BEYOND the radar of the government and regulators, several Indian companies are
offering \u2019put options\u2019 to foreign investors for raising money. This is a financial
innovation resorted to by corporates to bring in foreign loans masquerading as
equity. The option is used to sell securities to international investors who, in turn, are
promised an assured return and an easy exit.
The new financial structure is aimed at overcoming the recent clampdown on
\u2019partly and optionally\u2019 convertible debentures and preference shares. A few months
ago, the government said money brought in by selling these instruments overseas is
not foreign direct investment (FDI). Instead, such money should be identified as
foreign loans (or external commercial borrowings) where regulations are more
stringent than FDI in terms of end-use restrictions.
The restriction, which derailed fund-raising plans of many companies, particularly
real estate firms, drove the market towards financial innovation. Indian companies
are now issuing compulsory convertible debentures (CCDs) to foreign funds and also
agreeing to buy back the securities after two to three years at a price fixed today.
This is the put option that is tagged with the CCDs. For instance, a local property
firm raising $30 million by issuing CCDs, will give an undertaking that it will buy back
the securities after two years for $33 million.
According to market estimates, more than $750 million has been raised through
this route in the past two months. What\u2019s interesting is that such CCDs (unlike the
partly-convertible instruments) are shown as FDI, even though the underlying
structure is no different from a pure loan. More so, because issuers are also giving a
fixed interest return (just in case of loans) to foreign investors.
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