The government has decided to allow companies that issued foreign currency convertible bonds (FCCBs) before November 27, 2008 to align conversion price as closer to the market price as possible.

The companies will now be able to revise their FCCB conversion price to the level of average weekly high and low share prices of the period of two weeks before the date of issue of securities. The relevant date of issue is determined by the board.

The earlier rule included a minimum conversion price which was arrived at while looking at the higher of the average for the periods of six months and two weeks. Last time the revision of regulation took place on November 27,
2008.

The finance ministry indicated that the relaxation would be for six months period and the approval from RBI would be required before the revision of the conversion price. The move will benefit the companies that issued the bonds before November 27, 2008 and could not redeem them due to lack of finances.

The holders of these bonds did not prefer the conversion as the market prices had fallen to low due to the affects of the global financial crisis. The FCCB holders preferred redeeming their bonds which put pressure on the issuing companies.

Analysts believe that the move will help several companies; however they will now have to issue more shares which would result in dilution of the promoters' holding in the company. Experts also say that this will help solve the financial crunch and repayment problems and will be beneficial to both the issuing companies and the holders of the instrument.

The finance ministry has said that to utilize this flexibility the companies will have to adhere to some standards. The company will have to take approval from its board and shareholders and also sign new agreements with FCCB holders. The companies will also have to consider that they do not breach the FDI limit in the process.