Key Takeaways
- Recent SEBI informal guidance to Paramount clarifies ambiguity on holding periods for warrants
- Though warrants could be listed, listed warrants are almost non-existent
- Unlisted warrants cannot be transferred (no matter how long they’ve been held for)
- Shares received upon conversion of warrants are locked-in for 6 months, but unlike other convertibles, the holding period of warrants is excluded – hence exits cannot be planned with precision
- Tax nuances – around potential exposure for price delta between issuance and allotment/ conversion – to be identified and appropriately mitigated
Key Takeaways
- Recent SEBI informal guidance to Paramount clarifies ambiguity on holding periods for warrants
- Though warrants could be listed, listed warrants are almost non-existent
- Unlisted warrants cannot be transferred (no matter how long they’ve been held for)
- Shares received upon conversion of warrants are locked-in for 6 months, but unlike other convertibles, the holding period of warrants is excluded – hence exits cannot be planned with precision
- Tax nuances – around potential exposure for price delta between issuance and allotment/ conversion – to be identified and appropriately mitigated
Introduction
Price fixation in listed companies has always been a concern and warrants have often acted as the most optimum fix. Subscriber of a warrant can pay just a quarter of the prevailing share price and subscribe to warrants, which may then be converted within 18 months into equity shares by paying the remaining three quarters. Warrants, like any other convertible, could also be helpful to acquire shares in listed companies as they don’t have voting rights and hence don’t trigger the takeover code thresholds.
Warrants – Lock-ins and tax considerations
The downside, however, is – first, that an unlisted warrant cannot be transferred or traded until it is converted into underlying equity shares, and second, even when converted, the resultant equity shares are locked-in for a period of 6 months from the date of trading approval (post conversion into equity). Of course, trading approval could be procured for warrants as well, however, the way the regime stands in practice today, there are hardly any cases of warrant listing. To that extent, reference to trading approvals in context of warrants should rather be seen as trading approval for the underlying shares issued upon exercise of the warrants.
Equity shares received on conversion of convertible shares or debentures are also subject to a 6-month lock-in. It is this 6 month lock-in where the warrant holder is severely disadvantaged. While the period for which the convertible shares or debentures are held is counted for the purposes of computation of the 6-month lock-in, in case of warrants this 6 month period is excluded. Net-net, for warrants, the 6-month period starts afresh from the date of trading approval for the underlying shares.
Thus, the effective lock-in for unlisted warrants and other convertible securities are set out below:
Warrants issuances should also be structured appropriately to avoid tax exposure. Two key nuances to be considered and optimized for in this regard: (a) applicability of tax on the price delta between issuance and allotment of warrants; and (b) possibility of tax on conversion of warrants to equity shares. Both these nuances can be addressed to provide sufficient comfort to investors opting for warrants.
Conclusion
While warrants carry with it the incentive of locking-in the price by paying a quarter, the illiquidity of the warrants and then also shares allotted upon conversion take away from the sheen of well-timed price optimal exits typically sought in public markets. The lack of clarity on tax exemption on conversion of warrants (unlike convertible preference shares or debentures) does not seem to help either. Proponents of corporate governance have often argued that warrants should be priced higher than equity shares as they give an unfair advantage to warrant holders, but in doing so one must also consider the inherent handicap of a warrants - inability to plan a quick (often price optimal) exit, which does dampen the exuberance of the instrument.
1 SEBI Informal Guidance Letter dated 10 November 2023 to Paramount Communications Limited (accessible here)
Introduction
Price fixation in listed companies has always been a concern and warrants have often acted as the most optimum fix. Subscriber of a warrant can pay just a quarter of the prevailing share price and subscribe to warrants, which may then be converted within 18 months into equity shares by paying the remaining three quarters. Warrants, like any other convertible, could also be helpful to acquire shares in listed companies as they don’t have voting rights and hence don’t trigger the takeover code thresholds.
Warrants – Lock-ins and tax considerations
The downside, however, is – first, that an unlisted warrant cannot be transferred or traded until it is converted into underlying equity shares, and second, even when converted, the resultant equity shares are locked-in for a period of 6 months from the date of trading approval (post conversion into equity). Of course, trading approval could be procured for warrants as well, however, the way the regime stands in practice today, there are hardly any cases of warrant listing. To that extent, reference to trading approvals in context of warrants should rather be seen as trading approval for the underlying shares issued upon exercise of the warrants.
Equity shares received on conversion of convertible shares or debentures are also subject to a 6-month lock-in. It is this 6 month lock-in where the warrant holder is severely disadvantaged. While the period for which the convertible shares or debentures are held is counted for the purposes of computation of the 6-month lock-in, in case of warrants this 6 month period is excluded. Net-net, for warrants, the 6-month period starts afresh from the date of trading approval for the underlying shares.
Thus, the effective lock-in for unlisted warrants and other convertible securities are set out below:
Warrants issuances should also be structured appropriately to avoid tax exposure. Two key nuances to be considered and optimized for in this regard: (a) applicability of tax on the price delta between issuance and allotment of warrants; and (b) possibility of tax on conversion of warrants to equity shares. Both these nuances can be addressed to provide sufficient comfort to investors opting for warrants.
Conclusion
While warrants carry with it the incentive of locking-in the price by paying a quarter, the illiquidity of the warrants and then also shares allotted upon conversion take away from the sheen of well-timed price optimal exits typically sought in public markets. The lack of clarity on tax exemption on conversion of warrants (unlike convertible preference shares or debentures) does not seem to help either. Proponents of corporate governance have often argued that warrants should be priced higher than equity shares as they give an unfair advantage to warrant holders, but in doing so one must also consider the inherent handicap of a warrants - inability to plan a quick (often price optimal) exit, which does dampen the exuberance of the instrument.
1 SEBI Informal Guidance Letter dated 10 November 2023 to Paramount Communications Limited (accessible here)
Join our Whatsapp Community
Please click here or scan the QR code to join the WhatsApp community of Resolüt Partners.
Authors
Austin Thomas
READ MORE →
Shivam Yadav
READ MORE →Recent Research
Loading recent analysis...