Monday, February 22, 2010

Pricing Adjustments for FCCBs

On November 27, 2008, the Ministry of Finance introduced changes to the pricing norms for FCCBs. As we had discussed then, two changes were proposed:

(i) the minimum price will be the average weekly high and low prices for the 2 weeks prior to the relevant date, instead of the previous price determined as the higher of the average for 6 months and 2 weeks;

(ii) the relevant date for price determination will the date on which the board decides to issue to securities, and not 30 days prior to the shareholders’ resolution as it earlier stood.
These changes were introduced to overcome the difficulties faced by issuers in appropriately pricing FCCBs in declining market conditions. However, since the altered requirements were applicable prospectively, it did not provide any benefits in relation to FCCBs issued prior to the date of relaxation, being November 27, 2008. In view of representations received from companies and after consultation with RBI and SEBI, the Ministry of Finance last week issued a press release whereby “it has now been decided by the Government to provide a window of 6 months under the scheme to interested companies to revise their conversion price as per new pricing norms. This will be effective from the date of the issue of this Press Note”. In other words, companies that had issued FCCBs prior to the price relaxation effected on November 27, 2008 would also be entitled to the liberalised norms.

The adjustment of conversion price is subject to certain conditions: (i) the issue of shares at revised pricing should not breach FDI limits; (ii) the issuer company should obtain the approval of the board as well as its shareholders for repricing; (iii) the issuer company should enter into a fresh agreement with FCCB holders with the renegotiated conversion price; and (iv) the revision in conversion price should be approved by the RBI.

There are, however, some ambiguities in the new pricing guidelines. While it is clear that a 2-week average will be applied in computing the minimum price, the guidelines appear to be silent as to the date from which the 2-week period will be calculated while repricing the FCCB conversion. As a Business Standard report notes:

The point of confusion is the two-week period preceding the launch of an FCCB issue, which is used to calculate the minimum conversion price based on an average of closing share prices. Bankers are not sure whether to consider the 14 days preceding the original issue or the 14 days before the reset of the conversion price, which companies have now been allowed to undertake. The latter would be much more useful, since it would more closely reflect current market prices and facilitate conversion to equity.

However, if the original date at which the FCCBs were launched is considered, the new guidelines will bring little benefit to Indian companies, since most instruments were issued during the 2007 bull run in the stock markets.

“During a bull run, the two-week average price would be higher than the six-month average price, whereas in a bear phase it would be opposite,” said an investment banker with a foreign bank.

Corporate law firms contacted by Business Standard are of the opinion that FCCBs can be re-priced according to current market prices.
While companies and advisors will have to work with the regulators to achieve a resolution of this ambiguity, it seems that repricing the FCCB conversion as per current market prices will present its own unintended consequences.

From a legal perspective, the question is whether the regulatory intent can be derived from the guideline itself. The press note states that interested companies can “revise their conversion price as per new pricing norms”. The reference to “new pricing norms” is to those introduced on November 27, 2008. These norms include not only the pricing determination but also the “relevant date”, which is the “date of the meeting in which the Board of the company or the Committee of Directors duly authorized by the Board of the company decides to open the proposed issue.” To that extent, the relevant date applies with reference to the date of board meeting for authorizing the issue of the FCCBs and not to a current date when the possible repricing decision is being made.

From a policy perspective, if companies are allowed to reprice their FCCB conversion with reference to the current market price, then companies who are the beneficiaries of the new guidelines (i.e. those who issued FCCBs prior to November 27, 2008) would obtain an additional advantage over companies who issued them thereafter. This would result in a mismatch, and it is not clear if the guidelines were designed with a view to achieve such a result.

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