Issuance of warrants for purchase of shares

[Star]

Dear Members,

Is any member have information about the issuance of warrant(for purchase of share capital at some future date at determined price).

If a company wants to issue warrant what would be the requirements of Pakistani Law (with reference) and its accounting treatment in case of listed and unlisted company.


Seniors are requested to share their knowledge.

Regards,

*

[kamranACA]

Star

I am not aware of the possibility of issuance of warrants in Pakistan. On SECP's webpage there is no such guideline, rules or statute. We can only see regulations for issuance of TFCs, Preference Shares and Commercial Paper etc.

Let's see what other members opine.

Commercial paper would be very interesting to see in market as well but problem is that like short term borrowing (it has to be maximum for one year) it has to be repaid in cash and cannot be converted.

The best solution in Pakistan appears to be the issuance of Preference Shares with a conversion option "at the discretion of issuer" i.e. call option. A properly drafted agreement will also render this arrangement to be recorded as part of equity instead of debt under IFRSs so it can also be helpful in strengthening the equity base.

Ask the company management to think on it.

Regards,


KAMRAN.

[Star]

Dear,

Preference shares may be issued but usually dividend is paid on preference shares which may not be acceptable for the issuing company.


Lets see the response of others.


Regards,


*

[kamranACA]

Dear

It will be very hard to raise money without incurring cost of its utilization. Either it is dividend or interest, you cannot avoid it, specially when the conditions of stock market always remain dependent upon foreign players without any genuine growth.

I am interested to know, if somebody can tell about possibility of issuing warrants in Pakistan.

Thanks.


Kamran.

[Star]

Dear KamranACA,

I agree with you there is no specific law about the issuance of warrants in Pakistan but we can derive the requirements of issing warrants from the provisions of CO1984 and the Rules issued under this ordinance.

Section 90 of the CO1984 provides

"A company limited by shares may have different kinds of share capital and classes therein as provided by its memorandum and articles

Provided that different rights and privileges in relation to the different classes of shares may only be conferred in such manner as may be prescribed."

In the above section, there is room in respect of different classes of share capital. Therefore, warrant may be considered as one class of share capital in which shares will be issued at future date at determined or determinable price.

Section 86 (1) last para states about the further issuance of shares other than right shares;

"Provided that the Federal Government may, on an application made by any public company on the basis of a special resolution passed by it, allow such company to raise its further capital without issue of right shares."


For the above purpose, if provided in the memordum and articles of the the Company, special resolution can be passed in respect of issuance of warrants (not being right shares).

If memorandum does not state about the warrant as class of share capital then same can be altered as provided in the Ordinance before passing special resoulution.

On the basis of special resolution, FG / SECP may allow to make the issue.


Now come to your point about the return / dividend /interest (cost of utilization of finance) which we say in daily life that nothing is free in our life. -)

While issuing warrants, these may be issued at below the market value (determined by the investor by statistical calculations etc.) keeping in view the free reserve limits of premium / discount to be charged on issuance of capital under the issuance of capital Rules 1996.

I think above procedure may be followed and warrants can be issued in Pakistan remaining in the boundries of law. Comments will be welcomed.

You have stated in your earlier post that call/ put Options may be used for this purpose. But I think this deal would be different as options do not not have dilutive effect on EPS because options are traded for the share capital already issued while in case of warrants share capital will be issued in future and this will be dilutive.


Regards,

*


think warrants can be issued in Pakistan

[kamranACA]

Dear

I like to refer you to your own quotation of section 90 where you wrote

QUOTE

Section 90 of the CO1984 provides

"A company limited by shares may have different kinds of share capital and classes therein as provided by its memorandum and articles

Provided that different rights and privileges in relation to the different classes of shares may only be conferred in such manner as may be prescribed."

UNQUOTE

It is vital to have in place "prescribed rules" to determine rights and privileges in relation to the different classes of shares. I wish to inform you that such amendment in section 90 dated 30 June 1999 was aimed at to allow classification of preference shares within the definition of share capital. (if you read the text of section 90 before the said amendment, things will be clarified). Since nothing has been "prescribed" for warrants to determine rights and privilidges, in my view, these cannot be issued unless and until we have a statute to support such issuance. Merely amendment in memorandum/artciles will not serve a purpose.

This also has no linkage with section 86. "Share" has been defined in section 2 (35) of CO84 as "a share in the share capital of a company". Only "ordinary shares" and "preference shares" can so far make part of share capital, therefore warrants don't even fall under this umberalla as well.

As far as discount on issuance is concerned, it has almost similar cost to the company and there appears no financial benefit of allowing discount in comparison to paying dividend/interest. Further, it may be very difficult to issue shares/warrants on discount if the company has to make such issue as further issue.

As far as "options" or "call options" discussed by me in earlier post are concerned these were and are not meant for "traded options". These meant the put or call options available to preferencee shareholders in case these are convertible preference shareholders. Therefore, these do have dilutive effect on EPS.

Regards,


KAMRAN.

[Star]

Dear,

I at the outset has said that there is no law but cushion is available in the law. Section 90 does not restrict the classes of share capital as ordinary or preference. Therefore, warrant may be considered as a class of share capital.

As for as section 86 is concerned, the company can not issue share other than right. if we are to issue warrant to one shareholder, this section shall be followed as a substance of the matter not merely its legal form (the definition of share or capital). The company is going to issue warrant to purchase share capital to a single investor in future, how it can be issued without following section 86. Is special resolution will be required after 5 years when actually share will be issued?

In this case, i have supposed that the company is trading on the higher market value than its book value / face value. if warrant is issued at a price more than the face value but lower than market value, i think it will cost nothing for the company.


Regards,

*

[kamranACA]

Star

I could not explain my point of view, I guess. Let me do it again.

SO FAR section 90 does cover ordinary shares and preference shares ONLY since it has stipualted that such classes of shares have to be prescribed. It states that different rights and privileges in relation to the different classes of shares MAY ONLY BE CONFERRED IN SUCH MANNER AS MAY BE PRESCRIBED. Law always restrict its boundries by using these words.

I may be wrong but I have a determined view that section 90 restricts issuance of warrants, if these have not yet been prescribed.

You have agreed that there has nothing been prescribed about warrants in law. The only prescribed shares in company law are ordinary shares and preference shares therefore section 90 has utmost relevance to what I have tried to explain.

I am still of the view that unless and until law prescribes right and privilidges and proivide rules and guidance for issuance of warrants no company can issue warrants in Pakistan. This is the public money and regulators will never allow to collect and utilize it without or beyond the limited prescribed by the promulgated rules and regulations.

If it could be a case, why not every ABC or XYZ start collecting money from public in similar ways and what was the need for promulagting rules for commercial paper, TFCs, preference shares and for calling deposits from public etc.

It can be simply a difference of opinion but I wonder what SECP will opine if you post them a query to clarify this matter. If you do, and get a response, let us know as well.

Regards,


KAMRAN.

[Star]

Dear,

Let us see the contribution of other members. It was a discussion to gain knowledge about the subject matter.

If any update or opinion came under my observation i shall inform the members.

One thing you pointed out is very strong, that secp will not allow to issue warrant in absence of proper rules and regulations.


Regards,

*

[pakvestor]

An Interesting post. I came ac ross it as I myself am recently looking for ways to issue a warrant for my company. The Company has entered into a Service agreement with technical consultants who are providing extensive assistance in developing a bankable feasibility model and arrangement of financing for a project. In return, the consultant wants warrants which would allow the consultant to become a shareholder in the company. The warrant is to be exercised as a chasless transaction.

Whilst searching online for a solution, I found this particular thread. I found Star's proposal for a share class quite interesting. We could technically have a warrant as a seperate share class with the following slaient features
* PAR value of only Rupee 0.01 (as against the Par value of Rs10 for a regular share)
* Zero voting right, Zero dividend right, no right to attend general meetings.
* The above rights would be foa limited time period as well (as a parallel to the exericse period of the warrant)
All the above features are inline with the variation in Rights and Privileges Rules 2000

Additionally, each warrant class of share can have an option to convert the shares to regular shares within the limited time period at a specific conversion option price.

Alternatively, we can even issue a long term right issue, since that is exactly what a rights issue is, the ability (right) to purchase the stock of the company at a certain price int he future. WOuld it be possible to do that?? (lets say a 3 year rights issue, which is declined by the current sponsors. Can such a declination be secured beforehand though a warrant agreement?)

In either of the above two cases (waarant through Share class or through ling term rights issue), would it be possible to base the exercise price of the warrant or the subscription number of shares (or conversion ratio - if in case of a share class) on a formula. The reason for asking this is because the consultant wants the warrant to entitle him to a sweat equity based on a formula.

Also if we go through the rights issue process, would it be possible to allow the consultant to carry out a cash less exercise, whereby the value of the rights itself is taken as the consideration for the issue of shares and a lesser number of shares are issued.

Regard,