Sebi unlikely to block Amtek Group firm’s FCCB conversion

India’s capital market regulator is unlikely to intervene in the ongoing standoff between Castex Technologies Ltd and the holders of its foreign currency convertible bonds (FCCBs).

The bondholders have urged the Securities and Exchange Board of India (Sebi) to block the impending conversion of two sets of FCCBs worth $200 million into equity on Thursday and on 25 September.

They allege that the stock of the company was manipulated to rise, triggering the mandatory conversion of all outstanding bonds.

Shares of Castex rose sharply from Rs.41.40 in March to touch a peak of Rs.361.85 on 13 July on BSE. From its high, the stock continued to fall 5% every day. On Wednesday, the shares closed at Rs.42.45 each.

Shares of parent Amtek Auto crashed from a high of Rs.257.75 on 15 September 2014 to Rs.30.45 per share on Wednesday.

Three people familiar with Sebi’s view say that the regulator is unlikely to block the conversion even though it is looking at whether there has been any manipulation on the stock price.

Santosh Singhi, chief financial officer of Amtek Auto, didn’t respond to calls seeking comment.

Castex Technologies issued two sets of FCCBs in 2012-13—one of $130 million in April 2012 and the other of $70 million in September 2012. Both carried a 6% coupon rate. The conversion clause for the two sets came into effect in April and July, respectively.

Subsequently, on 31 July, Castex announced the mandatory conversion of all the outstanding bonds (around $80.8 million worth) out of the FCCB issue of $130 million, with the conversion date being 10 September. Further, the company also decided to mandatorily convert all the outstanding bonds ($56.6 million) of the FCCB issue out of $70 million, with the conversion date being 25 September.

This didn’t go down well with the FCCB holders. They believe the stock of Castex was artificially pushed up for a certain period of time, triggering the conversion of outstanding FCCBs. The clause states that if the Castex stock continues to trade at over Rs.160 for a month, the company can call for a mandatory conversion of the bonds.

Sebi doesn’t have cause to stop this, one of the three people cited above said.

“The conversion is purely a commercial decision between the company and the bondholders. Sebi has no reason to intervene in the commercial decision of the company in this matter at the moment. The clauses and the risk factors attached to the FCCBs were disclosed by the company clearly during the issuance. And, the FCCB holders are sophisticated investors and should have been clearly aware of all possible risks involved in such instruments,” added this person, asking not to be identified.

“Technically, Sebi can intervene under Section 11B and 11 D of the Sebi Act. But it maybe unfair to stop the company from converting its FCCBs to equity. The provisions under Section 11 are used in exceptional cases. In this case, it may amount to unfair business restrictions by the regulator because the disclosures about the bonds were explicitly made to the investors,” said the second person, who too asked not to be identified.

The sections deal with investor protection and violations of the Sebi Act.

An email sent to Sebi on Tuesday did not elicit any response.

Lawyers and market analysts say Sebi should intervene in the larger interest of investors and in order to maintain integrity of the markets and the instrument.

“It is a clear case of market manipulation orchestrated to benefit the company and its promoters by paring the disproportionately huge debt pile the parent company has accumulated. If the company manages to convert the FCCBs into equity, it will accomplish its goal to unfairly cut down the debt at the cost of investors’ interest,” said a corporate lawyer who has been part of several committees formed by the government to frame securities laws for India. He too spoke on condition of anonymity, stating that he works closely with one of the parties involved in the matter.

“Imagine the high predetermined price at which the company will be able to convert the FCCBs into equity and manage to reduce a large portion of its debt at one go. Today the stock has crashed. Compare the conversion price to the prevailing market price of the stock and imagine the significant loss investors have suffered in the stock. Sebi cannot allow such illegitimate acts, whereby one set of stakeholders benefits and the other set of public investors suffers so badly. Sebi should use its powers under Section 11, pass an interim order like it often does, and put the conversion on hold till the detailed investigation is concluded,” he added.

In order to protect the interest of investors and ensure orderly functioning of the capital market, Section 11 B and 11 D empower Sebi to suspend trading of any security and debar any listed entity or its associates to access the securities market or deal in any instrument in any manner through an order if the regulator has reasonable grounds to suspect a manipulation in stocks or any form of violation in the existing regulations. The Act entitles Sebi to take such actions till a detailed investigation is concluded.

The FCCBs in question, which are listed on the Singapore Stock Exchange, are mostly owned by foreign financial services firms. According to BSE, as on 30 June, Castex’ major shareholders included Cresta Fund Ltd (4.19%), NDMR BV (4.22%), Asian Investment Corp. (Mauritius) Ltd (4.24%), Albula Investments Fund Ltd (4.23%), Deutsche Bank AG London (2.89%), Credit Suisse Singapore Ltd (1.41%) and HYPNOS Fund Ltd (1.48%).

When the Castex stock was hovering above Rs.160, some FCCB holders opted for a conversion on their own. For instance, on 27 July, Castex announced on BSE that the company has allotted 480,000 shares at Rs.103.005 per share upon the conversion of FCCBs of $1 million out of the FCCB issue of $130 million. On 11 July, the company disclosed allotment of 1.46 million shares at the same price upon the conversion of FCCBs of $3 million out of the $130 million FCCB issue.

Earlier, on 24 June, the company’s allotment committee allotted 1.62 million equity shares at Rs.103.005 per share upon conversion of FCCBs worth $3 million out of the $70 million FCCB issue. On the same day, the company announced a further allotment of 1.95 million shares at Rs.103.005 apiece upon the conversion of FCCBs of $4 million out of the $130 million worth of FCCB issue.

There are several such instances of FCCB conversion during June and July.