Warrant
A warrant is a financial instrument issued by a company that gives the holder the right, but not the obligation, to subscribe to a specified number of equity shares of the company at a predetermined price within a defined time period.
Warrants issued by Indian listed companies are governed primarily by SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations). Unlike exchange-traded options, which are contracts between two market participants, warrants are issued directly by the company itself, and when exercised, the company issues new shares. This is a key distinction: warrant exercise results in dilution of the existing equity base because new shares are created.
In the Indian context, warrants are most commonly issued as part of a preferential allotment or as a sweetener attached to other instruments such as non-convertible debentures (NCDs) or rights issues. The ICDR Regulations prescribe that warrants can only be issued for a maximum tenure of eighteen months from the date of allotment. At the time of allotment, the warrant holder must pay an upfront consideration of at least twenty-five percent of the total issue price (the exercise price of the warrant). The remaining seventy-five percent must be paid at the time of exercising the warrant to receive the equity shares.
If the warrant holder chooses not to exercise the warrant within the eighteen-month period, the warrant lapses and the upfront consideration paid is forfeited in favour of the issuing company. This forfeiture provision protects the company and existing shareholders from a scenario where the holder acquires warrants at a preferential price but never commits to converting them into equity.
The exercise price of a warrant must comply with SEBI's pricing formula under the ICDR Regulations. For listed companies, the exercise price cannot be lower than the higher of: the average of the weekly high and low of the closing price of the shares during the twenty-six weeks preceding the relevant date, or the average of the weekly high and low of the closing price during the two weeks preceding the relevant date. This pricing discipline ensures that warrants are not used as a mechanism to issue equity at an unjustifiably discounted price to select investors.
Warrants serve multiple commercial purposes. Promoters may subscribe to warrants as part of a capital infusion plan, committing to bring in additional equity capital over time while paying an initial tranche upfront. Strategic investors and institutional investors use warrants to gain a future right to equity at a pre-agreed price, hedging against the risk of market price appreciation that might make a direct equity acquisition more expensive. For the company, warrants provide a two-stage capital infusion and create certainty around future equity capital availability.