Warrants

Key Highlights

• A Warrant is a financial instrument that gives the holder the right, but not the obligation, to buy or sell a company’s shares at a predetermined price (known as the exercise or strike price) within a specific period.

• Types of warrants includes equity, detachable and covered Warrants.

What are Warrants?

A Warrant is a financial instrument that gives the holder the right, but not the obligation, to buy or sell a company’s shares at a predetermined price (known as the exercise or strike price) within a specific period. Warrants are often issued by companies as part of fundraising, mergers, or debt restructuring initiatives to attract investors with potential upside exposure to equity performance.

Types of Warrants

• Equity Warrants: Allow investors to purchase company shares at a fixed price in the future.

• Detachable Warrants: Issued alongside bonds or preferred shares, these can be separated and traded independently.

• Covered Warrants: Issued by financial institutions rather than the company itself, offering exposure to various underlying assets.

Purpose and Use Cases

Companies use warrants as a capital-raising mechanism or an incentive tool in corporate deals. For instance, in India’s capital markets, warrants are often attached to convertible debentures or preferential issues to enhance investor participation. Institutional and high-net-worth investors may view warrants as a strategic instrument to access equity-like returns with lower capital deployment.

Benefits for Investors

• Leverage Opportunity: Allows investors to participate in equity gains without full share ownership.

• Portfolio Diversification: Adds a hybrid exposure combining debt and equity characteristics.

• Potential for High Returns: If the underlying stock performs well, warrant holders can realize substantial gains upon conversion.

Risks and Considerations

Warrants are high-risk instruments as their value depends on the underlying stock’s future price performance. They may expire worthless if the stock price remains below the exercise price. Additionally, factors such as time decay, market volatility, and dilution effects should be evaluated before investment.