Friday, February 15, 2008

As a Private Equity dealmaker, I would worry

The government today notified guidelines for Foreign Currency Exchangeable Bonds, that lets companies forming part of conglomerates to unlock some of their investments in group companies.

FCEB is a debt security offered by a company (“issuing company”) and subscribed to by investors living outside India and exchangeable into equity shares of another company (“the offered company”) of the same group, based on warrants attached to the security. Conditions include –

a) Companies to belong to the same group;
b) Offered co has to be listed, FDI/ECB compliant;
c) Not to use funds for stock buys/India real estate;
d) Five years for redemption but can exchange anytime.

This is yet another window for conglomerates in a hurry to monetize rich valuations in a booming market. I can explain. If a company has exhausted its FDI / ECB limits and still needs funds, it has to either raise fresh capital or resort to high cost borrowings. In both cases, the credit rating would suffer and that means higher cost of borrowing. By taking FCEB road, it can swap the FDI/ECB head room available for any other company in the group to raise more funds at the same reduced cost.

What would it entail? More companies from same groups, with or without ready projects would make a beeline to get listed. Now if R-Com has exhausted its FDI/ECB limits, it can raise it under Reliance Power, which is a shell now. Before that is exhausted, Anil bhai will float another company and take it public. One company always to be kept ready with FDI/ECB window open. Remember successive IPOs during early days of Reliance and the later consolidation? Even smaller players like the Modern group of yesteryears from the Ranka stable? Modern Sintex, Modern Denim, Modern Terry Towels – each of them were listed, their stocks rose and fell with little notice. Fundsraising was a chain reaction - one project was used to fund another till the chain collapsed during the late 90’s bear phase.

But then it’s an election year. Reliance has new oil strikes. Uncanny coincidence of timing the new law? Notice the relative calm even in the left benches despite the fuel price hike. Whatever happened to the elementary principle in Finance – every business should sustain by itself? Take life. How long would you stand on other’s legs?
As a Private Equity deal maker, I would worry.

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