Warning: Currency turmoil could cost India Inc Rs 33,000 crore

Amid pains of a plunging rupee and tanking stock markets, here’s some more bad news: foreign currency convertible bonds (FCCBs) could soon trigger huge capital outflows among companies, further weakening sentiment among investors.

According to a report by Edelweiss, India Inc could lose as much as Rs 33,000 crore in such redemption.

The brokerage says there are 28 companies with FCCBs totalling Rs 24,500 crore that will mature in the next financial year. Among them, 25 will most likely face redemption, it adds.

[caption id=“attachment_138502” align=“alignleft” width=“380” caption=“FCCBs are foreign currency-denominated bonds that can be converted into equities at the time of maturity. Reuters”] [/caption]

To the uninitiated, FCCBs are foreign currency-denominated bonds that can be converted into equities at the time of maturity. The conversion happens only if the share price is greater than the level agreed when the company issued the bonds.

If the share price at the time of maturity is less than what was agreed at the time of issuing the bonds, then the conversion will not take place. In that case, the bonds will have to be redeemed (repaid).

In the case of the 25 companies which are likely to face redemption, even a 20 percent growth in share prices from current levels will not take them to price levels fixed at the time of issuing the bonds.These companies will have little option but to redeem their bonds and that amount could total Rs 33,000 crore, Edelweiss said.

For companies, redemption suggests a significant requirement of funds. If these funds are arranged through domestic borrowings, profits will take a hit. Edelweiss notes that even if refinancing is done at an interest rate of 12 percent, the profit before tax of the concerned companies could be hit by 11.2 percent.

That’s over and above the huge mark-to-market losses - a whopping Rs 63,200 crore - they have to swallow because of the sharp fall in the rupee (17 percent since August), according to the brokerage.

Mark-to-market losses are losses that are provided for but not booked and are used to asses the current value of assets.

Companies opting not to refinance their FCCBs will be forced to lower their conversion price.

All things considered, it’s just one more bad turn for Corporate India.