Pharma companies are in a buyback mode. Domestic drug majors, which have raised funds through foreign currency convertible bonds (FCCBs), have an outstanding amount of over $1.7 billion, according to estimates. With currency fluctuation primarily a weakening rupee against the dollar leading to huge forex losses and adversely impacting Indian corporates, the government's FCCB prepayment/buyback measure could provide some hope.

After the recent RBI directive, Indian companies have been permitted to buy back FCCBs by using funds either raised through external commercial borrowings (ECBs), or through internal accruals. Sources said the rule was further relaxed early in December 2008 to allow companies to use rupee reserves to redeem overseas debt.

New Delhi-based drug major Jubilant Organosys has joined the trend and is eager to buy back $253 million worth of its bonds. Others on the list with outstanding FCCBs are Aurobindo Pharma, Wockhardt, Strides Arcolab, Orchid Chemical, Ranbaxy Laboratories, Torrent, Sterling Biotech, Strides Arcolab, Panacea Biotec, Dishman and Glenmark.

"Some of these FCCBs are currently quoting at huge discounts of around 30% to 50%. Several investment bankers have been appointed to check out the best deals,'' said Ranjit Kapadia, head of research at investment firm Prabhudas Lilladher. Aurobindo Pharma recently appointed Barclays for the same.

So, while India's sixth-largest drugmaker by revenue, Wockhardt, wants to raise funds to pay off investors in its $110-million FCCB issue, which comes up for redemption next year (October 25, 2009), Ranbaxy too has appointed investment banks to find funds to buy out investors from its outstanding FCCBs worth $440 million. Orchid Chemicals has issued instruments worth $193 million (comprising one tranche worth $175 million with maturity in February 2012 and other worth $18 million with maturity during Nov 2010).

Analysts argue that Ranbaxy also posseses funds worth $750 million, which has recently been infused by Sankyo Daiichi through its preferential issue.

"But Ranbaxy may not be able to utilise the funds for FCCB pre-payment purpose, as the fund has not been raised through fresh ECB or through internal accruals as per RBI guidelines,'' an analyst familiar with the company said.

For buying back of FCCBs from rupee resources, RBI has fixed a minimum discount of 25% on book value. The amount of the buyback is limited to $50 milllion of the redemption value per company where this window will be kept open till March 09.

Analysts indicated that most bonds are up for redemption any time in the next 18 months and, with markets taking a beating, many calculations could go wrong which could have a negative impact on the capital structure of these companies.

In its report, the research team at Reliance Money has said: "We do not think the liberalised scheme for prepayment/buyback of FCCBs would benefit Indian pharma majorly. One needs to raise fresh ECBs to buy back outstanding FCCBs under the auto route. Looking at the global financial turmoil, it will be tough for Indian players to raise fresh debt at favourable terms. Also, the deteriorated financials owing to wild currency fluctuations in the recent past disqualifies players from raise fund at favourable terms required for FCCB pre-redemption.''

Over the past three years, the telecom sector (14%) has topped the league tables for maximum number of FCCBs raised, followed by the pharma (13%), IT (12%) and metal sectors (9%). The maximum discount to conversion prices was noticed in sectors like auto, capital goods, telecom, construction and pharma.