Equity market still the favourite for investors.

The equity market is in the doldrums and a recovery looks some way off. But most institutional investors appear to favour this risky asset class over relatively safer fixed income debt instruments. At least, that seems to be the case among holders of foreign currency convertible bonds (FCCBs), who have decided to exercise the option of converting their bonds into shares, instead of redeeming the investment.

Leading foreign investors such as Goldman Sachs, Swiss Finance Corporation, Deutsche Bank and Lehman Brothers are among those who have chosen to convert their FCCB holdings into equity. This would help ease some redemption pressure on the respective companies which otherwise would be required to borrow funds from the market to meet their repayment obligations, say investment bankers. In some cases, the holders have gone for conversion into equity, though the market price is lower than the conversion price.

In the past, many corporates raised huge funds through FCCBs as the cost of borrowing is much lower than domestic funding options like debentures and loan from banks and financial institutions. FCCBs are issued in foreign currency with an option to convert them in shares of the issuer company. They are quasi-debt instruments, which carry coupon and have tenure between five and eight years.

“Some of the companies where conversions have happened could be financially sound and paying good dividend. Investors would not mind holding shares of such companies for a long period, irrespective of movements in their shares. Again, FCCBs do not yield much returns as coupon rates are low,” said Mayank Dalal, head of investment banking, Centrum Capital.

Recently, KLG Systel offered 3,27,750 shares to Deutsche Bank on conversion of FCCBs worth $3 million issued in 2007. The shares, which account for 2.8 per cent of the company’s equity, were issued at a price of Rs 400 per share against the market price of Rs 585 on the day of allotment (May 26 ‘08). The stock, however, has been on a decline since the conversion, ending at Rs 377 on Thursday, a 6 per cent discount to the conversion price. KLG System company secretary Jayant Gupta told ET that the company had issued FCCBs for a total amount of $ 22 million, out of which $ 16 million are outstanding as on Thursday. The bonds will mature in 2012.

In another example, Jubilant Organosys has converted FCCBs worth $19 million in six lots between February 13 and June 30, 2008. A clutch of investors like Swiss Finance Corporation, Copthall Mauritius, Grants Investments and CQS Master Fund has been allotted close to 30 lakh shares, or 2 per cent of the company’s equity, at Rs 273, while the share price moved between Rs 314 and Rs 381 during the period. Jubilant Organosys shares closed 1 per cent down at Rs 308 on Thursday. Among other companies, GTL Infrastructure and Jain Irrigation Systems have issued shares to Goldman Sachs while Micro Technologies converted some FCCBs of Lehman Bros into equity.

Some investment bankers feel the intention behind FCCB holders exercising conversion option in the choppy market could to be to avail an exit option before the market price falls below the conversion price. Shares of two companies — GTL Infrastructure and KLG Systel — are currently quoting at a discount to their respective conversion prices.
Source: - ET.