Companies avoid warrant conversion as shares dip

Company’s short term need for money/capital/funding is done through debentures, both convertible and non-convertible, and warrants are used.

A sharp decline in the prices of their company’s shares has forced many promoters to give up the initial payments made by them at the time of subscription towards convertible warrants.

A warrant is a security, entitling its holder to convert these into equity shares at a fixed price within the stipulated date. They are often issued by firms to their promoters, who are required to pay 25 per cent of the total value upfront, with the rest to be given at the time of conversion into shares, which would be anytime within 18 months from their date of allotment.

In the past month, the promoters of JSW Steel, Pantaloon Retail, Hanung Toys & Textiles, Ansal Housing & Constructions and Country Club have forfeited a total of Rs 656 crore they’d together paid at the time of allocation, as they preferred to avoid paying the remaining 75 per cent of the subscription money, since the stock price had dropped way below the warrant conversion one. These five companies had allotted warrants amounting to Rs 2,625 crore to their promoters.

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JSW Steel’s promoter entity, Sapphire Technologies, has alone forfeited Rs 529 crore of initial payments made in June 2010. The promoter could not convert 17.5 million warrants worth of Rs 2,118 crore within the permitted time period due to the fall in its market price.

The conversion price was fixed at Rs 1,210 per warrant, but the stock hit a low of Rs 464 in December. Future Ideas Realtors India, part of the promoter group of Pantaloon Retail, also forfeited the application money, amounting to Rs 100 crore, and transferred these to reserves due to non-conversion of warrants into equity shares.

India’s largest retailer allotted 10 million warrants amounting to Rs 400 crore. These currently trade at Rs 148 each 63 per cent below the conversation price of Rs 400 per warrant.

With the steep price correction, if a promoter subscribes to these shares, they would have to pay hugely for converting the warrants, when they could buy the stocks more cheaply through the open market, added Ostwal.

Promoters who had converted warrants into equity shares during 2011 in anticipation of value appreciation are now sitting on huge losses after a sharp fall in stock prices. Around 125-odd companies converted warrants into equity shares, currently valued at Rs 2,501 crore, about 58 per cent lower than their issue size of Rs 5,973 crore. The list of companies includes Reliance Infrastructure, HDIL, Unitech, Uflex and HCL Infosystems.

The following list shows the companies