Corporates rush with warrant offers as valuations take beating

They, however, are refraining from picking up additional stakes directly through open market acquisitions of shares or by way of fresh equity infusion. Instead, they prefer convertible warrants over equity shares as a better investment option in the current market. This trend is prominently reflected in the corporate rush to issue quasi-equity instruments to promoters. Interestingly, even public shareholders have participated in a few such offers.

Since January this year, about three dozen companies have allotted convertible warrants to their promoters. The list mostly includes small- and medium-sized companies across sectors. Ashapura Minechem, Flexituff Ventures, BCL Industries, Hariom Pipe Industries and Magnum Ventures are a few notable examples with an annual turnover above Rs 300 crore.

The Rs 600-crore Ashapura Minechem allotted 40.4 lakh convertible warrants at a price of Rs 95.96 per warrant to its promoters on February 14, 2023, at a substantial discount to that day’s closing share price of Rs 108 on the BSE. The stock, in fact, has fallen significantly from its 52-week high of Rs 175 recorded in April last year. The allotment was made with an option to convert the warrants into shares within a period of 18 months.

According to disclosures filed with the BSE, Ashapura Industrial Finance, one of the promoter warrant holders, held 16.2% stake in the company. This will increase to 17.7% post conversion. In another notable example, the Rs 2,000-crore BCL Industries issued 54.66 lakh warrants to its promoter and non-promoter shareholders at a price of Rs 360 per warrant in its board meeting on March 4, 2023.

The allotment was made at a 16% discount to the prevailing share price and 30% cheaper than the 52-week high value. Of the total warrants, 27.8 lakh were issued to the promoters while another 26.9 lakh to the public shareholders. The company said it would use part of the issue proceeds to repay debt of Rs 30 crore availed from banks and non-banking finance companies.

The Rs 1000-crore textile products company, Flexituff Ventures, allotted 59.4 lakh warrants at a price of Rs 31.50 per unit on March 28, 2023. The issue price was at a premium to the share price on the day of allotment but at a substantial discount to the 52-week high price of Rs 37.6 on the BSE.The promoters subscribed to 12 lakh warrants while many other non-promoter shareholders invested in 47.4 lakh warrants against 25.4% upfront payment. The balance amount is payable on exercise of the conversion of option, which will be within 18 months from the date of allotment. In addition to the warrants, Flexituff Ventures also allotted 12 lakh shares to the promoters who will hold 7.32% stake post-conversion, according to disclosures filed by the company with the BSE.

“Cheaper valuations and better company prospects could be driving many promoters to invest through convertible warrants despite uncertain market conditions,” said a broker. This is one of the convenient routes of investment, which offers promoters an opportunity to hike stake with cost advantage and payment flexibility.

Such a move indicates their confidence in the prospects of the companies and helps in keeping the morale of institutional and retail shareholders high, according to the broker.
Interestingly, share prices of most of the warrant-issuing companies have recorded some improvement post allotment. The stock price of Ashapura Minechem is currently quoting at Rs 121, up 11% since the placement of the warrants, while that of Flexituff Ventures has gained consistently from Rs 24.95 on March 28 (the date of warrant allotment) to Rs 30.30 on Wednesday.

BCL Industries, however, has fallen substantially from Rs 447.5 to Rs 412 on the BSE. A convertible warrant is an instrument that gives an investor a right to buy a particular stock at a predetermined price within a stipulated time period, which is generally 18 months from the date of allotment. It offers flexibility in payment as the investor is required to pay only 25% of the price initially and the balance 75% at the time of conversion.

The exercise price for conversion of warrants is calculated based on Sebi prescribed formulae, which is an average of closing prices in the previous 6 months.
Some brokers are concerned that unscrupulous promoters of lesser known, fundamentally weak companies may have been using the warrants to reap benefits in the form of capital gain.

“We believe preferential issue of warrants is mostly favourable to promoters and less beneficial to retail or minority shareholders. Promoters can earn hefty profits on their investments done at a cheaper than market price” says a large retail brokerage in its note on warrants published on its website for investors’ knowledge.

(The author is former journalist-turned-entrepreneur)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)