Stock Warrants are issued by the company essentially giving investors a right to buy the company’s stock at a specified price within a given period of time. Exercise of warrant by the investor will make him the owner of the stocks and add the proceeds to the share capital of the company. A warrant itself does not represent ownership in the company, but only a right to buy the stocks of the company. Thus, warrant can be termed as a customised call option, to some extent.
Warrant allows the investor to buy a specific number of shares in a company at a given price in future. On exercising the right of the warrant, a warrant certificate is issued, having the particulars of the warrant type it represents.
The price at which the share can be acquired is determined by the SEBI-defined formula (considering historic share price) and time line is a maximum of 18 month between allotment of warrant and its conversion to equity share. As per current laws, 25% of the acquisition price (of the future) must be paid upfront to the company by the potential investor. If for any reason, the warrant is not exercised to be converted to equity shares by the option holder (for lack of ability to pay balance 75% or sharp drop in share price), this 25% amount is seized by the company.
Companies generally issue warrants in order to attract marquee investors for their stock or to their promoters. This is an easier and quicker form of fund raising for the company vis-à-vis rights issue or follow-on public offer or qualified institutional placement (QIP). It also represents a staggered payment of funds, from the investor’s point of view.
Whatever the case may be, the stock warrants should be carefully used due to potential of quick gains or losses.