Tuesday, June 28, 2011

Indian FCCB crisis an opportunity for Chinese Banks

Increasing cost of finance and  risk of FCCB crisis  is forcing Indian business tycoons to look towards dragon for help.  The sinking sensex  has created havoc on atleast 100 companies who have to repay more than  US$ 7 billion before December 2012.

The growth story of India during 2005 to 2008 had made the FCCB (Foreign Currency Convertible Bonds) route as the preferred mode of financing to India Inc. Now, when the maturity is approaching , but the shares of these companies are unable to recover for number of factors a new crisis is emerging. These companies are required to repay an estimated sum Rs 33,000 crore.  From the current margins most of these companies will find it difficult to repay.

The option is to look  for cheaper loans to meet these repayment obligations. Finance at lower rates can come only from  trade surplus countries. Japan used to be one such source in past.  China can be one of such sources in the present situation. Chinese banks have more surplus than demanded by internal industry. This can be a win-win situation for both the countries.

How FCCB crisis can grip a company was seen in last week when GTL shares slipped below 50% mark in two days.  The other major companies which raised money via this route include 3i Infotech, Subex, Sterling Biotech, Country Club, JSW Steel, Tata Motors, Rolta, Educomp, Jaiprakash Associates, Tata Steel, Great Offshore, Suzlon, Firstsource, Pidilite, GTL Infra, Bartronics, Kinetic Engineering, Aban Offshore, Moser Baer and Hotel Leelaventure.

When Indian Stock market was zooming  and it was considered  to be more promising that China, many institutional investors in west came forward to invest in Indian companies with an option to convert to equity share subject to achieving targeted appreciation.  The players in Dalal Street have spoiled the mood  and shares of certain sectors – Infra, realty and capital goods have slipped down drastically and there does not  seem any possibility of turning around.

If the targeted price is not achieved on the browsers, the companies have either to repay the borrowed money or reset the conversion price at a lower rate as was done by Suzlon and Gitanjali Gems.  Many companies may not like to lose stake at lower rate.

In this situation the Chinese banks may emerge as the big winners since the companies would not like to default on FCCB redemption. Financing within India is very expensive and west has its own problems. Chinese banks get an opportunity to park their surplus at a higher rate than their internal rates, but that  is much reasonable for Indian corporate world. Thus, after toys, consumer goods and machines China may command over financial needs of India as well.

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