What are Warrants?

Published by Sharekhan Education | October 6, 2021

What are Warrants?

Warrants are a form of derivative instrument which gives the warrant holder the right to buy a particular share, not an obligation, to purchase shares at a pre-determined price within a stipulated time period. The buyer of such warrants has to make an upfront payment to the company issuing warrants. When the warrant holder exercises his rights then the issuer company issues fresh shares in place of warrants.

When a business is on a high growth path the company can issue warrants on a preferential basis to promoters, institutional and strategic investors. This is an option of increasing stake in the business which has good future prospects.

SEBI Regulations:

As per SEBI regulations, the preferential warrant holder is supposed to pay 25% as an upfront amount. This payment is adjusted to the final amount in case the warrants are exercised. If the warrants are not exercised then the upfront money is forfeited.

In order to ensure that the promoter of the company does not issue preferential warrants in a falling market at a throwaway price, SEBI has regulated the pre-determined price and stipulated that it 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

1. 1. 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

This rule is enforced to protect the interest of minority shareholders.

Prior to the conversion of warrants into equity shares, the promoter does not have dividend and voting rights. However, after the conversion, they can gain dividends and voting rights.

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