Unitech seeks approval to raise $700 m through FCCB issue

NEW DELHI: India’s second-largest real estate company Unitech will raise $700 million through foreign currency convertible bonds (FCCBs). The
company has sought approval from the Department of Industrial Policy and Planning (DIPP) and the Reserve Bank of India to raise the fund through convertible instruments.

The company has assured the government that the fund will be used for an integrated township and not for repaying existing debts. “The company will ring fence the fund raised through this route for a dedicated project (integrated township) through an escrow account,” a senior company official requesting anonymity said.

The company spokesperson refused to comment on the issue. The FCCBs are raised from foreign institutional investors and banks. The holders of FCCBs have the option to either redeem the bonds after the maturity period or convert them into equity at a pre-determined price.

Until then, the bonds carry a nominal rate of interest.

In January 2009, as part of the second stimulus package, the government allowed real estate companies to mop up funds through external commercial borrowings (ECBs) for integrated township project. But no realty company had approached the government so far seeking permission to raise fund through this route.

One of the key reasons why Unitech is looking overseas to raise money is to bring down the overall cost of debt, which is around 13%, said a company official on the condition of anonymity.

In case approval is granted, this will be the first case in which a real estate company is being allowed to raise funds through FCCBs. In May 2007, the government had barred real estate company from raising ECBs, even for setting up integrated townships.

As per a senior government official, the DIPP has approved the proposal and sent it for approval of Department of Economic Affairs in the finance ministry. The company has also approached RBI seeking exemption of three-year lock-in, since it is a convertible instrument and should be treated as debt till time of conversion, said a senior executive involved in the process.

Currently, under the government's ECB norms that also govern FCCBs, there's a three-year lock-in before which one cannot redeem the bonds.

According to a company official, Unitech has said the fund should be treated as pure debt till it is converted into equity. It has also given a commitment that at the time of conversion, the allotment of share will be made only to those overseas portfolio investors which are registered with the Securities and Exchange Board of India (SEBI).

Unitech is on a fund-raising spree this year. It has already raised $900 million, equivalent to Rs 4,000 crore, through two rounds of qualified institutional placements (QIPs). In June, it raised $575 million at Rs 82 per share. Prior to this, in March 2009, the company raised $325 million at Rs 38.50 per share.

Part of these funds have been used to repay its debts. The company had a total debt of over Rs 10,000 crore. After adjusting the debts toward telecom venture, it had a residual debt of Rs 8,600 crore before the QIP placement in March 2009. Its current debt is around Rs 6,300 crore, that means the company has repaid a debt of Rs 2,300 crore and the balance amount was used for implementing projects.