The Hindu Business Line : Warrant route to raising capital staging a comeback

THE warrant route to raising fresh capital is back in vogue and in a big way. In the last one year, no less than 25 companies have issued warrants to promoters.

A string of recognised mid-cap and small-cap companies such as IVRCL Infrastructures, Nagarjuna Construction, Monnet Ispat, Mercator Lines, Morepen Labs, Alok Industries and Aurobindo Pharma have employed the warrant route during this period.

Not new in themselves - there have been such issues in the past - but there are some differences between now and in the past. During the IPO boom between 1994 and 1996, warrants were used as "sweeteners" or "kickers," which are attached to convertible debt instruments or equity to lure investors to subscribe to public offerings.

But this time around, the warrant route has a fair sprinkling of preferential equity offers to some identified group such as FIIs or domestic institutional investors with a matching offer of warrants to promoters.

That these warrants could eventually shore up promoter stake diluted by issue of equity to outsiders may be a happy coincidence, but it is there nevertheless.

Take the case of Nagarjuna Construction. The company made a preferential offer of two million equity shares: one million to Mr Rakesh and Mrs Rekha Jhunjhunwala and the remaining one million to other institutional investors. Concurrently, it also proposed to issue five-lakh convertible warrants to the promoter group consisting of Mr A.V.S. Raju and others. Both the preferential offer and warrant issue to promoters were at the same price of Rs 135.

According to Mr M.V. Srinivasa Murthy, Company Secretary, Nagarjuna Construction, the preferential offers and issue of warrants to promoters were two unlinked proposals, which were put up before the shareholders for approval. But, he conceded that the warrant offer was intended to restore a part of the promoter's stake reduced on account of the preferential offer to the specified group.

Not all cases were of this nature. There have been warrants issued to promoters without any dilution of their stake by fresh issue of capital to outsiders.

Omax Autos, a Gurgaon-based auto ancillary company, is a case in point. In this case an allotment of warrants was made to promoters, without a preferential issue to an outsider.

According to a senior executive of the company, the promoters were unable to make a preferential offer to outsiders and raise finances for their capital expansion programme. Instead, they sold the promoters' equity stake in the market.

In order to shore up their reduced equity stake, Omax Autos has made an offer of 10 lakh warrants at Rs 90 to Forerunner Capital Investments, a promoter group company.

The market's view on issue of warrants to promoters is mixed. Mr Arun Kejriwal of KRIS Research said that issue of warrants to promoters indicates that promoters are diffident about the future of the company.

In his view, promoters should be called upon to pay a substantial amount as upfront payment compared to the 10 per cent that is required at present.

This amount gets forfeited if promoters decide not to convert the warrants into equity.

There is merit in his point of view. Take the recent foreign currency convertible bond (FCCB) offer made by the Tata Motors, in which investors have borne the risk on an upfront basis, for acquiring a right to convert their bonds (a debt instrument) into equity. In this case, investors to the offer settle for a lower return on the bond vis-à-vis the market yields, because there is a sweetener in the form of delaying their right to convert their bonds into equity.

For the duration that they stay invested in the bond, they do not earn any returns and if they hold onto their bonds till the date of maturity the bonds are actually redeemed at a discount.

According to Mr Prithvi Haldea of Prime Database, an independent primary market monitoring firm, as long as the warrant price is fixed upfront, the possibility of the instrument being abused may be mitigated.

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