All about Share Warrants-Part 2 - Finance Ppl

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All about Share Warrants-Part 2

    1. Is share warrant a legally enforceable document?

      2. Yes, share warrant is a legally enforceable document that grants the holder of document, the right to subscribe for the underlying stock at a predetermined price and within a specific time frame.

      The investors have the option to either buy shares at an exercise price, before the expiry of the warrant or choose not to exercise the option.

      If the market price of underlying stock rises above the exercise price, the investor can buy shares at the lower price and can gain a profit. If the market price is still below, the investor may chose not to exercise the option and warrant would expire.

    2. What are the Statutory provisions governing Share warrant?

      3. The provisions related to restriction on issue share warrants, which were previously present in the Companies Act 1956 have been eliminated in the 2013 Act. Companies Act 2013 in India does not directly address the topic of issuance of share warrants. The issuance of share warrants as far as listed public company is primarily governed by ICDR regulations set by SEBI. As far as Unlisted company and private limited are concerned, the issue of SW is governed by Sec 23 (raising capital through public or private offers), Sec 42 (private placements) and Sec 62 (further issue of share capital) of Companies Act 2013 and Rule 9A and 9B of Prospectus and Allotment of Securities Rules.

    3. What are the pricing norms?

      4. Pricing norms refer to the regulatory guidelines that determine how securities are priced during issuance.

      Pricing norms for listed entities are primarily regulated by SEBI under the ICDR Regulations and Pricing norms for private companies and unlisted companies are guided by the Companies Act 2013 and Rule 13 of the Share Capital and Debentures Rules especially when issuing warrants on a preferential basis.

      1. For listed companies: (as per SEBI regulations)
        1. Pricing of underlying shares (on conversion of warrants) must not be less than higher of a) 26-week average VWAP b) 2-week average VWAP preceding the relevant date.
        2. Pricing must be fixed upfront and clearly stated in the shareholder resolution approving the issue and in the offer documents also.

        What do you mean by 'relevant date' in this context?

        It can be Either 30 days before the proposed shareholder meeting that approves the issue of warrant (OR)
        30 days before the date from which the warrant holder becomes entitled to apply for shares.*

      2. For Un listed companies and private companies:

        3. Pricing norms for private companies and unlisted public companies are essentially the same when issuing share warrants or securities via preferential allotment.

        1. No fixed formula prescribed under the Companies Act 2013. But the Pricing must be based on a valuation report from a registered valuer ( Since unlisted companies don’t have a market-determined share price).
        2. The valuation report must be recent be recent, meaning it should be dated within 30 days before the board or shareholder approval of the warrant issue. Report older than 30 days might be an outdated one, leading to unfair pricing.
        3. Also, Price is determined before issuance of warrant typically at the time of: Board approval, in cases where directors approve the warrant issue (Or) at Shareholder meeting in cases where members pass a resolution to authorize it.
        4. Must be clearly stated in the offer documents and resolutions.
    4. Are there any post issue norms?

      5. There are post-issue norms that companies must follow after issuing share warrants. They are listed as below:

      1. Underlying securities involved in share warrants are subject to lock in period ie This means they cannot be sold or transferred until the lock-in period expires.
        1. For promoters: Warrants and resulting shares are subject to a 1-year lock-in.
        2. For non-promoters: Typically a 6-month lock-in applies post-conversion.
      2. Fund Utilization :Funds received from warrant holders must be tracked and disclosed. For private placements, money must be routed through a dedicated bank account.
      3. For listed companies, warrants and resulting shares must be held in dematerialized form.
      4. Reporting and Disclosures: post-issue reporting requirements of SEBI ICDR regulations wrt stock exchange filings must be compiled with and for warrants issued thru Private placement, company to file PAS-3 (return of allotment).
    5. Are they tradeable?

      6. Yes, they are tradeable, if issued by listed companies but only if they receive trading approval from stock exchange concerned and comply with SEBI regulations in this regard. Unlisted companies are not traded on public platforms.

    6. Is there a time limit for the warrant subscriber to exercise the option?

      7. Yes. The warrant holder if intending to subscribe for the stock, must do so within the exercise date (for understanding purposes, we will call it exercise period). Under ICDR regulations, listed companies must allow conversion within 18 months from the date of allotment of warrant. The warrant holder can exercise their right anytime during this period, subject to terms in warrant certificate. If the warrant holder does not exercise the option to convert the warrant into equity shares within this period the warrant typically lapses and the advance payment made is forfeited.

    7. What if the failure to convert the warrants into shares is the fault of the company?

      8. Conversion of warrants is a voluntary act by the holder and not a corporate action. However, if the company refuses or obstructs conversion despite valid exercise, it may face legal scrutiny. Warrant holders may have legal recourse and could potentially sue the company for damages or specific performance.

    8. What are the disclosure requirements with respect to Share warrants?

      9. Below are disclosure requirements for share warrants in financial statements (FS), based on SEBI regulations.

      For Listed Companies (SEBI ICDR Regulations)

      1. Purpose of issue: Fundraising, strategic investment, etc.
      2. Identity of allottees: Names and relationship with the company.
      3. Pricing details: Basis of pricing and relevant date used.
      4. Conversion timeline: Maximum 18 months from allotment.
      5. Dilution impact: Potential effect on shareholding pattern.
    9. Key Timelines

      10. Following are the key timelines wrt issue of share warrants:

      1. Initial Recognition: When issued, the upfront amount received (usually 25% of the total consideration) is recorded under “Money received against share warrants” in the equity section of the balance sheet. This amount is not treated as share capital until the warrant is exercised.
      2. Valuation:The price is determined based on a valuation report by a registered valuer.
      3. Conversion: Upon exercise, the remaining 75% is received. The full amount (face value + premium) is transferred to share capital and securities premium accounts.
      4. Lapse of Warrants: If not exercised within the stipulated time, the upfront amount is forfeited and retained in equity. When a warrant lapses, the money paid for the warrant by the subscriber is generally not returned. If the warrant is not exercised before its expiry date, it lapses, and the initial payment is typically forfeited.
    10. Accounting Treatment

      11. Journal Entries corresponding to accounting of share warrants are as follows:

      1. On receipt of upfront payment:

        2. Dr. Bank A/c
        Cr. Money received against share warrants

      2. On exercise of warrants:

        3. Dr. Bank A/c (remaining 75%)
        Dr. Money received against share warrants
        Cr. Share Capital
        Cr. Securities Premium