In what will be a major deterrent to promoters looking to increase their equity ownership through optionally convertible warrants, the market regulator Sebi today decided to hike the upfront margin to be paid by them to 25 per cent from the current 10 per cent.
Optionally convertible warrants give promoters an option to convert warrants into shares at a pre-determined price. The price of such conversion is decided based on the average price of the last six months or last two weeks, whichever is higher. Promoters have 18 months to convert the warrants into shares at that price. They generally convert the warrants in a rising market but tend to let them lapse when markets fall, as a result of which the 10 per cent margin is also forfeited.
While this move will not make much difference to promoters if they eventually exercise the warrants, promoters who decide not to opt for conversion will stand to lose the 25 per cent margin. Warrants of major companies such as Hero Honda, Axis bank and Sun Pharmaceuticals will expire this year, if they are not exercised, as per Bloomberg data. However, these were issued last year and so will not fall within the ambit of today's changes.
But some companies expressed concern over the move. "At such a high price, warrants may become a history," said a chief financial officer (CFO) with a leading service sector company. Recently, the guidelines for such preferential issue to qualified institutional buyers' (QIBs) were relaxed, allowing them to subscribe to such preferential warrants at the average price of the last two weeks. Such facilities were not made available to promoters, he added.
Bankers said that most of the warrants that were issued early last year would expire in the next six months. The fresh ones that are issued would be subject to a margin of 25 per cent. "This move will most definitely curb promoters who do not intend to exercise warrants from issuing them. They will wait for one or two months now before warrant allotment, if at all they do it, so that the market price and the six month average price would be the same," said a banker.