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Convertible Warrant

A convertible warrant is an option that allows the buyer to partially or fully


convert the alloted warrants into an equivalent number of equity shares of the
company within a specified time period.
Preferential allotment of convertible warrants is a private placement of warrants to
a select group of persons who may or may not belong to the promoter group.
SEBI has come up with certain guidelines for preferential allotment of warrants.
These guidlines have to be strictly followed by any company which goes for
preferential allotment.

Need for convertible warrants


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i)From the company's perspective : Every company requires cash for its operation,
expansion plans and M&A. When a company needs a large amount of money in a
short duration, private placement of warrants is a good option.

ii)From the Warrant Buyer's perspective : Convertible warrants allow the buyer to
earn a fixed rate of return without the risk of capital loss due to a fall in the stock
price of the company. The buyer can also earn profits by exercising the option to
convert the warrants to equity shares if the stock price of the company appreciates.

What it means to the shareholders of the company


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Advantages : It is a good sign if promoters go for convertible warrants at a price
higher than the market price. It reassures the shareholders that the promoters have
faith in the company. Also, the company can grow at a faster pace because of the
funds received. This will lead to a gain for the shareholders in the form of stock
price appreciation of the company.

Disadvantages : The equity capital of a company increases when warrants are


exercised and converted to equity shares. This leads to a dilution in EPS(Earnings
Per Share) for the shareholders of the company. Also, promoters may try to
accumulate more and more shares of the company to consolidated their hold on
the company.

The shareholders need to look at the price at which the warrants are issued and the
extent of equity dilution.

Example
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Pvr Limited has informed the Exchange that pursuant to shareholders approval
obtained for the issue of 12,00,000 warrants convertible into one equity share of
Rs. 10/- each at a price of Rs 215.57/- per share, Priya Exhibitors Private Limited
has paid Rs. 2,58,20,400/- (Rupees Two Crore Fifty Eight Lacs Twenty Thousand
Four Hundred only) being 10% of the total price consideration for 12,00,000
warrants calculated at the rate of Rs. 215.57/- each. The Warrants have since been
allotted to the said allottees on preferential basis.

Points to Note:
i) Warrants issued at price of 215.57 Rs. when the market price was 179.

ii)An additional 12,00,000 shares will be added to the already existing 2,30,13,870
if the warrants are exercised thus diluting the equity by 5.21%.

SEBI's guidelines for preferential allotment


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1)Preferential allotment of equity shares can be made at a price which is not lower
than the higher of the following:
i)The average of the weekly high and low of the closing prices of the shares during
130 trading days preceding the relevant date;
ii)The average of the weekly high and low of the closing prices of the shares
during 10 trading days preceding the relevant date.
Relevant date means the date 30 days prior to the date on which the meeting of the
general body of the shareholders was held
to consider the proposed issue.

2)Not less than 10% of the price shall be payable at the time of allotment of
warrant.

3)Preferential allotment to promoters is subject to a lock-in of 3 years from the


date of allotment and for non-promoters, the lock-in is 1 year.

4)Preferential allotment cannot be made to the promoters/non-promoters if they


have sold the equity shares of the company during a period of six months prior to
the relevant date.

References:
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i)CHAPTER XIII OF SEBI
(DISCLOSURE AND INVESTOR PROTECTION) GUIDELINES, 2000}

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