A warrant entitles its holders to subscribe to the equity capital of a company during a specified period at a stated/particular/certain price.

Warrants are generally issued along with debentures as sweeteners. Warrants may also be used in conjunction with ordinary or preference shares.

 Exercise

price: it is the price at which the holder of a warrant is entitled to acquire the ordinary shares of the firm. Exercise ratio: it reflects the number of shares that can be acquired per warrant. Typically the ratio is 1:1 which implies that one equity share can be purchased for one warrant. Expiry date: it means the date after which the option to buy shares expires, that is, the life of the warrant.

 Types:

1)detachable, and 2)non-detachable Detachable: a warrant that can be sold separately from the debenture(or preference share) to which it was originally attached. Non-detachable: the warrant which cannot be sold separately from the debenture to which it was originally attached. Rights: warrants entitles to purchase shares.

 Sweetening

debt: warrants help to make the issue of equity and debentures attractive. Low interest: a company may also offer relatively low interest rate to the investors if the warrants are attached to the debenture. Cash inflow in future: the company obtains cash when investors exercise their warrants.

 Leverage:

warrants provide high degree of leverage to the investor. Warrants are liquid and they are traded in the stock exchanges.

 When

executed, warrants dilute common stocks, possibly reducing the market price of stock. The warrants may be exercised at a time when the business has no need to additional capital.

 Convertible

debenture gives the debenture holders the right to convert them into a stated number of ordinary shares at the option of the investor. The most important feature of this debenture is that it promises a fixed income associated with the debenture as well as chance of capital gain associated with equity share after the owner has exercised his conversion option.

 Conversion

ratio: the number of ordinary shares for each convertible debenture. Conversion price: the price paid for the ordinary share at the time of conversion. (Thus, conversion ratio equals par value of convertible debentures divided by the conversion price.) Conversion time: the period from the date of allotment of convertible debentures after which the option to convert can be exercised.

 Sweetening

fixed-income securities: the primary purpose for issuing convertible debenture is to make the issue attractive enough so that it is fully subscribed. Deferred equity financing: by issuing a convertible debenture, the firm is in effect selling ordinary shares in future. Avoiding earnings dilution: the company would like to use the fixed-income security and not to increase the number of issued shares until its investment starts paying off. Raising low cost capital

 The

potential negative impact on the market price of the underlying stock due to market reaction to potential dilution. Any negative effects of short selling by hedge funds. The complexity of legal, tax and accounting issues. If the underlying stock price is less than the conversion price, holders are unlikely to convert their bonds and the issuer may need to raise additional money to pay the bonds at maturity.

 An

investor can hedge its investment risk while benefiting from capital appreciation if the underlying stock performs. A fixed rate of return on the bonds (even if low) is assured if the price of the underlying stock is less than the conversion price.

Low coupon (the annual rate of interest payable on the bonds). Low yield (the annual percentage rate of return earned on the bonds reflecting the purchase price and interest rate on the bond). No covenants and limited events of default means convertible bondholders have less control than non-convertible bondholders. The potential decrease of the issuer's stock price after the offering. The potential volatility of the issuer's stock price.

 In

a convertible debenture, the debenture and the option are inseparable. A warrant, however, is detachable. Warrants can be issued independently. They need not be tied to some other instrument. Warrants are typically exercisable for cash.

Thank

you