What is Equity Warrants
Definition: Equity warrants are instruments that bestow upon the holder of the instrument the right to buy a particular stock at a predetermined price within a stipulated time frame. However, to gain this right, the buyer of such warrants usually needs to make an upfront payment to the warrants issuer. On exercise of such warrants, fresh shares are issued by the issuer company.
Warrants are also issued by the way of preferential allotment to promoters, institutional investors, and other strategic investors. This allows such entities to increase their stake if the performance of the underlying business (and thus the stock) is on a high growth path.
Description: According to Indian regulations, in the case of preferential allotments, the buyer of the warrants needs to pay 25 per cent of the price upfront. This payment is to be adjusted against the final payment that needs to be paid in case the warrants are exercised.
In case the warrants are not exercised, the entire upfront payment is forfeited. Also, the pre-determined price of warrant conversion in such cases cannot be less than either:
1) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date
OR
2) The average of the weekly highs and lows of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date The rule for minimum pricing in case of preferential allotment of warrants is enforced in order to protect the interest of minority shareholders. In the absence of such a rule, a promoter/strategic investor may increase the stake in the target company via warrants in a bear market at throwaway prices.
Also, since warrants are not equity shares, they do not carry any dividend or voting rights. It is only after warrants are converted into equity shares does the investor gain dividend and voting rights.
Suppose a stock had an LTP of Rs 100 on April 1, 2015, and the average of its weekly high and low closing prices of the previous six months is Rs 120 while the average of the weekly highs and lows of the closing prices of preceding two weeks is Rs 140.
In such a case, if any preferential allotment of warrants is to be made to a particular set of investors, the minimum price of such warrants shall be Rs 140. And the investor(s) will have to pay 25 per cent of this price (i.e. Rs 35 in case the exercise price is Rs 140) upfront to the company immediately on issuance of the warrants.
By September 30, 2017, investors need to pay up a minimum of Rs 105 (75 per cent of Rs 140) to the company for allotment of shares. If the investor doesnĄ¯t pay the rest of the amount by this date, s/he will not be allotted any shares and would lose the paid amount too.
Warrants are also issued by the way of preferential allotment to promoters, institutional investors, and other strategic investors. This allows such entities to increase their stake if the performance of the underlying business (and thus the stock) is on a high growth path.
Description: According to Indian regulations, in the case of preferential allotments, the buyer of the warrants needs to pay 25 per cent of the price upfront. This payment is to be adjusted against the final payment that needs to be paid in case the warrants are exercised.
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In case the warrants are not exercised, the entire upfront payment is forfeited. Also, the pre-determined price of warrant conversion in such cases cannot be less than either:
1) The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date
OR
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2) The average of the weekly highs and lows of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date The rule for minimum pricing in case of preferential allotment of warrants is enforced in order to protect the interest of minority shareholders. In the absence of such a rule, a promoter/strategic investor may increase the stake in the target company via warrants in a bear market at throwaway prices.
Also, since warrants are not equity shares, they do not carry any dividend or voting rights. It is only after warrants are converted into equity shares does the investor gain dividend and voting rights.
Suppose a stock had an LTP of Rs 100 on April 1, 2015, and the average of its weekly high and low closing prices of the previous six months is Rs 120 while the average of the weekly highs and lows of the closing prices of preceding two weeks is Rs 140.
In such a case, if any preferential allotment of warrants is to be made to a particular set of investors, the minimum price of such warrants shall be Rs 140. And the investor(s) will have to pay 25 per cent of this price (i.e. Rs 35 in case the exercise price is Rs 140) upfront to the company immediately on issuance of the warrants.
By September 30, 2017, investors need to pay up a minimum of Rs 105 (75 per cent of Rs 140) to the company for allotment of shares. If the investor doesnĄ¯t pay the rest of the amount by this date, s/he will not be allotted any shares and would lose the paid amount too.