Mumbai: The more the government tries to curb foreign funds, the more these funds seek innovative routes. The new favourite is getting money through convertible debentures. While this route has its pitfalls, the government may be looking at curbing foreign convertible debentures as well.
Foreign flows, desperate to reach India Inc, are now discovering a new route — convertible debentures. With the government clamping down on foreign investment through convertible preference shares, convertible debentures are getting a look in. Experts say convertible debentures offer more simpler and transparent funding structures.
Hemal Mehta, Associate Director, KPMG, says, “Innovative structures, which were there earlier will get reduced and people will get into plain vanilla structures, which are more transparent.”
But raising debt through compulsory convertible debentures comes at a big cost. The company has to pay a withholding tax on the gross interest for these instruments. For instance, in Mauritius, the withholding tax on the gross interest for compulsory convertible debentures works out to about 42 per cent. The tax is only between 10-15 per cent in the Netherlands, Singapore and Cyprus.
However, some of these countries charge a higher withholding tax if the money is merely being routed through them. Market sources say about $300-400 million of compulsory convertible issues are in the pipeline and more may follow, though these investors are still trying to tackle the withholding tax angle.
Market players also fear that the government may look at curbing this route as well by classifying them under ECBs. This is due to the fact that RBI is distinctly uncomfortable with the recent surge in capital flows and its impact on inflation and the rupee.
(Source: Moneycontrol.com)
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