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What are share warrants?

Share warrants are instruments issued by a company to interested parties. The parties to whom warrants are issues have the right, but not an obligation to convert these warrants into equity shares at a pre-determined price after a pre-determined period. Relax, this is not as complex as it looks. Let me explain you using an example:

  1. Suppose you run a Bakery business and hold 51% of the outstanding shares of your company. The remaining 49% are held by lenders, institutional investors and retail investors.

  2. One fine day you realise that you have to infuse INR 1 crore in your Business to allow the Business to grow. You approach a banker for loan, but he tells you that your debt levels are already too high. He can lend you more money only if you put INR 20 lakhs by your own into the Business.

  3. You do not have INR 20 lakhs to infuse right away. At this stage your company issues share warrants to yourself. In this arrangement you pay 25% of the intended amount (i.e. INR 5 lakhs) as an upfront charge (or premium). This amount is transferred into the company's account and is immediately available for company's daily operations. The remaining 75% amount i.e. INR 15 lakhs needs to be transferred at a later stage.

  4. The initial amount that you paid is similar to a call option premium. The promoter (you) in this case gets the facility of increasing equity stake in his company. You benefit immensely if the share price increase. Assume you had subscribed to warrants at a price of INR 20. If in 1 year, the share price increase to INR 40, you have made 100% on your investment.

  5. If the share price does not increase above the conversion price, you may choose not to convert the warrants into shares and let the premium paid expire worthless.

Hope the concept of warrants is clear!

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