonds. The external commercial borrowings would be converted into company’s shares following the date of issue, Zee Tele said in a statement.

Many corporate houses do not want to issue equity directly and reduce their earnings per share. Instead, they are issuing bonds to either refinance their old debts or raise new debts to expand and modernise. The effects of the capital expansion will be seen after a couple of years, by which time the bonds will be converted into equity. The increased revenues will support a equity dilution.

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