Reliance Communications is all set to be the the first corporate to take advantage of the new norms issued by RBI for premature buyback of Foreign currency conveyable bonds (FCCB).

According to a report in the Business Standard, Anil Ambani-promoted Reliance Communications (R-Com) is set to be the first company to buy back foreign currency convertible bonds (FCCBs) after the Reserve Bank of India (RBI) allowed premature buyback of such bonds through rupee resources as well.

Reliance Communications had issued zero-coupon FCCBs in February 2007 to raise $1 billion. The bonds are now trading at a 35 per cent discount to the issue price. At this price, Reliancce Communications will have to spend $650 million on the buyback.

The report said that the company has over Rs10,000-crore in cash reserves ($2 billion at the current exchange rate). This includes about $600 million worth of investments in mutual funds overseas. Sources said the company can also convert a portion of the rupee reserves into foreign currency for the buyback, should the need arise.

Other than Reliance Communications, companies like Amtek Auto, Orchid Chemicals, Bharat Forge, United Phosphorus and Wockhardt are said to be in a position to buy back thier FCCBs.

New norms giving the push factor
Prime Minister Dr Manmohan Singh had cleared a proposal to revise norms last week for foreign currency convertible bonds (FCCBs) and external commercial borrowings (ECBs). The new norms will allow Indian companies to buy back FCCBs.

As per new norms, companies may use unutilised funds from its FCCB, export income, EFFC balances, internal accruals or domestic borrowing to finance a buyback.
 
Companies can use either existing foreign currency funds held abroad or in India. They have also been allowed to issue fresh external commercial borrowings (ECBs) and buy back the FCCB.

In addition, the RBI will consider applications for buyback of FCCBs out of rupee resources provided that:
1. There is a minimum discount of 25 per cent on the book value
2. The amount of the buyback is limited to $50 million of the redemption value per company
3. The resources for buyback are drawn out of internal accruals of the company as certified by the statutory auditor.

Reliance Communications has over Rs10,000 crore or $2 billion at the current exchange rate in cash reserves, which includes around $600 million worth of investment in mutual funds overseas.

Sources reportedly said that the company might also convert a portion of the rupee reserves into foreign currency for the buyback, if need arises. Reliance Communications' move will help it to reduce the liability and forex exposure.

The capital gain is attractive, so the company will not delay the buyback. The company has enough cash in its books and, if needed, it could raise part of the funds as debt, sources added.