Warrant
An option issued by a company giving the holder the right, not the obligation, to subscribe to its shares at a fixed price on or after a set date. SEBI requires 25 per cent of the price upfront.
In plain language
A share warrant lets an investor lock in today the price at which they may buy new shares from the company later.
It works like a stock option, with two differences the workbook draws out: a warrant is issued by the company (not by the exchange), and it has a longer life than the 1 to 3 months of an exchange-traded stock option. And unlike most options, the holder pays a real chunk upfront: 25 per cent of the total consideration — which is lost if the warrant is not exercised.
How it works
The workbook's mechanics (section 2.6.4):
- The company issues warrants at a predetermined exercise price, exercisable on or after a predetermined date.
- Under SEBI rules, investors pay 25 per cent of the consideration upfront, when the warrants are issued.
- On the exercise date, investors who exercise are allotted equity shares as per the prescribed formula and pay the balance.
- Investors who do not exercise forfeit what they paid.
Who benefits and why. For the company, warrants make sense when the exercise price is above the current share price: if prospects are expected to improve, the company captures part of the future price rise instead of issuing shares at today's valuation. For the investor, warrants lock in a price for a future purchase by paying only 25 per cent now, with the upside if the share price rises.
Chapter 3 adds that warrants — along with fully and partly convertible debentures — can be issued by a listed company through preferential allotment, which needs a shareholders' resolution and SEBI-formula pricing.
A worked example
The workbook's example. Shares of ABC Ltd trade at Rs 180. On 31 August 20Y1 the company issues 4,00,000 warrants at an issue price of Rs 220 to institutional investors, exercisable on 31 August 20Y2.
Total consideration = 4,00,000 × Rs 220 = Rs 8.80 crore
Upfront (25%) = Rs 2.20 crore
Balance on exercise = Rs 6.60 crore
One year later — illustrative prices:
| Share price on exercise date | Decision | Outcome for the investors |
|---|---|---|
| Rs 300 | Exercise: pay Rs 6.60 crore more | Shares worth 4 lakh × 300 = Rs 12 crore for a total outlay of Rs 8.80 crore — a gain of Rs 3.20 crore |
| Rs 200 | Do not exercise — shares are cheaper in the market | Forfeit Rs 2.20 crore |
For ABC Ltd, the first row means issuing shares at Rs 220 when it could only have got Rs 180 a year earlier. The second row means it keeps Rs 2.20 crore without issuing any shares.
Why NISM asks about it
Chapter 2 (Securities: Types, Features and Concepts of Asset Allocation and Investing), section 2.6.4, among hybrid instruments; Chapter 3 (Primary Markets), section 3.17, under preferential allotment. The numbers to hold are the 25 per cent upfront payment and the forfeiture rule; the concept to hold is the difference between a warrant and an exchange-traded stock option.
Common exam traps
- 25 per cent upfront, balance on exercise; not exercised means forfeited, not refunded.
- Warrants are issued by the company; stock options by the exchange (as the workbook puts it), and warrants have a longer life.
- Exercising a warrant creates new shares, so it dilutes existing shareholders — unlike buying an exchange-traded call.
- A right, not an obligation. The holder chooses whether to exercise.
- An inconsistency in the workbook's example: the warrants are issued "to institutional investors", but the next sentence says the balance is paid "if the promoters decide to exercise their warrants". Read it as the warrant holders — the same investors who paid the Rs 2.20 crore.
Where this is taught
- Series IX · Chapter 1: Introduction to the Capital Marketintroduced here
- Series II-A · Chapter 4: Characteristics of Other Securitiesintroduced here
- Series II-B · Chapter 4: Characteristics of Other Securitiesintroduced here
- Series XII · Chapter 2: Securities: Types, Features and Concepts of Asset Allocation and Investingintroduced here
Related terms
- Convertible debenturesDebentures that turn into equity shares on terms fixed at issue — the investor draws a coupon until conversion, and the company settles the debt in shares instead of cash.
- Preferential issueAn issue of specified securities by a listed issuer to a select person or group on a private placement basis — excluding public, rights, bonus and ESOP issues, QIPs, sweat equity and overseas depository receipts.
- Call optionA contract giving its buyer the right, but never the obligation, to buy the underlying at a fixed strike price — so the loss is capped at the premium and the gain is not.
- Foreign Currency Convertible BondA bond issued by an Indian company to investors in foreign currency, paying interest and principal in that currency and convertible into ordinary shares at a price usually set above the market price.
- Strike priceThe price fixed in an option contract at which the buyer may buy (call) or sell (put) the underlying if he chooses to exercise — fixed for the life of the contract, unlike the premium.
- Securities under the SCRAThe statutory list in Section 2(h) of the SCRA, 1956 that decides what counts as a "security" in India — shares and debentures, but also derivatives, mutual fund units and zero coupon zero principal instruments.
- Share warrantAn option issued by a company to subscribe to its equity shares at a pre-determined price — and, in tax terms, a capital asset whose conversion, transfer or forfeiture each has its own treatment.