Mumbai: The sharp fall in share prices in 2008 is playing spoilsport for many Indian promoters, who had planned to increase their stakes in companies through preferential warrants.
Warrants are issued by firms to their promoters, who are required to cough up 25% of the total value of the warrants upfront. Warrants can be converted into equity shares any time within 18 months from their date of allotment.
Promoters use this route to increase their stake, infuse more capital into the company or for treasury management.
According to a Mint analysis of data provided by Delhi-based investment bank SMC Capitals Ltd, warrants issued by 34 firms are yet to expire, but their promoters have converted only Rs3,886.41 crore of warrants into equity shares, against a possible Rs25,153.04 crore.
The Bombay Stock Exchange’s (BSE) Sensex index shed at least 52% in 2008. This means many warrants are out of money. They are trading at a huge premium to the underlying share price since they were issued when the Sensex was close to its historic high.
All 34 firms whose warrants are yet to expire are out of money, from anywhere between 15% and 86%, indicating that there is very little chance of the promoter converting these into equity shares.
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The promoters of Usha Martin Ltd, Monnet Ispat Ltd, Nagarjuna Fertilizers and Chemicals Ltd, among others, have informed the bourses that they will not convert the warrants, though the final date for conversion is still to come.
Mint reported on Monday that Kumar Mangalam Birla, chairman of the Aditya Birla Group, will not convert Rs4,000 crore of preferential warrants in Aditya Birla Nuvo Ltd into equity shares because the firm’s share price has dropped by at least 60% since the allotment of the warrants.
“If the share price is trading close to the exercise price of the warrant, or even a little below that, it makes sense for the promoter to convert the warrants into shares. If the share price goes dramatically below that, it doesn’t make any sense,” said Abhay Soi, co-founder and managing director of Halcyon Resources and Management Pvt. Ltd, a Mumbai-based special situations fund.
To illustrate, let’s say company A issued warrants in May 2008 at an exercise price of Rs100, when shares of the company were trading at Rs90 apiece. To issue the warrant, the promoters had to make an upfront payment of Rs10 (in May 2008, 10% upfront payment was the regulatory norm; now it’s 25%). Today, if the share is trading at Rs50, the promoter is better off forfeiting the Rs10 he paid upfront as he can buy the shares directly from the market at Rs50.
“Many of these cancellations may be meant for financial restructuring before the closure of the financial year,” said Jagannadham Thunuguntla, head of equity at SMC Capital.
A firm has to mandatorily report basic earnings per share (EPS) and diluted EPS at the end of each fiscal year. EPS is arrived at by dividing net profit with the number of shares. Preferential warrants have to be taken into consideration and can effectively lower EPS.
In an interview with Mint last week, the managing director of another listed firm said he would not be converting his warrants into shares. Anil Jain, MD of Jain Irrigation Systems Ltd, had said: “We will let seven million shares (warrants to be converted into shares) lapse, because funding is not available.”
Including those that have expired on or after 1 January 2007, Indian promoters have converted Rs30,168.67 crore worth of warrants into equities, against Rs56,889.35 crore issued by 102 companies. Reliance Industries Ltd alone accounts for nearly 50% of the total value of warrants converted—Rs16,824 crore.
Promoters of a few firms in urgent need of funds seem to be cancelling earlier warrants issued at a higher conversion price and issuing fresh ones at a lower conversion price. Kishore Biyani-promoted Pantaloon Retail (India) Ltd announced on Monday that it would issue five million preferential warrants to its promoters and associates, which can be converted into equity shares any time within the next 18 months at Rs183 a share.
The promoters had only partially converted 21.2 million warrants issued at an exercise price of Rs500 apiece in September 2007. The Pantaloom Retail shares closed at Rs184.70 on BSE on Monday, after gaining 8.04%.
Graphics by Ahmed Raza Khan / Mint