Financial Management & Corporate Finance Case Study

Case Title:

Jaypee Group’s Foreign Currency Convertible Bonds (FCCBs): Redemption Pressures

Abstract:
This case study is mainly written to understand the redemption pressures faced bythe Indian companies as they raised large amounts through Foreign Currency Convertible Bonds(FCCBs). Because of the lowcoupon rates and embedded call optionon the equity shares of the issuing company, FCCBs gained wide popularity and became an important sourceof raising external funds in Indian capital market. Availing the opportunity of low-cost borrowing, many Indian companies issued/raised heavy amounts through FCCBs route. However, the recent financial turbulence has created wide gap between the current stock prices of these companies and the effective conversion price, making redemption inevitable.One such Indian company,Jaiprakash Associates Ltd. (JAL) issued FCCBs worth $400million, which falls due in 2012. In such scenario,how can the Indian companies, inparticular JAL, manage the redemption pressures? Further more, the case study provides a rich discussion as towhat are the best possible actions for the company to manage its liquidity and profitability position?

Pedagogical Objectives:

• To understand the operating dynamics of FCCBs in India
• To understand the dynamics of Jaypee Group’s FCCBs
• To assess the impact of the redemption pressures on the company and analyse the alternatives for it.
• To analyse the reasons for Hindalco’s rights issue being under subscribed and debate on what could have prevented such a situation.

Keywords : FCCBs; Foreign Currency Convertible Bonds; External Commercial Borrowings; Indian Financial Market; ECBs; Conversion ratio; Conversion price; Finance for Managers; Principles of Financial Management; Financial Management; MBA; Managerial Finance; Corporate Finance; Financial Management Course Case Pack; Financial Management Course Case; Course Case Maps; Course Case Packs