Large companies that hope to revise the outstanding foreign currency convertible bonds (FCCBs) as

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per new pricing norms prescribed by the finance ministry, face a major roadblock mounted by institutional investors. Existing equity investors are upset because the new norms mean a steep dilution in the equity base of a company and brings down their holdings in it.

Suzlon Energy has called for a bondholders’ meeting on April 7 -- the first company to do so – to attempt a revision in the bond conversion price in accordance with the ministry guidelines.

Once the conversion price is revised downwards, bondholders will get more shares to make good their investments.

According to two independent investment bankers, Suzlon is looking at changing the conversion price of its FCCBs, worth $500 million, to Rs 80-85 a share. “This will mean a 30 per cent dilution in the equity of the company, a concern for existing equity investors,” a senior banker told Financial Chronicle.

A detailed questionnaire sent to the company failed to elicit a response.

According to another official of a foreign bank, there are many companies in the pharmaceutical and automotive industries are grappling with similar problems.

Calendar year 2010 will see FCCBs worth $960 million coming up for redemption, while the figure for 2011 is $4.28 billion.

“There are companies which have seen a drop of between 60 and 70 per cent in their stock prices. Their shareholders will hence see up to 50 per cent dilution in the stake to match the conversion price promised,” a banker said.

According to him, bondholders realise that the credit risk has suddenly disappeared with the relaxation that the government has allowed. “The pricing norms have turned out to be a blessing for FCCB holders, because earlier they were being forced to take a hit on their investments as most companies were trying to restructure their FCCBs following a steep fall in their stock prices,” he said.

Suzlon has informed stock exchanges that it would seek shareholders’ approval for a revision in the bond conversion price through postal ballots.

“Suzlon will easily get the approval, considering that the promoters and group companies hold over 53 per cent in the company. However, they may face some opposition from other equity investors,” said another banker.

Most companies that raised funds though FCCBs in 2007 were hit by the stock market crash in 2008. Bogged down by redemption pressures, companies had approached the government to bail them out. The Reserve Bank of India (RBI) then allowed companies to buy back bonds before maturity out of their internal accruals or using funds raised through external commercial borrowings (ECBs) at huge discounts.

However, only a few companies could make use of this window which closed by December 31, 2009, due to paucity of funds.

On Thursday, Suzlon’s stock closed at Rs 77.05 on BSE (equivalent to Rs 385.25 after a 1:5 stock split in December 2007), down 28 per cent from its promised conversion price of Rs 538.30. The bonds were issued prior to the stock split, in October 2007.

In April 2008, Suzlon had tried rolling over its FCCBs with new issuance at a conversion price of Rs 76.67 per equity share of Rs 2 each at an exchange rate of Rs 49.8112 a dollar. Bonds worth $61 million were bought back in May last year.