ECB regulations? No thanks, we got Compulsory Convertible Debentures (CCDs)
From the Economic Times: Curbs go kaput as firms brandish put options
. . . the government said that money brought in by selling these instruments (‘partly and optionally’ convertible debentures and preference shares) overseas is not foreign direct investment (FDI). Instead, such money should be identified as foreign loans (or external commercial borrowings - ECBs) where regulations are far 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 a financial innovation. Indian companies are now issuing compulsory convertible debentures (CCDs) to foreign funds and also agreeing to buy back the securities after 2-3 years at a price which is fixed today. This is the put option that is tagged with CCDs.
Got to love it; the government regulates and the industry works-around!
The catch? As a seller of a put option, you are screwed if the price of the underlying goes down a lot. In this case, the real estate companies that are making liberal use of these instruments are essentially betting on their stock prices remaining stable, at worst.
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