A share warrant is an agreement between a person and a corporation that entitles
the person to trade company shares at a certain price on or before a specified
date. They are frequently given out by businesses as a means of fund raising,
employee benefits, recruitment, or retention strategies. A key distinction
between a share and a warrant is that a warrant holder has the right to purchase
or sell shares within a predetermined timeframe while a shareholder receives
partial ownership in the company.
Before the expiration date, warrant holders
have the option to exercise their rights. Only when the exercise price is lower
than the cost of a common share would a warrant holder choose to exercise the
right. For instance, say the stock price is 165 per share right now, but you
think it will shortly surpass 200 per share.
So, you spend Rs.200 on a warrant
that entitles you to purchase 100 shares of XYZ Limited for Rs.200 each. The
cost of the warrant is 10, bringing your overall expenditure to Rs.1000. Let's
say the stock price increased to 280 per share after four years. If you exercise
the warrant in this case, you can acquire 100 shares for 20,000 instead of
28,000, which is a benefit.
You might immediately receive a discount of 8,000,
and your net gain would be 7,000 after deducting the warrant price of 1,000. The
corporation will issue you fresh shares once you've exercised the warrant.
Types Of Share Warrants:
Taxes On Share Warrants:
- European warrants:
These are the warrants which you can exercise only on a pre-decided expiration date.
- American warrants:
These are the ones you can exercise on or before a pre-decided expiration date.
- Call warrants:
Call warrants are those warrants that provide you the option to purchase shares of a company at a set price within a predetermined window of time. When the company's stock price rises above the strike price (the price at which the warrants grant you the right to purchase that stock), it would be advantageous to exercise the call options. For example, you bought call warrants with a 125-strike price. If warrants are exercised, you can obtain shares at a reduced price if the underlying stock price rises over 125. However, it would be pointless to exercise the warrant if the stock price was 125 or less.
- Put warrants:
Put warrants are those warrants that allow you to sell a
company's shares at a set price within a predetermined window of time. Put
warrants are issued by businesses to draw higher investments and lower investor
risk. In this way, even newer or smaller businesses could be able to draw in
investors. When the company's stock price falls below the strike price (the
price at which the warrants grant you the right to sell that stock), it would be
advantageous to exercise the put options. For example, you bought put warrants
with a 120-strike price. If you use warrants to sell the shares, you can make
money if the underlying stock's price is below 120. But if the stock price is
120 or above, using the warrant might not be a good idea.
The difference between the strike price and the share's market price at the time
the warrant is exercised is treated as ordinary income for tax purposes. The
difference between the strike price and the selling price of these shares, which
will be your capital gain when you sell them, will be taxed depending on how
long you held the shares�long-term capital gain tax if held for more than 12
months, short-term capital gain tax if held for less than 12 months.
Insights Into Share Warrants:
Share warrants may give you the opportunity to buy or sell shares in the future
at a higher price than the current stock price. This advantage could, however,
come at the cost of losing the minimal money you make to buy warrants. Companies
may profit in both scenarios since they can issue equity warrants or additional
shares to raise capital or broaden their equity base.
Whether stock warrants
prove to be a wise investment depends on how the stock price performs. If you
exercise call warrants at a time when the company's stock price is higher than
the strike price, you might profit. When you exercise put warrants when the
stock price falls below the strike price, you will profit. One of the drawbacks
of warrants is that they do not pay dividends to the investors.
SEBI DIP Guidelines and ICDR Regulations:SEBI Guidelines
The share warrants can be issued at the pricing of average of highest and lowest
weekly prices preceding the 6 months tenure to the relevant date OR average of
the highest and lowest weekly price preceding the 6 months tenure to the
relevant date. An amount equivalent to at least 25% of the value must be paid
up-front during the time of allotment and the balance can be paid at the time of
The tenure of share warrants issued shall not exceed a period of 18 months from
the date of allotment in their public offering. A single security can only have
one warrant attached with it. The formula for calculation of share warrants must
be disclosed upfront and at least 25% of the amount must be paid. If the warrant
holder doesn't convert any of his warrants into shares, then after 3 months
period of payment of the consideration the amount paid by the issuer can be
Share warrants are still an underutilized and little-known source of investment
finance for investors. However, some of the benefits of warrants include their
inherent leverage, significant upside potential, longer time horizons, giving
investors a larger window of opportunity to see their bets succeed, and the
ability for the issuing company to lower the strike price while paying
dividends. Share warrants therefore have the potential to become the go-to
investment for everyone looking for a buy-in for their money, even though they
currently appear to be harsh for some investors.