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In finance, a warrant is a security that entitles the holder to buy the underlying stock of the
issuing company at a fixed price called exercise price until the expiry date.
Warrants and options are similar in that the two contractual financial instruments allow the
holder special rights to buy securities. Both are discretionary and have expiration dates. The
word warrant simply means to "endow with the right", which is only slightly different from the
meaning of option.
Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer
to pay lower interest rates or dividends. They can be used to enhance the yield of the bond and
make them more attractive to potential buyers. Warrants can also be used in private equity deals.
Frequently, these warrants are detachable and can be sold independently of the bond or stock.
In the case of warrants issued with preferred stocks, stockholders may need to detach and sell the
warrant before they can receive dividend payments. Thus, it is sometimes beneficial to detach
and sell a warrant as soon as possible so the investor can earn dividends.
Warrants are actively traded in some financial markets such as German Stock Exchange
(Deutsche Brse) and Hong Kong.1 In Hong Kong Stock Exchange, warrants accounted for
11.7% of the turnover in the first quarter of 2009, just second to the callable bull/bear contract.2

Secondary market
Sometimes the issuer will try to establish a market for the warrant and to register it with a listed
exchange. In this case, the price can be obtained from a stockbroker. But often, warrants are
privately held or not registered, which makes their prices less obvious. On the NYSE warrants
can be easily tracked by adding a "w" after the companys ticker symbol to check the warrant's
1 http://www.sfc.hk/sfc/doc/EN/research/research/rs%20paper%2013.pdf

2 http://paper.wenweipo.com/2009/04/02/FI0904020009.htm

price. Unregistered warrant transactions can still be facilitated between accredited parties and in
fact several secondary markets have been formed to provide liquidity for these investments.
Warrants are in many ways similar to options, but a few key differences distinguish them.
Warrants are generally issued by the company itself, not a third party, and they are traded overthe-counter more often than on an exchange. Investors cannot write warrants like they can
options. Unlike options (with the exception of employee stock options), warrants are dilutive:
when an investor exercises her warrant, she receives newly issued stock, rather than alreadyoutstanding stock. Warrants tend to have much longer periods between issue and expiration than
options, of years rather than months.
Warrants do not pay dividends or come with voting rights. Investors are attracted to warrants as a
means of leveraging their positions in a security, hedging against downside (for example, by
combining a put warrant with a long position in the underlying stock) or exploiting arbitrage
opportunities. Warrants are no longer very common in the U.S., but are heavily traded in Hong
Kong, Germany and other countries.

Structure and features

Warrants have similar characteristics to that of other equity derivatives, such as options, for

Exercising: A warrant is exercised when the holder informs the issuer their intention to
purchase the shares underlying the warrant.
The warrant parameters, such as exercise price, are fixed shortly after the issue of the bond

With warrants, it is important to consider the following main characteristics

Premium: A warrant's "premium" represents how much extra you have to pay for your
shares when buying them through the warrant as compared to buying them in the regular

Gearing (leverage): A warrant's "gearing" is the way to ascertain how much more
exposure you have to the underlying shares using the warrant as compared to the exposure
you would have if you buy shares through the market.

Expiration Date: This is the date the warrant expires. If you plan on exercising the
warrant you must do so before the expiration date. The more time remaining until expiry, the
more time for the underlying security to appreciate, which, in turn, will increase the price of
the warrant (unless it depreciates). Therefore, the expiry date is the date on which the right to
exercise ceases to exist.

Restrictions on exercise: Like options, there are different exercise types associated with
warrants such as American style (holder can exercise anytime before expiration) or European
style (holder can only exercise on expiration date).
Warrants are longer-dated options and are generally traded over-the-counter.3

Warrant Premium he amount that an investor must pay above the current market price for a
security, when purchasing and exercising a warrant. The warrant premium represents the cost of
purchasing a share through the warrant, compared to buying the share directly through the open
market. It is calculated as: [(warrant price + exercise price - current share price) / current share
price] * 100 For example, an investor holds a warrant with a price of $10 and an exercise price
of $25. The current share price is $30. The warrant premium would be [($10+$25-$30)/$30]*100
= 16.7%. Warrants have both a price and premium. Typically, the premium will decrease as the
price of the warrant rises and the time to expiration decreases. A warrant is in the money when
the exercise price is less than the current share price. The more in the money the warrant is, the
lower the warrant premium is. High volatility can also cause the warrant premium to be higher.

3 http://paper.wenweipo.com/2009/04/02/FI0904020009.htm

Types of Warrants
There are two categories of warrants: a call warrant and a put warrant. A call warrant represents a
specific number of shares that can be purchased from the issuer at a specific price, on or before a
certain date. A put warrant represents a certain amount of equity that can be sold back to the
issuer at a specified price, on or before a stated date.
Although there are several kinds of warrants, the most common types are detachable and naked.
Detachable warrants are issued in conjunction with other securities (like bonds or preferred
stock) and may be traded separately from them. Naked warrants are issued as is and without any
accompanying securities.
Other less common types of warrants include wedded warrants (which can only be exercised if
the attached bond/preferred stock is surrendered) and covered warrants (which are often issued
by financial institutions and rarely issued by the underlying company). Companies will also
occasionally issue put warrants to hedge employee option programs.
Traditional warrants are issued in conjunction with bonds, which in turn are called warrantlinked bonds, as a kind of sweetener that allows the issuer to offer a lower coupon rate. These
warrants are often detachable, meaning that they can be separated from the bond and sold on

the secondary markets before expiration. A detachable warrant can also be issued in conjunction
with preferred stock; often the warrant must be sold before the investor can collect dividends.
Wedded or wedding warrants are not detachable, and the investor must surrender the bond or
preferred stock the warrant is "wedded" to in order to exercise it. Naked warrants are issued on
their own, without accompanying bonds or preferred stock.
Covered warrants are issued by financial institutions rather than companies, so no new stock is
issued when covered warrants are exercised. Rather, the warrants are "covered" in that the
issuing institution already owns the underlying shares or can somehow acquire them. The
underlying securities are not limited to equity, as with other types of warrants, but may be
currencies, commodities or any number of other financial instruments.
Trading warrants can be difficult and time-consuming, as they are for the
most part not listed on stock exchanges, and data on warrant issues is not
readily available for free. When a warrant is listed on an exchange, its ticker
symbol will often be the symbol of the company's common stock with a W
added to the end. Warrants generally trade at a premium, which is subject
to time decay as the expiration date nears. As with options, warrants can be
priced using the Black-Scholes model.
A type of security that gives the holder the right (but not the obligation) to sell a given quantity
of an underlying asset for an agreed upon price on or before a specified date. A put warrant is a
company-issued option to sell back to the issuer a specified number of shares of the
company's common stock at a particular price sometime in the future. Unlike options that are
instruments of an exchange, warrants - including put and call warrants - are issued by companies.
There are two types of warrants - put warrants and call warrants. All warrants have an expiration
date - the last day that the rights of the warrant can be exercised. If a warrant is not exercised
before the end of its fixed tenure, it expires worthless. A put warrant's exercise price (also called

the strike price) is the price at which the holder can sell the warrant. Both put and call warrants
are classified by their exercise style. American warrants can be exercised anytime on or before
the expiration date; European warrants can only be exercised on the day of expiration. Investors
can use put warrants to hedge against falling share values of stock held in their portfolios. 4

A call warrant is a financial instrument that gives the holder the right to buy the underlying share
at a specific price, on or before a specified date. Call warrants are often included in a new equity
or debt offering from a company, in order to provide an added inducement to potential investors.
Call warrants are usually detachable from the accompanying stock or bond certificate and trade
separately on major stock exchanges.
The price at which the warrant holder can buy the underlying stock is called the exercise price or
strike price. This strike price is often set "out-of-the-money," i.e., it is fixed at a certain
percentage above the current trading price of the underlying stock
A type of warrant that allows the holder to buy or sell a specific amount of equities, currency or
other financial instruments from the issuer, usually a bank or a similar financial institution, at a
specific price and time.
The main differences between normal warrants and covered warrants are:
1. Covered warrants can have a wide variety of underlying financial products. Normal warrants
only have a company's stock as their underlying financial product.
2. Covered warrants are only issued by financial institutions. Normal warrants are only issued by
the company that issued the underlying equity.

4 Finance glossary by SGCIB

3. Covered warrants can have a variety of exercise prices depending on the conditions set forth
by each issue. Normal warrants generally have only one exercise price.
4. Covered warrants allow the warrant holder to buy or sell the underlying asset. Normal
warrants allow the warrant holder only to buy the underlying equity.
Additional warrants that are acquired following the exercise of primary warrants. Piggyback
warrants are a type of sweetener and can prompt additional investment in a company.5
A warrant that is issued without a host bond. A naked warrant allows the holder to buy or sell a
particular financial instrument, such as a bond or shares, but unlike a normal warrant, it is not
sold with an accompanying bond. Naked warrants are typically issued by banks or other financial
institutions that are not also issuing a bond, and can be traded in the stock market. Normal
warrants are issued with an accompanying bond (a warrant-linked bond), giving the investor
holding the warrant the right to exercise it and acquire shares of the company that issued the
underlying bond. The company writing the bond is typically the same company issuing the
underlying bond. Naked warrants, on the other hand, can be backed by a variety of underlying
investments, including stocks, and are considered more flexible.
A warrant that requires the holder to surrender a similar bond when purchasing a new fixedincome instrument. For the warrant to be exercisable, the two bonds must have similar terms,
such as maturity, yield and principal. Also known as a "wedding warrant." Issuing a harmless
warrant provides the debt issuer with some call protection. Under a normal warrant, bond holders
might all opt to buy more instruments, drastically increasing the firm's level of debt. With a
harmless warrant, the original bond must be surrendered at the time of purchase, allowing the
level of debt to remain constant.
5 Common Stock Warrants

A warrant that can only be exercised if the host asset, typically a bond or preferred stock, is
surrendered. Until the call date of the host asset is reached, the warrant can only be exercised if
the holder surrenders an equal amount of host asset. The time period in which the investor has to
surrender the equal amount of host asset is set in the warrant itself. After that time has passed, the
warrant's holder can buy non-callable bonds. Also known as "harmless warrant" or "wedded
warrant." Wedding warrants are so named because the warrant is "wedded" for a certain period of
time, and can only be "divorced" from the host bond after that time has passed. Wedding
warrants were introduced as financial products in the 1980s. Investors typically don't use them
because they have to hold the warrant for a long period of time until the call date is reached, or
risk having to buy the host bond as well.67


Let's look at an example that illustrates one of the potential benefits of warrants. Say that XYZ
shares are currently priced on the market for $1.50 per share. In order to purchase 1,000 shares,
an investor would need $1,500. However, if the investor opted to buy a warrant (representing one
share) that was going for $0.50 per warrant, he or she would be in possession of 3,000 shares
using the same $1,500. Because the prices of warrants are low, the leverage and gearing they
offer is high. This means that there is a potential for larger capital gains and losses. While it is
common for both a share price and a warrant price to move in parallel (in absolute terms) the
6 Common Stock Warrants

7 www.sebi.gov.in/cms/sebi_data/attachdocs/1417511914375.pdf

percentage gain (or loss), will vary significantly because of the initial difference in price.
Warrants generally exaggerate share price movements in terms of percentage change.
Here's another example to illustrate these points. Say that share XYZ gains $0.30 per share from
$1.50, to close at $1.80. The percentage gain would be 20%. However, with a $0.30 gain in the
warrant, from $0.50 to $0.80, the percentage gain would be 60%. In this example, the gearing
factor is calculated by dividing the original share price by the original warrant price: $1.50 /
$0.50 = 3. The "3" is the gearing factor - essentially the amount of financial leverage the warrant
offers. The higher the number is, the larger the potential for capital gains (or losses).
Warrants can offer significant gains to an investor during a bull market. They can also offer some
protection to an investor during a bear market. This is because as the price of an underlying share
begins to drop, the warrant may not realize as much loss because the price, in relation to the
actual share, is already low. (Leverage can be a good thing, up to a point.

Like any other type of investment, warrants also have their drawbacks and risks. As mentioned
above, the leverage and gearing warrants offer can be high. But these can also work to the
disadvantage of the investor. If we reverse the outcome of the example from above and realize a
drop in absolute price by $0.30, the percentage loss for the share price would be 20%, while the
loss on the warrant would be 60% - obvious when you consider the factor of three used to
leverage, but a different matter when it bites a hole in your portfolio. Another disadvantage and
risk to the warrant investor is that the value of the certificate can drop to zero. If that were to
happen before it is exercised, the warrant would lose any redemption value. Finally, a holder of a
warrant does not have any voting, shareholding or dividend rights. The investor can therefore
have no say in the functioning of the company, even though he or she is affected by any
decisions made.8

A Bittersweet Stock Jump

8 http://www.investopedia.com/walkthrough/corporate-finance/5/riskmanagement/warrants.aspx

One notable instance in which warrants made a big difference to the company and investors took
place in the early 1980s when the Chrysler Corporation received governmentally guaranteed
loans totaling approximately $1.2 billion. Chrysler used warrants - 14.4 million of them - to
"sweeten" the deal for the government and solidify the loans.
Because these loans would keep the auto giant from bankruptcy, management showed little
hesitation issuing what they thought was a purely superficial bonus that would never be cashed
in. At the time of issuance Chrysler stock was hovering around $5, so issuing warrants with an
exercise price of $13 did not seem like a bad idea. However, the warrants ended up costing
Chrysler approximately $311 million, as their stock shot up to nearly $30. For the federal
government, this "cherry on top" turned quite profitable, but for Chrysler it was an expensive

Valuing Warrants with the Black-Scholes Model

Although there are several possible methods for valuing a warrant, a modified version of the
Black-Scholes model is most common. This formula is for European-style options and, though
American-style options are theoretically worth more, there is not much difference in price in

The Factors That Influence Warrant Prices

Beyond the calculation above, investors should consider the following factors when evaluating
the price of a warrant

Underlying Security Price: The higher the price of the underlying security, the more
valuable the warrant becomes. After all, if the price of the stock is below the strike price
of the warrant, there is no reason to exercise the warrant because it is cheaper to buy the
stock on the open market.

Days to Maturity: Generally speaking, options and warrants are worth less as time goes
on and expiration approaches. This phenomenon is also called "time decay," and it will

accelerate as expiration approaches if the strike price is above the current price.
Dividend: Warrant-holders are not entitled to receive dividends, and the corresponding

reduction in the stock price reduces the value of the warrant.

Interest Rate/Risk-Free Rate: Higher interest rates increase the value of options like

Implied Volatility: The higher the volatility, the higher the odds that the warrant will

eventually be in the money and the higher the value of the warrant will be.
Additional Factors: In addition to those factors that are common between options and

warrants, warrants have a few extra factors of their own.

Dilution: Because the exercise of a warrant will increase a company's outstanding shares,

this dilution adds a twist to valuation that is not present in normal option valuation.
Premium: Warrants can be issued at premiums; the lower the premium the more valuable

the warrant.
Gearing/leverage: Gearing is the ratio of the share price to the warrant premium, and it
reflects how much the price of the warrant changes for a given change in the stock. The

higher the gearing is, the more valuable the warrant.

Restrictions on exercise: Though very difficult to quantify mathematically, any
restrictions on the exercise of warrants will impact the value of a warrant, typically
negatively. A common restriction (and one that is easy to quantify) is the difference
between American-style and European-style warrants; American-style warrants permit
exercise at any time, while European-style warrants can only be exercised on the

expiration date.
The Bottom Line:Although warrants are not very common any more, they are not all that
hard to value in practice. After all, a warrant is basically just a long-term option issued by
a company. Investors need to make a few adjustments for unique factors like dilution, but
a basic Black-Scholes options pricing formula will produce a reasonable assessment of
the warrant's value. Warrants can offer a smart addition to an investor's portfolio, but
warrant investors need to be attentive to market movements due to their risky nature9

9 www.manupatrafast.com/NewsletterArchives%5Clisting%5CInduslaw%5C2015/SEPT...

Issuance of partly paid shares and warrants by Indian companies

1. The Ministry of Finance has decided to permit issuance of partly paid shares and warrants
("the said instruments") by the Indian companies to foreign investors.
2. In this regard, RBI has notified the Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident Outside India) (Ninth Amendment) Regulations, 2014 on June 30,
2014. The said amendment essentially permits foreign investment in partly paid-up shares and
warrants issued by Indian companies. RBI has also issued A.P. (DIR Series) circular No. 3 dated
July 14, 2014 ("RBI circular") declaring the said instruments as eligible for the purpose of FDI
and FPI subject to compliance with FDI and FPI schemes. The circular also lays down certain
conditions in respect of pricing, receipt of balance consideration, reporting, etc.
The provisions in the said RBI circular are summarized as under:

A. Eligible instruments and investors - Partly paid equity shares and warrants issued
by an Indian company in accordance with the provisions of the Companies Act,
2013 and the SEBI guidelines, as applicable, have been made eligible instruments
for the purpose of FDI and foreign portfolio investment (FPI) by Foreign
Institutional Investors (FIIs) / Registered Foreign Portfolio Investors (RFPIs)
subject to compliance with FDI and FPI schemes.
B. Pricing and receipt of balance consideration
Partly paid equity shares: The pricing of partly paid equity shares shall be
determined upfront and 25% of the total consideration amount (including
share premium, if any), shall also be received upfront. The balance
consideration towards fully paid equity shares shall be received within a
period of 12 months. The time period for receipt of balance consideration
within 12 months shall not be insisted upon where the issue size exceeds
INR 500 crores and the issuer complies with regulation 17 of SEBI (Issue
of Capital and Disclosure Requirements) Regulations, 2009 ("ICDR")
regarding monitoring agency. This exemption of not mandating receipt of
balance consideration within 12 months period has also been extended to

the unlisted Indian investee companies.

Warrants: The pricing of the warrants and price / conversion formula
shall be determined upfront and 25% of the consideration amount shall
also be received upfront. The balance consideration towards fully paid up
equity shares shall be received within a period of 18 months. The price at
the time of conversion should not in any case be lower than the fair value
worked out, at the time of issuance of such warrants, in accordance with
the extant FEMA regulations and pricing guidelines stipulated by RBI

from time to time.

C. Reporting and other conditions - Certain requirements as regards reporting
under FEMA regulations have been prescribed. The onus of compliance of all the
conditions under FEMA as regards entry route, sectoral caps and all other
conditions under FDI guidelines has been put on the investee company in case of
issue of partly paid shares / warrants as well as upon resident transferor or
transferee in accordance with extant guidelines in case of transfer of partlypaid

shares / warrants. Certain other requirements including giving notice for transfer
of partly-paid shares, FIIs / FPIs complying with the individual limit of
investment, compliance with sectoral caps, prior-approval of FIPB for investing
under the government route, forfeiture of upfront payment on nonpayment of call
money, etc. have also been laid down under the said circular.
Proposals for amendment
5. A. Issuance of partly paid shares I. Requirement of upfront payment a. Rights issue In case of
rights issues, the following is presently stipulated under regulation 54(7) of ICDR:
"54(7) The issuer shall give only one payment option out of the following to all the investors
(a) part payment on application with balance money to be paid in calls; or
(b) full payment on application: Provided that where the issuer has given the part payment
option to investors, such issuer shall obtain the necessary regulatory approvals to facilitate the
As can be seen from the above, part payment option is available in rights issues. However, there
is no specification as to the minimum amount to be paid with the application. To enable
application by foreign investors and ensure uniformity with the RBI guidelines, the said
regulation 54(7) of ICDR may have to be amended to specify that in case of part payment option
being provided by the issuer in rights issue, the part payment on application shall not be less than
25 % of the issue price.
B. Issuance of warrants
I. Requirement of upfront payment
a. Public and Rights issue :In terms of regulation 4(3) of ICDR, warrants can be issued along
with public issue / rights issue of other specified securities. The said regulation 4(3) reads as
"4(3) Warrants may be issued along with public issue or rights issue of specified securities
subject to the following:

(a) the tenure of such warrants shall not exceed twelve months from their date of allotment in the
public/rights issue;
(b) not more than one warrant shall be attached to one specified security.
" Currently, there is no specific provision regarding minimum upfront payment to be received by
issuer in respect of such issuance of warrants. However, as per schedule VIII - part A - paragraph
2(VII)(A)(6) read with regulation 57(2) of ICDR, full disclosures shall be made regarding the
objects towards which the funds from conversions of warrants are proposed to be used. To

ensure certainty regarding receipt of funds by the issuer company, a minimum upfront

payment in respect of allotment of warrants may be stipulated.

Hence, in line with the norms prescribed by RBI, it may be stipulated under ICDR that pricing
of the warrants and price / conversion formula shall be determined upfront and 25% of the
consideration amount shall be received upfront. In case of non-exercise of warrants, entire
upfront payment may be forfeited by the issuer.
II. Period of conversion
a. Public and Rights issue Regulation 4(3) of ICDR permits warrants to be issued along
with public issue or rights issue of specified securities subject to certain conditions
including maximum tenure of warrants not exceeding 12 months from the date of
allotment. To ensure uniformity, regulation 4(3) of ICDR may be amended for increasing
the tenure of warrants issued along with public issue or rights issue of specified securities
to 18 months.


With a view to boost foreign direct investment in the country, the Department of
Industrial Policy and Promotion (DIPP) has on 15 September 2015 issued a press note
(Press Note 9) amending the existing Consolidated Foreign Direct Investment Policy

(FDI Policy) in relation to the issuance of partly paid equity shares and warrants by
Indian companies to foreign investors.
In 2014, the Reserve Bank of India (RBI) had specifically amended its guidelines on
foreign investment to include partly paid equity shares and warrants within the scope of
eligible capital instruments which may be issued by Indian companies to foreign
investors. The RBI had however, clarified that prior approval of the Foreign Investment
Promotion Board (FIPB) will be required for the issuance of partly paid equity shares and
warrants to foreign investors by those companies whose activities fall within the
government route under the FDI Policy.
Though the RBI amended its guidelines in 2014, the FDI Policy continued to provide that
warrants and partly paid shares may be issued to persons resident outside India only after
obtaining the approval of the FIPB, irrespective of whether the investment was being
made under the automatic route or the approval route. This led to an ambiguity between
the RBI guidelines and the FDI Policy, and the government (under the current FDI
Policy) recognized that there was a need to review its policy to bridge this gap.
Accordingly, Press Note 9 has now amended the current FDI Policy to allow partly paid
equity shares and warrants to be issued to foreign investors without government approval
in those sectors where FDI is allowed under the automatic route. This amendment now
aligns DIPP's stance on partly paid equity shares and warrants with the RBI's treatment of
such instruments.

The key features of Press Note 9 are set out below.

(a) Partly paid equity shares and warrants (which include share warrants under the
Companies Act 2013) have now been included within the definition of 'Capital' under the
FDI Policy.
(b) Press Note 9 specifically provides that preference shares and convertible debentures
must be fully paid up, and must be mandatorily and fully convertible.
(c) A new paragraph has been added to the FDI Policy which provides that Indian
companies may issue warrants and partly paid equity shares to persons resident outside
India subject to terms and conditions stipulated by the RBI in this regard.
Some of the key conditions for the issuance of partly paid equity shares and
warrants as per the prevailing RBI guidelines are summarized below.

- Adherence with sectoral caps: The issuing Indian company and the non-resident
investor need to ensure that sectoral caps are not breached even after the equity shares get
fully paid-up, or warrants get converted into fully paid equity shares.
- FIPB approval under the government route: For companies whose activity falls
within the government route under the FDI Policy, prior approval of the FIPB will be
required for issuance of partly paid equity shares and warrants to eligible foreign
investors. This position remains unchanged pursuant to Press Note 9.
- Pricing: Partly paid equity shares: Pricing has to be determined upfront and 25% of the
total consideration amount (including share premium, if any), has to be received upfront.
The balance consideration towards fully paid equity shares has to be received within a
period of 12 months.
Warrants: Pricing and price/ conversion formula has to be determined upfront and 25%
of the consideration amount has to be received upfront. The balance consideration
towards fully paid up equity shares has to be received within a period of 18 months.
The clarity introduced by Press Note 9 is welcome and will provide much greater
flexibility to Indian companies looking to raise funds from foreign investors by allowing
deferred payment structures, hybrid debt and equity instruments (e.g. non-convertible
debentures coupled with warrants) etc.
Facility sharing agreements between group companies
The DIPP had been receiving requests to clarify whether facility sharing agreements
through leasing/ sub leasing arrangements between group companies for business
activities, would be construed as 'real estate business' for the purposes of the FDI Policy.
In response to such enquiries, the DIPP has on 15 September 2015 clarified that entering into
such agreements would not be construed as 'real estate business' under the FDI Policy, provided
that the following conditions are met:
(a) all such arrangements should be at arm's length price in accordance with the relevant
provisions of the Income Tax Act, 1961; and
(b) the annual lease rent earned by the lessor company in such arrangements should not
exceed 5% of its total revenue.


Several amendments have been made to the SEBI DIP Guidelines as briefly highlighted here. I
am sharing a few more thoughts on two areas, but in separate posts. This post focuses on the
increase of minimum deposit on Share Warrants from 10% to 25% of issue price. This
amendment was the least unexpected, even too late. Too late because it has already been heavily
misused and abused and also made at a time when Promoters are least like to subscribe to Share
Warrants. In fact, there appears to be literally a flood of cases of Promoters allowing the 10%
deposit on existing Share Warrants to be forfeited. I have even heard that advisors are straining
their legal creativity in finding ways in which even this 10% could be returned to the Promoters!
True, most I have heard of till now sound bird-brained but, considering the stakes
involved, further efforts are on.
Coming back, let us quickly highlight some aspects of Share Warrants to place the recent
amendment in context. Share Warrants are instruments that give a right and option to the holder

to acquire shares within a specified time and at a specified price. They are thus similar to ESOPs
and also to options traded in markets, though the latter represent private contracts where the
listed company is not involved. Share Warrants thus have several advantages. You dont need to
pay the full share price upfront. You can exercise the Share Warrants anytime. You even have the
option to back out and let the deposit be forfeited. And so on. For the Company, they were often
useful as, for example, acting as sweeteners to otherwise unattractive Unsecured, NonConvertible Bonds. They also had the weak justification, in the early years of globalization, of
allowing Promoters to increase their stake to prevent hostile takeovers. However, they quickly
degenerated to being used almost exclusively to enrich Promoters, at the cost of the Company
and other shareholders. Consider, from the point of view of the Promoters, the free lunch of
Share Warrants. You get the Share Warrants (earlier for free) by paying just 10% deposit. Even if
this deposit is forfeited, you still get to share it to the extent of your holding (e.g., a Promoter
holding 50% of the Company thus shares 50% of the forfeited deposit). Even this deposit of 10%
was an absurdly low amount it barely covered the interest on the balance 90% for 18 months.
But interest is obviously not the only factor. Often the bigger advantage is of the option. Having
done and reviewed several valuations of options in context of ESOPs, I have found that in
numerous cases, particularly in times of higher volatility, even the increased 25% deposit may be
found to be too low.
Further, in case of market-traded options, the option premium is an additional cost and not partpayment of the purchase price. Thus, even if you decide to actually purchase the shares, you pay
the full purchase price in addition to this premium. In case of Share Warrants, the deposit paid is
adjusted against the issue price. Till a recent prohibition, Share Warrants also represented simple
arbitrage. Sell today and buy Share Warrants by paying 10% deposit. This also meant that the
surplus cash could be used to acquire higher shares and raise the balance amount later.
It was also quickly realized by Promoters that Share Warrants could help avoid the creeping
acquisition limits. Well planned, the Promoters could increase their holding by 15% over 18
months without violating the 5% creeping acquisition limits. All this by paying just 10% today
and that too at todays prices! Needless to say, this technique was widely used. How sound was
the deal from the point of view of the Company? Almost certainly a loss making one since if the
same deal was offered to a third party, he would have paid a far higher amount. The public

shareholders obviously also lost. SEBI of course has been chipping away slowly at the
anomalies. The early amendments included reducing the conversion to period to the current 18
months and the 10% deposit, increased to 25% now. There is a ban on preferential allotment to
those who have sold in last six months. The lock-in has been effectively increased, as discussed






though, from


perspective, these very amendments over time which appear mainly intended to protect Share
Warrants from misuse by Promoters. What was the result on Share Warrant itself as an
instrument? How sound a financial proposition they appear to third party, non-Promoter
investors? How attractive would Share Warrants sound, if one has to pay 25% upfront, if one has
to convert them within 18 months, if one has to suffer double lockin, if the conversion price has
to be a minimum one related to recent prices, and so on The latest amendment comes not only
too late but also at a time when Promoters are least in the mood to acquire Share Warrants simply
because the six monthly average prices are typically higher than the current market price.
What then is the justification for continuing to allow issuance of an instrument that is a win-win
proposition for the Promoters and a lose-lose one for the Company and the public shareholders?
Is it not time for, instead of making marginal improvements, simply sentencing Share Warrants to
a dishonorable discharge, having led, far more often than not, a disgraceful existence
Alternatively, major changes are required if they are to be continued. Linking pricing and deposit
for Share Warrants to past average prices is absurd. Share Warrants are equivalent to options and
should be valued as such. Even a rudimentary version of the Black-Scholes formula would give a
fairer price. Remember, this technique is already being used, albeit as an alternative, for valuing
and accounting for ESOPs. And, at the very least, it is this price that should be paid. The amount
should be paid as a premium for being granted the Share Warrants and not as a deposit that is
adjustable towards the issue price Also, at the risk of sounding petty, I would even suggest that if
this amount paid by Promoters is to be forfeited, it should be distributed as a special
dividend/bonus to non-Promoter shareholders! (as I said, sharp minds are hard at work, so I keep
hearing, to find ways to return the forfeitable deposits to the Promoters on existing Share
Warrants suddenly found to be out of the money). There should also be a commercial
justification for issuance of Share Warrants, especially from the point of view of the Company.
The Company puts itself in a peculiar position when it issues Share Warrants. Other Potential
investors are wary of the potential dilution and thus the Company becomes slightly unattractive

to them. The Company may or may not receive the balance amount for the shares. And it may
receive this balance price at any time the Promoters deem fit. Is it a commercially sound
proposition for the Company to issue Share Warrants on such terms and where monies come in
such uncertain manner and timing? Only if the answer is a clear yes, that the Share Warrants
should be issued.




Dr. Ajay Kumar
ROLL NO.:723



Apart from the efforts of the researcher, the success of any project depends largely on the
encouragement and guidelines of many others. I take this opportunity to express my gratitude to
the people who have been instrumental in the successful completion of this project. I would like
to show my greatest appreciation to Dr Ajay Kumar. I cant say thank you enough for his
tremendous support and help. I feel motivated and encouraged every time I attend his lectures.
Without his encouragement and guidance this project would not have materialized.
The guidance and support received from all the members who contributed and who are
contributing to this project, was vital for the success of the project. I am grateful for their
constant support and help.
I am thankful to my librarians, who provided me the books and materials required for the
completion of this project. I am grateful to all my friends, from whom I got the meticulous
comments and suggestions which proved very beneficiary in the completion of this project.

Finally, I am thankful to all those individuals and institutions that directly and indirectly
provided me the materials which helped me to complete this project.
SESSION: 2012- 2017


Types of Warrant
Advantages And Disadvantages
Factor Affecting warrant Price
Issuance Of Partly Paid Shares And Warrants By Indian Companies
Reserve Bank Of India Guideline: Summary

Books :
High-Rebound Warrants , Karl N. Kaiser Published By Capital Gains
Institute, 1961
New Opportunities In An Exciting New Market, Andrew Mchattie
Warrants: Analysis And Investment Strategy, Donald T. Mesler
PUBLISHED BY Probus Pub., 1986.