Ranju Sarkar / Mumbai December 13, 2008, 0:13 IST
Mutual funds are considering buying Foreign Currency Convertible Bonds (FCCBs)
of Indian companies that are trading at discounts of 30 to 40 per cent to their
face value on the assumption that these bonds can deliver good returns in two
to three years, when they mature.
"We are looking at the FCCB market and will consider buying these bonds which
promise higher yields. We are doing the homework to understand the market,"
said Nilesh Shah, DMD and CIO, ICICI Prudential Asset Management Company (AMC).
Another fund manager with a large AMC, who didn't wish to be quoted, said that
he will definitely consider buying these bonds. The AMC already holds stocks of
many of these companies or is familiar with most of them.
AMCs can invest $7 billion abroad, and $300 million per AMC, but investments
are way below these levels. Most equity schemes can invest 35 per cent of their
assets abroad and there are schemes that invest only in overseas equity.
What's holding them back is that they are not very sure if they can buy these
bonds. "There's no clarity on this," said A Balasubramanian, CIO, Birla Sun
Life.
Shah said mutual funds are allowed to invest in investment-grade foreign
securities, but he is not sure whether FCCBs fit in. "It's a grey area", he
said.
DISCOUNTED BARGAINS
(Some FCCBs and their conversion price)
Name of company Conversion* Mkt price^ % change
Subex 446.20 32.25 -92.77
Amtek Auto 613.70 54.60 -91.10
First Source Solu 128.60 13.17 -89.76
Tata Motors 1266.70 154.10 -87.83
Tata Motors 950.40 154.10 -83.79
JSW Steel 1361.50 226.55 -83.36
Jubilant Org 588.90 112.60 -80.88
Jaiprakash Assoc 365.90 84.25 -76.97
Tata Steel 935.00 217.90 -76.70
M&M 1180.50 292.95 -75.18
Price in Rs * Effective conversion price ^ As on December 12,
2008
Source: Edelweiss Research
And there lies the problem. "If mutual funds need to invest in only AAA-rated
instruments, there may be no Indian company with an 'AAA' foreign currency
rating overseas,'' said Krishnan Sitaraman, head, fund services, Crisil.
A Sebi circular, dated September 26 last year, said mutual funds could invest
in "foreign debt securities in the countries with fully convertible currencies,
short-term as well as long-term debt instruments with rating not below
investment grade by accredited/registered credit rating agencies".
Analysts said the circular implies that mutual funds can invest in debt
instruments with ratings not below investment grade (BBB & above) though it
doesn't mention FCCBs anywhere. If mutual funds were to buy them, it's better
to get an approval from Sebi, they said.
India's sovereign rating is in the "BBB category" (some agencies give BBB+
while some others put in -BBB). There will be some Indian companies whose debt
instruments will have a rating of BBB, making them eligible for mutual funds to
buy.Mutual funds keen to buy FCCBs
Ranju Sarkar / Mumbai December 13, 2008, 0:13 IST
Mutual funds are considering buying Foreign Currency Convertible Bonds (FCCBs)
of Indian companies that are trading at discounts of 30 to 40 per cent to their
face value on the assumption that these bonds can deliver good returns in two
to three years, when they mature.
"We are looking at the FCCB market and will consider buying these bonds which
promise higher yields. We are doing the homework to understand the market,"
said Nilesh Shah, DMD and CIO, ICICI Prudential Asset Management Company (AMC).
Another fund manager with a large AMC, who didn't wish to be quoted, said that
he will definitely consider buying these bonds. The AMC already holds stocks of
many of these companies or is familiar with most of them.
AMCs can invest $7 billion abroad, and $300 million per AMC, but investments
are way below these levels. Most equity schemes can invest 35 per cent of their
assets abroad and there are schemes that invest only in overseas equity.
What's holding them back is that they are not very sure if they can buy these
bonds. "There's no clarity on this," said A Balasubramanian, CIO, Birla Sun
Life.
Shah said mutual funds are allowed to invest in investment-grade foreign
securities, but he is not sure whether FCCBs fit in. "It's a grey area", he
said.
DISCOUNTED BARGAINS
(Some FCCBs and their conversion price)
Name of company Conversion* Mkt price^ % change
Subex 446.20 32.25 -92.77
Amtek Auto 613.70 54.60 -91.10
First Source Solu 128.60 13.17 -89.76
Tata Motors 1266.70 154.10 -87.83
Tata Motors 950.40 154.10 -83.79
JSW Steel 1361.50 226.55 -83.36
Jubilant Org 588.90 112.60 -80.88
Jaiprakash Assoc 365.90 84.25 -76.97
Tata Steel 935.00 217.90 -76.70
M&M 1180.50 292.95 -75.18
Price in Rs * Effective conversion price ^ As on December 12,
2008
Source: Edelweiss Research
And there lies the problem. "If mutual funds need to invest in only AAA-rated
instruments, there may be no Indian company with an 'AAA' foreign currency
rating overseas,'' said Krishnan Sitaraman, head, fund services, Crisil.
A Sebi circular, dated September 26 last year, said mutual funds could invest
in "foreign debt securities in the countries with fully convertible currencies,
short-term as well as long-term debt instruments with rating not below
investment grade by accredited/registered credit rating agencies".
Analysts said the circular implies that mutual funds can invest in debt
instruments with ratings not below investment grade (BBB & above) though it
doesn't mention FCCBs anywhere. If mutual funds were to buy them, it's better
to get an approval from Sebi, they said.
India's sovereign rating is in the "BBB category" (some agencies give BBB+
while some others put in -BBB). There will be some Indian companies whose debt
instruments will have a rating of BBB, making them eligible for mutual funds to
buy.
http://www.business-standard.com/india/news/mutual-funds-keen-to-buy-fccbs/17/46/343099/
Government cannot make man richer, but it can make him poorer
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