The disclosure by wind turbine major Suzlon Energy that it may not be able to repay foreign currency convertible bonds (FCCBs) worth over $200 million ( Rs. 1,056 crore) has brought to the fore the fragility of Indian corporate to service the debt of the foreign investors.
Indian companies, which had rushed to tap the offshore convertible bonds market before the 2008 global financial turmoil, will have a tough time servicing debt as companies are suffering from weak financial health due to the protracted slowdown.
The ability of companies to repay debt - in other words the financial health of our companies - will be further tested in the coming three months when bonds to the tune of $1.3 billion (R6,866 crore) comes up for redemption.
With rising default cases - some of which lead to corporate debt restructuring cells and others to long-drawn court battles - the FCCB debt pipeline for Indian corporates is drying up.
FCCB issuance peaked at $ 7 billion during the 2007 boom. Last year it plummeted to $800 million, which is likely to halve this year.
According to a Fitch report released early this year, out of 59 companies facing FCCB redemption in 2012, about 12 may default.
"The default rate is on predicted lines," said Amey Joshi, an author of the report.
Some companies including Moser Baer, Hotel Leela Venture and ICSA went into CDR. Moser Baer's FCCB of $88.5 million, which became redeemable in June 2012, got RBI approval for extension till December 20.
There are at least four instances of bondholders taking defaulter companies to court. While in three cases, the debtors and creditors arrived at settlement one case is still going on.
"It seems some companies do not intend to pay the money, mainly due to two reasons: firstly this is is an unsecured debt and secondly they think they can drag the case to court and buy time," said one bondholder, on condition of anonymity.