The current article covers different aspects related to the preferential allotment of stock warrants/share warrants to promoters. The article focuses on the significance of warrant issuance from the perspectives of a retail investor and how she should analyse and interpret the issuance of warrants.
Warrants are like stock options where the promoters get a right to acquire new shares from the company at a fixed price by paying 25% of the money upfront. After warrants are allotted to the promoters, then they may approach the company any time within next 18 months and get shares from the company at the predetermined price irrespective of the current market price of the shares of the company.
Over time, during our analysis of the incidences of warrant issuances by companies, we have noticed some key characteristics for preferential allotment of warrants to promoters. These are:
- Stock warrants are insider trading timed to perfection
- Using stock warrants, the promoters get shares of their company at a cheaper price than the market price. Many times, the promoters book profits by selling these shares at a higher price in the market.
- In the preferential issuance of warrants, the odds are highly against the company and minority shareholders. The stock warrants are only 25% beneficial to the company whereas they are 75% beneficial to promoters.
In the current article, we would discuss examples illustrating each of these situations. We will also discuss conditions where warrants are allotted to the promoters at a price higher than the prevailing stock price as well as the situations where the bankers force the company to issue preferential warrants to promoters.
Let us see these aspects of preferential issuance of warrants to promoters in details.
Stock warrants are insider trading timed to perfection!
The case of warrant allotment by Indo Count Industries Ltd to its promoters in 2013 is a good example to understand how promoters used the stock warrants to benefit themselves like a person with insider information.
Indo Count Industries Ltd approved the allotment of 28,98,300 stock warrants to promoters in the meeting on September 11, 2013, at a price of ₹17.25 per share (pre-split price, the post-split equivalent price would be 1/5 of it: i.e. ₹3.45 and the number of shares post-split would be 5 times: i.e. 1,44,91,500).
The Shareholders of the Company in their Extra Ordinary General Meeting held on 11-09-2013 accorded their approval for issue and allotment of 28,98300 equity share warrants at ₹ 17.25 each (including premium of ₹ 7.25 each) on preferential basis to promoter group. The Company alloted 28,98,300 equity shares at a premium of ₹ 7.25 each on 20-12-2014 which shall be subject to a lock-in period of 3 years as specified under Regulation 78 of Chapter VII of the SEBI ICDR Regulations, 2009.
The (post-split) share price of the company on September 11, 2013, was in the range of ₹5.44 meaning that the promoters had a gain of ₹2.9 cr [1.44 cr. Share * (5.44-3.45)] on the very day of allotment.
The stock warrants are allotted by companies based on a formula, which is based on the share price levels of past 6 months and are allotted by taking 25% of the value at warrants allotment. The balance 75% of the money is collected when the warrant holder converts them into equity shares.
In the case of Indo Count Industries Ltd, the promoters paid the 25% price of allotment i.e. ₹1.25 cr (1.44 cr. Shares * ₹3.45 * 25%), which the company disclosed in the FY2014 annual report, as share price money pending allotment.
The above information indicates that the promoters paid ₹1.25 cr for something which was giving them a profit of ₹2.9 cr right on the day of allotment.
An investor would notice that stock warrants are like call options where the holder has paid a premium of 25% of the value and would convert the warrants into equity shares by paying the balance 75% only if at the time of conversion the price of the equity share of the company is such that the holder of the warrants makes money over her warrant allotment price. Stock warrants are usually convertible within 18 months from the allotment.
An investor would notice that the stock warrants holder (promoter in this case) has got a right to subscribe to the company shares and increase her stake in the company at a predetermined price without worrying about the usual share price increase which happens if the promoters buy shares of their company from the open market. In case the share price does not increase, then the promoter simply lets the warrants expire.
That’s even though the companies say that stock warrants are issued to the promoters in lieu of the capital infusion by them at times when the company needed funds. However, I call stock warrants a legal instrument in the hands of promoters/allottees to speculate on their company share price. And invariably, the persons to bear the cost of such speculation are the minority shareholders.
An investor would see that the promoters infused ₹1.25 cr for allotment of stock warrants in FY2014. Looking at the financials of the company in FY2014: Sales of about ₹1,468 cr, net profit of ₹110 cr, a debt of ₹434 cr and interest expense of ₹50 cr, the infusion of ₹1.25 cr by promoters seems insignificant in terms of overall financial position of the company and that too by calling a special extraordinary general meeting.
If it was urgent, then Indo Count Industries Ltd could have collected this much amount by making a single phone call to any of their customers so that they may pay ₹1.25 cr from the outstanding trade receivables of ₹127 cr on March 31, 2013, and ₹167 cr at March 31, 2014. Such collection in the time of urgency would not have been difficult from long-standing customer relationships.
Moreover, even if the company needed funds, the promoters did not infuse the balance 75% of the warrants funds i.e. ₹3.73 cr (1.44 cr. Shares * ₹3.45 * 75%), until December 20, 2014, which is good 15 months post allotment. If the stock warrants were allotted supposedly for the urgent requirement of funds by the company, then the balance 75% funds infusion would have come much sooner. However, even the balance 75% (₹3.73 cr) seems insignificant in terms of overall finance requirement of Indo Count Industries Ltd.
Anyway, the promoters got 1.44 cr. shares (post-split) at December 20, 2014, at an effective price of ₹3.45, which is the original warrant allotment price. The post-split share price of Indo Count Industries Ltd at December 20, 2014, was about ₹60. Therefore, at the time of allotment of equity shares, the promoters had a gain of about ₹56.55 per share (post-split, ₹60 – ₹3.45), amounting to a total gain of ₹81.43 cr (1.44 cr shares * ₹56.55).
Moreover, the conversion of stock warrants allowed the promoters to increase their stake in the company by 3.20%.
The increase in stake in the company for the promoters comes at a very low cost of ₹4.97 cr (1.44 cr shares * warrant allotment price ₹3.45), which otherwise would have cost them about ₹86 cr (1.44 cr share * price at equity conversion date ₹60). This is without considering the almost certain possibility that if the promoters would have bought these additional shares from the open market, then the market would have taken the share price at a much higher level than ₹60.
Also read: How Promoters use Loopholes to Inflate their Shareholding
Further, there is a peculiar observation related to the timing of conversion of stock warrants into equity shares in December 2014. As per our analysis above, we have observed that from FY2014, the performance of the company had started improving a lot and as a result, the company came out of the corporate debt restructuring (CDR) in March 2015, which is just 3 months after the promoters converted their warrants into equity shares.
No wonder, the promoters converted their stock warrants in December 2014, as they know the best out of all the people, about the financial position of the company at any point of time and that the company would be exiting the CDR very soon. As is normally expected with a company showing improving business performance, after the exit from CDR, the share of Indo Count Industries Ltd raced ahead and touched the lifetime high of ₹249.69 on February 8, 2016, valuing the 1.44 cr shares (post-split) converted by promoters from warrants at ₹360 cr. It must be remembered that promoters got these shares by getting the warrant allotment at ₹4.97 cr. (1.44 cr share * ₹3.45 post-split allotment price).
This is an example of someone having her cake and eating it too.
Investors may read our complete analysis of Indo Count Industries Ltd in the following article: Indo Count Industries Limited
While reading about companies issuing warrants to the promoters, an investor would also come across instances where the promoters initially got the shares from the company at a cheaper price using warrants and then sold these shares in the market later at a high price to book the profits. Let us see such a scenario in real-life companies.
While analysing companies, investors find many such examples where the promoters get stocks from the company at a cheaper price using the method of warrants and then they sell their shares in the stock market at a higher price to book profits. Let us see some of the examples that we have come across.
1) Century Textiles & Industries Ltd:
Century Textiles & Industries Ltd is a B.K. Birla group company currently involved in the production of paper and textiles products, and real estate activities. The company has sold its large cement division.
In FY2015, Century Textiles & Industries Ltd allotted warrants to its promoters on a preferential basis. The promoters converted some of these warrants into equity shares in FY2015 and the remaining warrants in FY2016.
FY2016 annual report, page 64:
In terms of the shareholder approval obtained at the extra ordinary general meeting held on 4 th June, 2014 the Company issued and alloted 1,86,50,000 preferential warrant to the Promoter Group at a price of ₹ 354.89 per warrant…..
On 30 th March, 2015 the warrant holders had partially exercised their entitlement to convert 84,70,000 warrant into equivalent number of equity shares as per the terms of issue. Further on 18 th December, 2015 warrant holders exercised the balance entitlement and converted 1,01,80,000 warrants into equivalent number of equity share….
The following chart shows the share price of Century Textiles & Industries Ltd on the date of allotment of warrants (June 4, 2014), on the dates of exercise of warrants (March 30, 2015, and December 18, 2015) and on the date when one of the promoters sold 2.46% stake in the company after allotment of warrants (March 22, 2016). (Source: Moneycontrol)
When an investor analyses the above chart, then she observes the following:
In the months preceding the allotment of warrants on June 4, 2014, the share price of Century Textiles & Industries Ltd stayed in the price range of ₹300-350/-. As a result, according to the formula approved by the regulator, the company allotted 1.865 cr warrants at ₹354.89 to the promoters. It valued the total warrant transaction at ₹661 cr. At June 4, 2014, the promoters paid 25% of the amount i.e. ₹165 cr (=661 * 0.25) to the company and got the warrants. This transaction fixed the price at which the promoter would get 1.865 cr shares from the company at ₹354.89 irrespective of the share price when they decide to exercise the warrant.
On March 30, 2015, the promoters exercised 0.847 cr warrants and paid balance 75% of the value for 0.847 cr shares. At March 30, 2015, the market price of the shares of Century Textiles & Industries Ltd was ₹638.90. Therefore, at March 30, 2015, the promoters got 0.847 cr shares at a cost of ₹300 cr (=0.847 * 354.89) whose market value at March 30, 2015, was ₹541 cr (=0.847 * 638.90). The promoters had an unrealized gain of ₹241 cr (=541 – 300) due to allotment and exercise of warrants.
On December 18, 2015, the promoters exercised the remaining 1.018 cr warrants and paid balance 75% of the value for 1.018 cr shares. At December 18, 2015, the market price of the shares of Century Textiles & Industries Ltd was ₹572.70. Therefore, at December 18, 2015, the promoters got 1.018 cr shares at a cost of ₹361 cr (=1.018 * 354.89) whose market value at December 18, 2015, was ₹583 cr (=1.018 * 572.70). The promoters had an unrealized gain of ₹222 cr (=583 – 361) due to allotment and exercise of warrants.
Moreover, due to the exercise of warrants, the shareholding of the promoters increased from 40.23% on December 31, 2014 (BSE) to 50.21% on December 31, 2015 (BSE). An investor would note that due to the warrant transaction, the promoters could fix the cost of acquisition of about 10% stake in the company at ₹354.89 per shares, which was constant irrespective of the subsequent movement in the share price of the company. An investor may appreciate that if the promoters would have attempted to buy a 10% stake from the market, then it is unlikely that they could get it at ₹354.89 per share. This is because, whenever the stock market notices that the promoters are buying shares from the open market, then it increases the share price significantly.
An investor would appreciate that even though the regulatory guidelines state that promoters cannot sell shares received via warrant allocation for a period of 3 years. However, when the promoters already have many existing shares of the company with them, then they can safely sell the existing shares and in turn, get a profit from the warrant allotments.
As per FY2016 annual report, page 33, on March 22, 2016, the promoters sold 27,46,100 shares (2.46% stake) in the company. At March 22, 2016, the market price of the shares of Century Textiles & Industries Ltd was ₹524.15. Therefore, when compared to the warrant allotment price of ₹354.89 per share, the promoter realized the gains of ₹169.26 per share (524.15 – 354.89). It amounted to a total realized gain of ₹46.48 cr. (= 169.26 * 27,46,100).
An investor may read the complete analysis of Century Textiles & Industries Ltd in the following article: Analysis: Century Textiles & Industries Ltd
Let us see another example where the promoters got shares at a cheap price by exercising warrants and then sold shares in the market at a higher price.
2) PIX Transmissions Ltd:
PIX Transmission Ltd is a manufacturer of power transmission belts applicable in industrial, agricultural, lawn & garden and automotive segments.
While analysing PIX Transmissions Ltd, an investor would notice that from March 2012 to December 2017, the shareholding of the promoters has witnessed an increase by about 9% from 51.90% in March 2012 to 60.96% in December 2017.
On the face of it, the decision of promoters to increase their stake in the company looks like a very positive development and shows the confidence that the promoters have in the future of the company. However, while analysing the promoters’ shareholding in the company, we have extended our analysis beyond March 2012 and have analysed all the changes in their shareholding from March 2009 onwards.
The following table reflects the key findings from the analysis of promoters’ shareholding over time. For the key observations related to the sale of shares by promoters, an investor may focus on the two rightmost columns (G and H):
From the above table and the detailed analysis of PIX Transmissions Ltd, an investor comes across the following observations related to the allotment of warrants and then the sale of shares in the market:
A) Promoters subscribed to 28,00,000 warrants at a conversion price of ₹30 before FY2009. (We could not get annual reports of the company prior to FY2010; therefore, we are not able to find out the exact year of warrants allotment. In all probability, warrants should have been issued in FY2008). The following section from FY2010 annual report, page: 21, highlights the warrants allotment price and the conversion of 4,15,000 warrants in FY2009 and 11,45,000 warrants in FY2010 i.e. 15,60,000 warrants (4,15,000+11,45,000) were converted into equity shares by FY2010:
B) In FY2011, the remaining 12,40,000 warrants (28,00,000-15,60,000) were converted into equity shares. FY2011 annual report, page 30:
C) An important aspect to note here is that even though the promoters received 28,00,000 additional shares at ₹30 from the company by conversion of warrants during last three financial years (FY2009-11), however, they did not retain all of these shares with them. In fact, the promoters kept on selling part of these shares along the way.
- In FY2010, as per the table above the promoters received 14,50,000 additional shares from the company, however, during the year, their shareholding increased by only 6,25,839 shares indicating that the promoters sold 5,19,161 shares during the year out the new shares received by them from the conversion of the warrants.
- In FY2011, the promoters received 12,40,000 additional shares from the company, however, during the year, their shareholding increased by only 6,85,239 shares indicating that the promoters sold 5,54,761 shares during the year out the new shares received by them from the conversion of the warrants
- During June 2011 quarter, promoters sold additional 3,99,474 shares indicating that during FY2010, FY2011 and Q1-FY2012, the promoters sold about 14,73,396 shares out of the total 28,00,000 shares received by them from the conversion of warrants. Promoters had received these shares at ₹30 from the company.
A look at the share price movement of the company over last 10 years shows that during FY2010 and FY2011, the share price of the company was consistently above ₹75 for the most period and has crossed ₹100 at times.
It seems that the promoters used the opportunity of the share price recovery after 2008 global slowdown to realize the gains, which had accrued to them because of allotment of shares at a price, which was at a discount to the market price.
Therefore, some investors may believe that the decision of promoters to subscribe to the warrants is an act of helping the company by putting in their equity in the company. However, we believe that such deals where promoters enter into conditions of infusing part of the money upfront (10% in this case) and hold back remaining (90%) of the money to be infused at a later stage, are most of the times favouring the promoters/warrant subscribers.
As witnessed in this case, the promoters agreed to infuse a total amount of ₹8.4 cr. (28,00,000 * ₹30) in the company as equity. However, they infused only 10% of it (₹0.84 cr.) upfront at the time of allotment of warrants. They paid the remaining amount later when the market price of the shares was higher than the warrant allotment price (₹30). The promoters benefited by selling part of these additional shares received by them by directly selling these shares in the market at a higher price shortly after allotment.
Moreover, an investor would note that the amount of capex done by the company during FY2008-10 was about ₹100 cr. The amount of money given by the promoters upfront (₹0.84 cr.) is negligible when compared to the overall fund requirement of the company.
Therefore, the process of getting shares by way of warrant allotment and then sell them in the market at a profit seems like an attempt of the promotes to benefit at the cost of minority shareholders.
You may read the complete analysis of PIX Transmission Ltd in the following article: Analysis: PIX Transmission Ltd
Stock warrants are 25% beneficial to the company and 75% beneficial to promoters!
In case of warrants, the promoters give a part of the money up front to the company on the allotment and then pay balance amount of the money at the time of conversion of the warrants into equity shares. Before 2009, the promoters were required to pay only 10% of the money at the allotment and balance 90% at the time of conversion. However, from February 2009, SEBI changed the guidelines and increased the upfront payment to 25%.
Therefore, now we believe that the warrants are 25% beneficial to the company and 75% beneficial to the promoters. Before February 2009, this ratio was 10% beneficial to the company and 90% beneficial to the promoters.
The key reason that led SEBI to increase the upfront payment for warrants was that the promoters used warrants to enrich themselves when the stock markets rose while their loss was limited to only 10% if the markets fell. (Source)
There were complaints that promoters allotted warrants to themselves and select investors at a pre-determined price, but didn’t buy them when the due date came if the prevailing stock prices were lower than the decided price. If the prices were higher, they would convert those warrants and at least make a paper profit, and in some cases encash the gains.
It is to discourage promoters from trading profits. Warrants are seen as an instrument that gives an advantage to promoters above retail investors, who have all other rights equal to company founders.
When the markets melted during 2008 and early 2009, promoters of many companies such as Hindalco Industries, Tata Power, GE Shipping and Pantaloon Retail did not convert those warrants, regulatory filings show.
After similar complaints, in February 2009, the regulator had raised the up-front margin to be paid by warrant subscribers to 25% from 10% since the payment lost was insignificant compared with the losses one would have made if forced to buy.
Common logic says that anyone holding stock warrants would not exercise them to get shares at a price, which is higher than the price at which he/she can get shares from the market.
More so, if the intention of the promoters is to infuse money into the company, then they should simply get all the shares at the current market price and give the entire money to the company upfront so that the company may use it for the purpose for which it needs money.
The entire gimmick of paying 25% at the time of allotment of stock warrants and then keeping the option to pay 75% at the time of exercise, which the promoters would decide based on whether at the date of exercise, the promoters are making money or not, seems like a facade to us.
If the promoters pay 25% now and let the stock warrants expire due to the market price being consistently lower than the exercise price in future, then it effectively means that the promoters did not have the true intention of infusing 100% of the money or that the company did not need 100% of the money.
It might be that the company needed only 25% of the money, which promoters put in by way of stock warrants allotment and the right to get shares in future at a discount is the payoff that promoters would enjoy as a consideration for giving 25% to the company. The company might not have needed the balance 75% at all.
Nevertheless, we believe that if the promoters wish to infuse funds into the company, then the company should straight away issue additional shares to them at prevailing market price and get 100% of the funds upfront rather than letting the promoters speculate at the company’s share price by holding back 75% of the funds as happens in case of stock warrants.
Further Reading: Steps to Assess Management Quality before Buying Stocks
Many times, when the markets crash after the allotment of warrants and the promoters refuse to exercise the warrants and pay the balance money, then the promoters lose the money, which they had paid upfront on the allotment of the warrants. However, in such situations, an investor should not think that the promoters have lost and the company got free money.
An investor should understand that it is the promoter who is in charge of the company. He makes decisions on behalf of the company. He will not take the loss sitting down. Many times, investors would notice that when promoter lose money on a warrant issuance as the markets had crashed, then they make the company come up with a second warrant issuance, which is usually bigger in size and at a cheaper exercise price. This is primarily to recover their losses in the first warrant allotment.
Let us see the example of ADF Foods Ltd. in which the promoters lost about ₹1 cr to the company in 2009 when the markets crashed after warrant allotment and they could not exercise the warrants. Immediately after the loss in the first issue of warrants, the promoters came up with another bigger issue of warrants at a much cheaper price where they could recover their losses.
FY2010 annual report of ADF Foods Ltd, page 6:
The Company had allotted 15,00,000 Convertible Warrants of Rs. 70/- each (Rs. 7.00 per warrant paid on allotment) on preferential basis to Promoters/Directors, their friends and relatives on 24 th December 2007. None of the subscribers of the warrants had exercised their option and the same expired on 23 rd June 2009. Rs. 1,05,00,000 received on allotment of warrants was credited to Capital Reserve Account.
The Company had allotted 23,26,110 Convertible warrants of Rs. 32/- each (Rs. 8.00 per warrant paid on allotment) on preferential basis to Promoters/Directors, their friends and relatives on 29 th July 2009. Of the above, 8,20,222 warrants were converted on 11 th September 2009 and balance warrants 15,05,888 were converted on 27 th October 2009. The balance amount of Rs. 24 per warrant was duly received before exercise of warrants.
Investors may read our complete analysis of ADF Foods Ltd in the following article: Analysis: ADF Foods Ltd.
Promoters of another company, IOL Chemicals and Pharmaceuticals Ltd also refused to exercise their warrants when the stock price of the company declined.
While analysing the issuance and exercise of different incidences of allocation of warrants by IOL Chemicals and Pharmaceuticals Ltd, an investor comes across instances, where the promoters did not exercise their warrants and let them expire.
FY2012 annual report of IOL Chemicals and Pharmaceuticals Ltd, page 33:
The allottees of 15,00,000 warrants expressed their unwillingness to convert these warrants to equity shares. The Company, in accordance with SEBI guidelines for preferential issue, forfeited ₹ 210 lacs, the amount paid by the allottees for these warrants
When an investor studies more about these warrants, then she notices that these warrants were issued on January 16, 2010, at an exercise price of ₹56 per share. However, shortly after the allotment of the warrants, the share price of the company started declining. By March 2012, the share price of the company had declined to ₹25/-.
An investor would appreciate that it does not make any economic sense for the promoters to buy shares from the company by exercising the warrants at ₹56/- when the market price is only ₹25/-. As a result, the promoters expressed their unwillingness to exercise the warrants to the company.
Because of refusal of the promoters to exercise 15,00,000 warrants priced at ₹56/-, in FY2012 the company could not receive the 75% of the money due on the exercise of warrants i.e. ₹6.3 cr. (= 15,00,000 * 56 * 75%).
Moreover, in FY2012, IOL Chemicals and Pharmaceuticals Ltd defaulted to Punjab National Bank (PNB) for its dues of about ₹4.77 cr as it did not sufficient amount of money to repay its debt.
FY2012 annual report of IOL Chemicals and Pharmaceuticals Ltd, page 35:
The Company has defaulted in repayment of loans and interest in respect of the following: (Particulars as at 31 March 2012): Term loans from banks: Punjab National Bank
- Principal (Jan – March 2012): 3,14,42,000
- Interest (Feb 2012): 1,63,02,423
- Total: 4,77,44,423
It was not the first instance when the promoters of IOL Chemicals and Pharmaceuticals Ltd declined to exercise the warrants allotted to them. Previously, in FY2009 as well, when the share price of the company declined sharply, then the promoters chose not to exercise the warrants and let them expire.
FY2010 annual report of IOL Chemicals and Pharmaceuticals Ltd, page 33:
Other income in year ended March 31, 2009
- Equity Warrants forfeited ₹96,42,000
The following chart shows the share price movement of IOL Chemicals and Pharmaceuticals Ltd from January 2008 to March 2009.
Investors may read our complete analysis of IOL Chemicals and Pharmaceuticals Ltd in the following article: Analysis: IOL Chemicals and Pharmaceuticals Ltd.
Therefore, an investor would appreciate that when promoters attempt to structure infusion of their contribution by way of warrants, then they would give the entire money to the company only when the promoters make a profit by way of buying the shares at a cheaper price from the company than the prevailing share price in the market. If the price in the market is lower, then the promoters hesitate to exercise the warrants even if the company is in severe liquidity stress and may default to the lenders.
These incidences proved the concerns of the minority investors about preferential allotment of warrants to promoters that promoters use warrants to benefit themselves ahead of minority shareholders.
Therefore, we believe that the condition of paying only a part of money upfront at warrant allotment and the condition of payment of the balance money at the exercise of warrants put the odds highly in the favour of the promoters who will exercise the warrants only when they are making profits on the warrants.
The exercise price in the warrant allotment is based on a formula, which takes into account the average share price of shares in the previous six months. Therefore, at times, an investor may come across situations where the warrants are allotted to the promoters at a price, which is higher than the market price of the shares of the company on the date of warrant’s allotment.
However, as explained above, we believe that any such instrument that involves part upfront payment and balance payment later while freezing the acquisition price should be seen with caution.
Share warrants issued at a premium are still better than those issued at discount to the current market price, as at least in the case of issuance at a premium, the interest of the promoters and minority shareholder are somewhat aligned. This is because, now, the promoters will work hard that the share price of the company rises so that they do not lose the money paid on the warrants’ allotment. Nevertheless, the concept of freezing of cost of conversion irrespective of future market price still benefits the promoters at the cost of minority shareholders.
When bankers force promoters to subscribe to warrants
Many times, in the case of a stressed company which is undergoing restructuring, the lenders are happy with whatever amount the promoters bring in in the form of equity. The company is anyway not doing good and not able to honour the commitment to lenders. In such a case, any amount of money infused in the company is good for lenders. Be it in the garb of warrants or any other form. Moreover, warrants do not dilute lenders’ stake in the company, which is a fixed principal, interest and penalties, if any.
Warrant have different implications for equity holders/minority shareholders and more so in companies, which are not stressed.
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Disclaimer
Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.
19 thoughts on “Stock Warrants to Promoters: How to Analyse”
Vijay ji, how do we see a situation where a promoter honours warrants even when the market price is quite lower than the warrant price? Take the recent case of Anant Raj. The promoter honoured ₹100 cr warrants at ₹750 per share and even paid the money while the stock’s current price was below ₹500 while they were honoring the warrant.
Thank you
Dear Krish,
Thanks for writing to us!
We would be happy to provide our input. However, we would request you first elaborate more on your query by including your personal thoughts about how should an investor interpret such cases where promoters subscribe to warrants when the market price is less than the exercise price.
Thereafter, please revise your query and we would be happy to provide our input on your line of thought on this issue.
Regards,
Dr Vijay Malik
Sir, through which source can I learn more about warrants issued in India?
Dear Ardra,
You should read annual reports of companies that have issued warrants during the period in which they issued the warrants until the time the warrants were exercised or lapsed. Thereafter, compare the decisions of exercise or relinquishment of warrants with the movement of the share price of the company with respect to the warrants’ exercise price.
The following article will help you in reading annual reports: How to study Annual Report of a Company
Regards,
Dr Vijay Malik
Thank you for the piece of knowledge, sir. It was a useful article for understanding warrants. I would like to study more about the patterns of the companies issuing warrants. Could you please help me gather the data on warrants issued by companies in India?
Dear Ardra,
Thanks for writing to us!
We are unaware of any dedicated database, which provides a list of all companies that have issued warrants. Starting on Google with a search about warrants might be a good initiation to find such companies.
Regards,
Dr Vijay Malik
Hello sir,
Very nice article.
My query is what if warrants are issued to non-promotor as well? and fund infusion is very large compared to the market cap. Can we consider this positive for investment decisions as a retailer?
Dear Paresh,
Thanks for writing to us!
Paresh, we would request you to elaborate on your current views about how a minority investor should view warrants issued to non-promoters, which are very large in size. Please also focus on the aspect regarding who would be these non-promoters to whom the existing promoters would be willing to give a large stake in the company.
We would be happy to share our input to your line of thought on this issue.
Regards,
Dr Vijay Malik
I ignored the 25% premium as that is a mere entry; that is why I ignored it.
Sir, in the article you’ve said that if and when promoters choose not to exercise, the company forfeits the 25% money they get at the time of allotment. What happens to the forfeited money? Do the promoters recoup their 25% money or is it a dead loss for them? What happens to the forfeited money in that case? One more thing sir, where can I find the list of listed warrants in India?
Dear Rahul,
We would be happy to provide our inputs to your query. However, we would request you first do an independent search for the answer on the internet/Google and then elaborate your learning from such search.
Regards,
Dr Vijay Malik
Sir, Thank you very much for the detailed explanation. Do you strictly avoid such companies or since some of these companies performing well, you try to participate even after knowing this?
Dear Narendra,
Any stock investing decision is always based on a comprehensive understanding after doing a complete study of various parameters like financial, business, management, valuation, margin of safety, operating efficiency etc. Making any decision only based on limited information may lead to a myopic view about the company.
An investor may read the following article to understand the steps for doing a comprehensive analysis of any company:
https://www.drvijaymalik.com/stocks-analysis-stepwise-process/
Regards,
Dr Vijay Malik
Hello Dr Malik,
I have learnt a lot from you. Thank you so much.
ESOP and ESOS are not discussed much on your website. Is ESOP and ESOS are same? At what price ESOS is allocated? What is the duration employee need to hold ESOS? How ESOS impact an investor who has a holding of that company?
Like today’s company updates to exchange:
“This is to inform you that ICICI Bank has allotted 364,110 equity shares of the face value of 2 each on May 10, 2021, under the Employee Stock Option Scheme (ESOS)”
Where to find more details? How to evaluate frequent ESOS allocation?
Thanks
Hi Devendra,
Thanks for sharing your feedback.
Devendra, we request readers to do an independent search for an answer for their queries on Google before asking queries. In the case of ESOP/ESOS, there are numerous articles available on the internet. We request you to read the online articles and do an independent search.
In case, after such online search and reading, you still have queries, then you should elaborate your query along with your learning from online search and reading. We will be happy to provide our inputs to your updated query.
Regards,
Dr Vijay Malik
Sir, these two paragraphs confused me about the split price. In the first para, the post-split price was Rs 3.45 and then in the next para, it was Rs. 5.44. Please correct me if I am wrong.
“Indo Count Industries Ltd approved the allotment of 28,98,300 stock warrants to promoters in the meeting on September 11, 2013, at a price of ₹17.25 per share (pre-split price, the post-split equivalent price would be 1/5 of it: i.e. ₹3.45 and the number of shares post-split would be 5 times: i.e. 1,44,91,500).”
“The (post-split) share price of the company on September 11, 2013, was in the range of ₹5.44 meaning that the promoters had a gain of ₹2.9 cr [1.44 cr. Share * (5.44-3.45)] on the very day of allotment.”
Dear Anuradha,
We request you to do two exercises to get clarity in this matter.
First, read on the internet more about how stock split work and once stock is split, then how investors should adjust stock prices prior to the date of the stock split.
Second, read the above article again to understand what Rs. 3.45 and Rs. 5.44 relate to. What is Rs. 3.45 and why this number is referenced in the above paragraph? and What is Rs. 5.44 and why is this price referenced in the other paragraph?
Once you have done the above two exercises, then you would have a much better understanding of stock splits and how investors should adjust stock prices after stock splits in their analysis.
Regards,
Dr Vijay Malik
Hello Sir,
It is quite an informative article. In the Indo Count example, however, I could not understand why the company price first split to Rs 3.45 per share in September 2013 when promoters were allotted warrants and then again split to Rs.5.44 per share in the same month. Could you explain?
Regards,
Dear Anuradha,
The stock was split only once. Where did you get the message that it was split twice? You may refer to the corporate actions of the company at the website of Bombay Stock Exchange (BSE) to know all the splits undertaken by the company in the past.
Regards,
Dr Vijay Malik