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CNBC TV18
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FCCB Holders Vs Castex Technologies

Published on Sat, Aug 29,2015 | 13:44, Updated at Mon, Aug 31 at 22:48Source : CNBC-TV18 |   Watch Video :

Introduction: It’s a rare case, if not the first one. A group of foreign currency convertible bonds (FCCBs) bondholders are alleging the Indian issuer company manipulated its stock price so as to trigger a mandatory conversion of the bonds into equity. The bondholders have complained to the regulators and the exchanges and they are now threatening legal action in the UK and in India.

Doshi: Bikes, cars, trucks, why even tractors use components manufactured by Amtek India. Now renamed Castex Technologies, the company is present in eight countries and last year made Rs 3,800 crore in revenue and Rs 267 crore in profits. Its total debt stood at Rs 5,700 crore.

Castex                                      REVENUE Rs 3800 cr
Technologies                          PROFIT Rs 267 cr
                                                 DEBT Rs 5700 cr
                                                 DEBT/EQUITY 2.3


2012
Castex Technologies raised $200m

Apr 2012              $130 m  via 6% FCCBs
                                                                                5 years tenure
Sep 2012             $70 m via 2.5% FCCBs

Conversion Price: Rs 103 per share

In 2012 Castex raised nearly USD 200 million via two tranches of foreign currency convertible bonds (FCCBs). The company issued 6 percent convertible bonds and 2.5 percent convertible bonds, both of a five year tenure and due for conversion in 2017. The conversion price was pre-decided at Rs 103 a share. Three years later Castex relationship with a group of bond holders has soured. CNBC-TV18's Sajeet Manghat has been investigating the story.

Sajeet Manghat
CNBC TV18

Manghat: A group of bond holders have complained to the Indian regulator Securities and Exchange Board of India (SEBI), the stock exchanges Bombay Stock Exchange (BSE) and National Stock Exchange of India Limited (NSE) and now they are threatening to sue the company. I spoke to their lawyer Richard East.

Doshi (voiceover): Richard East is co-managing partner at London based law firm, Quinn Emanuel. He won’t name his clients but he says they are hedge funds with a significant holding of Castex's 6 percent bonds and they are accusing the company of foul play.

Richard East
Co-Managing Partner, Quinn Emanuel

Richard: The facts are that there was a material increase in the stock. It coincided very obviously with the rights in the offering memoranda and this relates to the two sets of bonds at play here and it allowed the company to exercise the mandatory conversion and the stock price has gone down in price every day since that point.

Castex Technologies Bond Deed                      
Bondholders can seek conversion anytime after 16th May    2017
Company can MANDATORILY convert..
•    Conversion Window 5th April 2015 – 30th March 2017
•    On date of conversion notice CLOSING PRICE should be atleast 130% of the principal  value for each of the 30 consecutive days prior to notice
•    Mandatory conversion should be for ALL Bonds

Doshi (voiceover): The standoff is best explained by understanding the bond deed. While it gives bondholders the option to seek conversion anytime after May 16, 2012, the bond deed also allows the issuer Castex to seek mandatory conversion if certain conditions are met. The window for mandatory conversion opens on or after April 5, 2015 and extends till seven days prior to the maturity of the bonds which in the case of the 6 percent bonds is April 6, 2017. On the date the notice of conversion is issued, the closing price of the shares translated into US Dollars at the prevailing rate should be at least 130 percent of the principal value for each of the 30 consecutive days prior to the date of notice and that the mandatory conversion should be for all outstanding bonds and not just some bonds.

Doshi: And so it all comes down to stock price, doesn’t it Sajeet?

Sajeet Manghat
CNBC TV18

Manghat: Yes it does and that is the twist in the case. While the Castex stock price barely moved for a year, this April onwards it zoomed.



 

Manghat (voiceover): Look at the chart for the past two years, August 2013 the stock was at Rs 70, April 1 last year it was at Rs 83. In June last year it spiked to Rs 131 but then declined all the way to Rs 46 in March this year. Now look what happened to the stock starting April 2015.



 

Doshi (voiceover): On April 1, the Castex stock price was Rs 57, on April 5 the window to possible mandatory conversion opened. Hereon if the stock made certain gains, Castex could issue notice to mandatorily convert the FCCBS into shares. By the end of May 2015, the stock hit Rs 181, that is three times its price in April. In order to trigger mandatory conversion, the stock needed to remain above a threshold price of approximately Rs 170 for 30 consecutive days. Between June 19 and July 13, The Castex stock rouse on a daily basis to the maximum possible limit of 5 percent and though the price fell thereafter, by then the company had met all the conditions needed to trigger a mandatory conversion. On July 31, the Castex board decided that all outstanding FCCBs will be converted to shares in September 2015.

Richard East
Co-Managing Partner, Quinn Emanuel

Richard: That right did not exist until April 5 of this year. On or around that time, the shares in what was then Amtek is now called Castex began to rise very significantly and they rose something like three times their original value in just over two months and they rose to a level which was necessary for the company to be able to trigger the mandatory conversion rights. They rose at a time there was no significant or material news in the market place to justify that rise and they rose and apparently there was no effect on the parent company shares at all even though the rise in the stock price suggested that the value of the Castex subsidiary had tripled in value.

Castex Technologies

April 2015
Rs 57

July 2015
362

Castex Technologies
DEBT REDUCTION  
16%


Doshi (voiceover): From Rs 57 to Rs 362, Castex stock price increased six times between April and July this year. The mandatory conversion will reduce Castex’s debt by around 16 percent.

Doshi: Suspecting foul play, that group of bond holders represented by Richard East the approached the company.

Sajeet Manghat
CNBC TV18

Manghat: But the company dismissed the suspicions and refused to engage with the bondholders directly. In fact they asked the bond holders to go via the bond trustee which is Citicorp International.

Richard East
Co-Managing Partner, Quinn Emanuel

Richard: They have refused in written correspondence to engage with our clients on a technical argument that the company only has to engage directly with the trustee of the bond. We thought that was a highly technical argument and not an argument that would be used in circumstances where the company was operating reasonably and constructively with its creditors.

Doshi (voiceover): Then the bond holders wrote to SEBI, the BSE and the NSE. The first letter sent on July 10, 2015 alleged unlawful manipulation of the company’s share price. The letter claimed that if the artificially inflated price is not investigated, it may lead to the company asserting mandatory conversion of bonds.

In a second letter to SEBI on July 24, bond holders claimed that the alleged price manipulation will ensure that there will be insufficient trading days left before July 30 for the share price to fall beneath the mandatory conversion threshold. That forecast eventually came true.

In their third letter on July 31, the bond holders protested against the mandatory conversion notice issued by Castex. The NSE confirmed to CNBC-TV18 that it had received a complaint and was seeking clarification from the company. The BSE and SEBI have not responded to our queries.

Richard East
Co-Managing Partner, Quinn Emanuel

Richard: We understand that one of the exchanges has initiated a formal complaint process but we have had no direct contact from SEBI. What we hope to achieve is that what the regulator will become interested in this and will investigate and will try to determine what has actually occurred because we say that the circumstances if in fact there has been some form of wrongdoing and I stress at the moment that our clients have merely raised the facts and circumstances and suggested that there is an inference of wrongdoing. If in fact there has been wrongdoing, in our view it will undermine and invalidate the mandatory conversion.

Doshi (voiceover): There is not much time left, Castex has set September 10 as the conversion date for the 6 percent bonds and September 25 as the conversion date for the 2.5 percent bonds. Besides waiting for a response from the Indian regulator and the stock exchanges, are the bondholders contemplating any legal action?

Richard East
Co-Managing Partner, Quinn Emanuel

Richard: All I can say at this stage is that all remedies are being looked at. This is an English law governed bond, so that raises the possibility of English proceedings but the company is located and operates and these conversions will practically take place in India. So, that also raises the prospect of Indian proceedings.

Sajeet Manghat
CNBC TV18

Manghat: In that interview Richard told me that his firm would like to invite all Castex FCCB holders to reach out to them and join the fight. Right now it is only a group of those owning the 6 percent FCCBs; we haven’t yet heard from the 2.5 percent bond holders though I must mention here that some FCCB holders have voluntarily converted their bonds to shares. So, it is not clear how many will join this fight and how successful it will be.

Doshi: In your conversation with Richard East, did he make any mention of seeking any kind of settlement with the company, any middle path option of any sort?

Manghat: Richard told me that all options are available with the clients but it depends upon whether the company is going to withdraw the mandatory conversion notice first or not.

Doshi: So, that is the bare minimum that the clients want?

Manghat: Yes.

Doshi: Did you reach out to Castex Technologies; did they have any comment to offer on all these allegations made by this group of bond holders?

Manghat: We did reach out to the senior management of Castex Technologies but they refused to respond to our query.

 
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