A convertible warrant is an option that allows the buyer to partially or fully convert the alloted warrants into an equivalent number of equity shares of the company within a specified time period.
Preferential allotment of convertible warrants is a private placement of warrants to a select group of persons who may or may not belong to the promoter group.
SEBI has come up with certain guidelines for preferential allotment of warrants. These guidlines have to be strictly followed by any company which goes for preferential allotment.
Need for convertible warrants
i)From the company's perspective : Every company requires cash for its operation, expansion plans and M&A. When a company needs a large amount of money in a short duration, private placement of warrants is a good option.
ii)From the Warrant Buyer's perspective : Convertible warrants allow the buyer to earn a fixed rate of return without the risk of capital loss due to a ...view middle of the document...
Disadvantages : The equity capital of a company increases when warrants are exercised and converted to equity shares. This leads to a dilution in EPS(Earnings Per Share) for the shareholders of the company. Also, promoters may try to accumulate more and more shares of the company to consolidated their hold on the company.
The shareholders need to look at the price at which the warrants are issued and the extent of equity dilution.
Pvr Limited has informed the Exchange that pursuant to shareholders approval obtained for the issue of 12,00,000 warrants convertible into one equity share of Rs. 10/- each at a price of Rs 215.57/- per share, Priya Exhibitors Private Limited has paid Rs. 2,58,20,400/- (Rupees Two Crore Fifty Eight Lacs Twenty Thousand Four Hundred only) being 10% of the total price consideration for 12,00,000 warrants calculated at the rate of Rs. 215.57/- each. The Warrants have since been allotted to the said allottees on preferential basis.
Points to Note:
i) Warrants issued at price of 215.57 Rs. when the market price was 179.
ii)An additional 12,00,000 shares will be added to the already existing 2,30,13,870 if the warrants are exercised thus diluting the equity by 5.21%.
SECP's guidelines for preferential allotment
1)Preferential allotment of equity shares can be made at a price which is not lower than the higher of the following:
i)The average of the weekly high and low of the closing prices of the shares during 130 trading days preceding the relevant date;
ii)The average of the weekly high and low of the closing prices of the shares during 10 trading days preceding the relevant date.
Relevant date means the date 30 days prior to the date on which the meeting of the general body of the shareholders was held
to consider the proposed issue.
2)Not less than 10% of the price shall be payable at the time of allotment of warrant.
3)Preferential allotment to promoters is subject to a lock-in of 3 years from the date of allotment and for non-promoters, the lock-in is 1 year.
4)Preferential allotment cannot be made to the promoters/non-promoters if they have sold the equity shares of the company during a period of six months prior to the relevant date