Category: Your Money

 

Corporate India’s worry lines do not simply end with high input costs, slackening demand, rising credit costs, and low business sentiment. Lured by buoyant share prices, companies went overboard with their fascination for Foreign Currency Convertible Bonds (FCCBs) and raised foreign capital to fund their expansion plans from 2005-06 to 2007-08 when the bubble was just about to burst.

Riding on their heady valuations, the conversion price on such bonds was set at a steep premium, about 25-150 per cent higher than the prevailing stock price at the time of issuance and they carried zero or very low coupons.

But the crash in stock prices post the 2008-financial crisis has caught many companies that opted for the FCCB route on the wrong foot.

Although the benchmark indices have largely recovered and are about 20% below their 2008-highs, the share prices of companies with outstanding FCCBs are way below their peaks.

FCCBs worth more than US$ 7 billion is maturing by March 2013. With the first option of equity conversion knocked off, redemption pressure stares at issuers as they have to either buyback or repay the bond holders. Ratings agency CRISIL estimates that FCCBs worth Rs 220 – 240 billion may not get converted into equity shares as the current stock prices of issuing companies are significantly below their conversion price.

Take the case of Jaiprakash Associates [stockquote]JPASSOCIAT[/stockquote]. The Gaur-controlled entity issued FCCBs worth $400 million in Sept 2007, with the conversion price set at Rs 165 per share for bondholders. The stock is now quoting at Rs 64.00.

The same is the case with Tata Steel [stockquote]TATASTEEL[/stockquote], Suzlon [stockquote]SUZLON[/stockquote], RCom [stockquote]RCOM[/stockquote], Subex [stockquote]SUBEX[/stockquote], Educomp Solutions [stockquote]EDUCOMP[/stockquote], GTL Infra [stockquote]GTL[/stockquote] and others. RCom escaped the noose by tapping Chinese banks for refinancing its $1.18-bn FCCBs that were due on March 1, 2012. Suzlon, whose shares have lost about 60 percent in the last one year, is also in talks to raise $300 mn to refinance its FCCBs maturing on June 12.

Suzlon is currently trading at Rs 21.70 while the conversion price of its foreign currency bonds maturing this year are set at Rs 97, making them unattractive for bondholders to convert into shares.

If companies with low promoter holding opt for downward revision of the conversion price, it will only lead to further dilution of their equity stake and drag their share prices lower.

Moreover, the recent rupee fall has dealt a crude blow to companies. For example, a company would now need to pay an amount of about Rs 5,504 crore (based on current rupee value of Rs 55.04 per US dollar) towards the principal amount to a bondholder of $1 billion, while a similar loan amount would have been worth about Rs 4,400 crore at the start of 2010 when the rupee was quoted at Rs 44.

During these times of severe liquidity crunch, plummeting currency, highly leveraged balance sheets and tight cash flows, the upcoming redemptions can leave many companies paralyzed.

Unable to meet debt obligations or restructure terms of repayment with bondholders can lead to messy legal fights and winding up petitions as seen in the dispute between Wockhardt [stockquote]WOCKPHARMA[/stockquote] and its investors. The countdown has begun and the coming months will determine if India Inc can survive the redemption pressure or is another crisis looming?

When it comes to business, the Hindi Chini bhai-bhai comment has lived upto its billing. Despite the sharp downturn in global economy, bilateral trade between India and China has been growing, reflecting the vast potential for economic cooperation. Trade between India and China hit a record $ 73.9 billion last year, rising by almost 20%. China is the fastest growing market for India, ahead of US and Japan and two-way trade is expected to touch the $100 billion- mark by 2015.

While India’s exports to China grew by a mere $3 billion last year, China’s exports to India during the said period jumped by over $10 billion.

The huge trade imbalance in favour of our northern neighbour has been a cause of concern and India has been vocal about ‘seeking a more conducive business environment’. The trade deficit for India for 2011 stood at $ 27.08 billion.

Notwithstanding the huge trade gap, the economic relationship between the two top emerging market economies has gained much traction during the last decade.

Chinese export to India relies strongly on manufactured items meeting the demand of fast expanding sectors like telecom and power in India. Chinese companies supply equipments at competitive prices. India’s exports are characterized by primary products, raw material and intermediate products.

Items like iron Ores, textile, copper, precious stones, organic chemicals, etc. continue to dominate India’s export basket. Among these, iron ores, slag and ash comprised of a hefty 45% share while cotton, yarn and fabrics made up 14% of the export basket. The fall in export of iron ore in 2011, which has traditionally been the top export item, has been attributed to the ban on mining in Karnataka and Goa and restriction on shipments from Orissa.

Imports from China rose by 24% with India emerging as the seventh largest export destination for China with a share of 2.66% of total Chinese exports to the world. Electrical machinery accounted for a huge chunk of imports to India. The composition of export/ import basket reveals that India ships raw material to China while China sends finished, value added goods back to India.

To ensure more balanced trade ties, India wants China to import more IT, ITeS and pharma products. New Delhi has also sought removal of restrictions on import of basmati rice, fruits and vegetables, ­­ landing rights for Indian TV channels in China and import of more Indian films.

With China emerging as our largest trading partner, it is high time India ups the tempo as far as the rate of its exports is concerned in relation to imports.

India must diversify its trade basket and press for increased access to Chinese market whose annual imports stood at $1.4 trillion annually. Trade disputes between the two are not new with both initiating anti-dumping charges against each other. India has filed more anti-dumping investigations against China than any other country at the World Trade Organization (WTO) against a host of Chinese products, from toys and mobile phones to tyres and chemicals. China has slapped anti-dumping measures on Indian antibiotics.

Despite the political distrust between the two nations, bilateral trade has grown exponentially.

While India must cash in on the growing Chinese market by targeting different segments like jewellery, pharma and services, it also needs to plug the widening trade deficit for long-term benefits. Expanding economic engagement will also set the platform for overcoming political hostilities.