All about Share Warrants-Part 1

What is share warrant?

Share warrant or option is a financial instrument issued by a company that gives the holder/bearer the right (but not obligation) to buy the underlying stock at a future date.

Precise summary, before getting into details:

Salient features of Share Warrants

1. Share warrants are basically deferred equity option. Gives the wrrant holders the right to subscribe to equity shares in the future.
2. Initial funding: But, the Company receive an initial payment (usually 25%) when warrants are issued. Offering immediate funding without immediately diluting the share capital.
3. Conversion flexibility: The Balance 75% is payable on exercise — typically allowed within 18 months.
4. Selective issuance: Offered via preferential allotment to promoters, institutions, or strategic investors — not the general public.

Nature of issue:

Warrants are options that are issued independently as standalone deferred equity option or alongside other securities like bonds or preference shares. Often used when a company wants to offer a sweetener to make the other security more attractive or to raise funds for future acting without immediate dilution in ownership.

Purpose of issue:

These are instruments used for strategic fundraising or investor incentives. Also, SW can also be used as employee incentives.


Here's a more detailed breakdown:

1. Capital Raising: Companies issue warrants to raise funds without immediate equity dilution. Investors pay an upfront amount (usually 25%) and can convert the warrant into shares later.
2. Strategic Investments: Warrants may be issued to attract long-term investors or as part of mergers and acquisitions.
3. Bond Enhancements: Warrants can be attached to bonds or preferred shares, to make them more appealing to the potential investors.
4. Employee Incentives: warrants used as perks to retain or attract talent, similar to stock options.

Who can issue SW?

Typically, both public company and private limited company can issue share warrant. Restriction under the Companies Act 1956 preventing private companies from issuing share warrant no longer applies. Companies Act, 2013, doesn't explicitly prohibit private companies from issuing warrants, it doesn't provide specific guidelines either.

To whom are these share warrants issued?

Share warrants are typically issued to a select group of investors and not to the general public. Usually available to:

1. Promoters
2. Institutional investors
3. High net-worth individuals (retail investors).
4. Strategic partners

Forms in which share warrants are issued

Preferential Allotment: Primary route for listed public companies to issue warrants to select investors, under SEBI (ICDR) Regulations. Issue to comply with Sec 62(1)(c) of Companies Act 2013 and ICDR Regulations for listed companies.

Private Placement: Used by private companies or unlisted public companies to issue warrants to a limited number of identified persons. When issued under PP mode, issue is to comply with Sec 42 of companies act 2013.

Conditions for issue:

Conditions/pre-requisites for issue of share warrants are as follows:

1. There is a requirement of upfront payment from the subscriber of the warrant. A minimum of 25% of the total consideration must be paid upfront, with the remaining amount typically paid within 18 months. This upfront payment gives the holder the right (but not the obligation) to purchase shares at a specific price within a defined period.
2. There must be special resolution passed in the company general meeting to approve the issue of share warrants.
3. It is not be noted that Articles of Association (AOA), must specifically permit the issuance of SW.
4. In-principle Approval from Stock Exchange: Listed companies must obtain prior approval from the stock exchange before allotting warrants.
5. As per provisions of erstwhile Companies Act 1956, prior approval of Central government was also required for issue of SWs, but now, these provisions are no longer applicable.

Is prospectus issued for SW?

As mentioned earlier, Since share warrants are not issued via public offerings, the question of prospectus is not applicable. It is PAS-4 (offer letter form) that must be issued to selected investors as an offer letter, in case of private placements. Previously PAS-4 was required to filed with ROC as well, but is no longer required.

What are the technical terms associated with share warrant

Key technical terms associated with share warrants are:

1. Underlying Security: This refers to the specific stock that the warrant provides the right to purchase or sell.
2. Exercise Price: The fixed price at which the warrant holder can buy the underlying security.
3. Exercise date: Exercise Date refers to the specific time window/period/duration (rather than a single fixed date) within which the warrant holder can choose to convert their warrants into equity shares of the company.
4. Expiry Date: The date beyond which the warrant can no longer be exercised. Ie date after which the ‘right to subscribe' for the shares expires
5. Warrant Certificate: Document that is issued by the company on receipt of upfront payment from warrant subscriber. The document that outlines the terms and conditions of the warrant including the number of shares it covers, the exercise price, and the expiry date. It confirms the holder the right to subscribe to underlying stock within set time frame.
6. In India, Warrant is also alternatively referred to as Call Warrant, since it grants the holder the right to purchase stock at the strike price.