With share prices having retreated from their bull market highs, a whole host of promoters have obviously decided not to convert warrants that they had allotted themselves in 2007 or 2008. That’s not surprising because sixteen or eighteen months down the line, the conversion prices appear stratospheric compared with the reality in the markets, even after the recent rally. So it’s better to forfeit a mere 10 per cent of the amount rather than pay what now seems like a small fortune.
The trend isn’t really new—even in early 2007 a couple of companies like PVR and Punj Lloyd had decided to let the warrants lapse when they discovered how expensive it was; only the meltdown in the market late last year has made it even less attractive to buy the shares. So whether it’s an India Infoline or, more recently, an Aditya Birla Nuvo, no one’s thinking twice. After all, there’s a far simpler alternative —all they need to do is allot themselves a fresh set of warrants at a much lower price.
In the case of AB Nuvo, for instance, the old warrants would have been converted at a premium of Rs 1997.45 per share. If and when new warrants are allotted, the shares will come far cheaper. Somehow, that doesn’t seem fair to small shareholders who believe the promoters when they say they will be bringing in a certain amount of money into the company at a certain price within a certain time period. And who better than the main shareholders would know the value of their company? So backing out of such a transaction, while it may be legally above board, doesn’t really send the right signals even if it’s clear from the very beginning that the money doesn’t compulsorily have to be brought in and that it’s only an option.
The market regulator recently upped the penalty for not converting the warrants from 10 per cent to 25 per cent of the value of the shares — not an insignificant move. But that’s not good enough because Indian businessmen are smart enough to make sure they recover the money somehow, or at least a part of it. What’s needed is a ban on fresh warrants for at least a two- or even three-year period from the time the earlier set of warrants lapses. It may seem that the company would lose out on the money that may have come in otherwise but promoters who are really serious about investing in their companies will do so regardless. In fact, it may not be a bad idea to revisit the rules altogether. Why should promoters have an option to buy shares when other shareholders don’t? Perhaps warrants can be done away with altogether since most promoters don’t seem convinced about the value of their companies.
The market regulator also needs to tighten the norms for buybacks—it has been talking about doing so. Too many companies have said they will be buying back shares only to leave small shareholders disappointed. For sure, these are only enabling resolutions and there is no commitment on the part of the management to buy shares. But perhaps that needs to change because shareholders do read such announcements as a sign that prices will find support.
More often than not, though, the support is inconsequential. SEBI has reportedly been indicating to companies, informally, that they need to pick up at least 30 per cent of the number of shares that they had planned to. That seems to be a reasonable number though 40 per cent may be more relevant, especially since many stocks could be illiquid and, as a result, a lot of shareholders may not get an exit. Some market watchers have been asking for a price band rather than a only a specified price ceiling, but that’s not really being fair. Companies shouldn’t be forced to buy above any given price and should have the chance to support the price at any level.
Again there have been instances where the buyback hasn’t been genuine in the sense that the shares have been bought back from one big shareholder rather than from many individual sellers. That’s evident from the sudden jump in volumes — at times volumes have been ten times the average levels. There have been cases where for three months not a single share has been bought and suddenly a big transaction takes place. So, maybe some kind of phased buying is needed. At the end of the day, though, buybacks should be permitted only with a commitment from the management.