Warrants become a high-cost option

In what will be a major deterrent to promoters looking to increase their equity ownership through optionally convertible warrants, the market regulator 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, those who decide not to opt for conversion will stand to lose the 25 per cent margin. Warrants of major companies such as Hero Honda and Axis Bank 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 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.
The Sebi board took several other decisions also:
* Listed companies to declare dividend on per share basis only
Listing agreement will be amended to provide that listed entities will declare dividend on per-share basis only. At present, there is no uniformity in declaring dividend. Some companies declare dividend on per share basis and some as a percentage of face value of the shares.

Declaration of dividend as a percentage of face value has the potential to mislead investors in case face values of the shares of two companies are different.

* Timelines for bonus issues reduced
Sebi has decided to reduce the period for completing a bonus issue to 15 days, where no shareholders’ approval is required as per articles of association of the company and to 60 days where shareholders’ approval is required as per articles of association of the company.

At present, in terms of the guidelines, listed companies are required to complete a bonus issue within a maximum period of six months from the date of approval of the issue by the board of the company.

* Time frame for announcing IPO price band shortened
Sebi will amend the guidelines to enable the issuer company making an IPO to declare the floor price/ price band at least two working days before the date of opening of IPO subject to wide dissemination of the price band through newspaper advertisements, availability in websites etc.

The issue advertisements will also disclose the financial ratios calculated for both upper and lower end of the price band.

At present, in terms of the guidelines, in case of an IPO, either the floor price or the price band is required to be disclosed in the red herring prospectus — about two weeks before the date of opening of the IPO.

* Investor Protection and Education Fund
The Sebi board also approved regulations for governance of the fund. The fund may be credited by contribution as may be made by the board; grants and donations given to the fund by the government or any other entity approved by the board for this purpose; proceeds of foreclosures of deposit/innovation of bank guarantee/sale of the securities kept in the escrow accounts by an acquirer in case of non fulfillment of its obligations under the Securities and Exchange Board of India (SAST) Regulations, 1997.

The fund will be used for investor protection and promotion of investor awareness and education.