WARRANT vs WARRANT

In simple dictionary meaning warrant is to make particular activity necessary. In criminal law, warrant is term clearly defined term meaning a legal document permitting an action by authority and making its compliance necessary to the person named therein. In corporate and financial word, warrant is an instrument with different meaning at different financial and legal jurisdiction. In this post, we will discuss these meaning of warrant with reference to Share Warrant.

Warrant is a security that entitles the holder to buy before the expiry date the underlying security of the issuing company at the fixed price (exercise price). According to oxford dictionary, “warrant is a negotiable security allowing the holder to buy shares at a specified price at or before a future date”. According to Cambridge dictionary, “warrant is the right to buy a company’s shares at a particular price by a particular date”.

Warrant is different form “Stock Option”. According to investopedia:

“A stock warrant is just like a stock option because it gives you the right to purchase a company’s stock at a specific price and at a specific date. However, a stock warrant differs from an option in two key ways:

1. A stock warrant is issued by the company itself
2. New shares are issued by the company for the transaction. Unlike a stock option, a stock warrant is issued directly by the company. When a stock option is exercised, the shares usually are received or given by one investor to another; when a stock warrant is exercised, the shares that fulfill the obligation are not received from another investor, but directly from the company.”

Warrant is also different from “bearer shares”. According to investopedia, a bearer share is an equity security that is wholly owned by whoever holds the physical stock certificate. The issuing firm neither registers the owner of the stock, nor does it track transfers of ownership. The company disperses dividends to bearer shares when a physical coupon is presented to the firm.

Nasdaq define bearer shares as security not registered on the books of the issuing corporation and thus payable to possessor of the shares. Negotiable without endorsement and transferred by delivery, thus avoiding some of the control associated with ordinary shares. Dividends are payable upon presentation of dividend coupons, which are dated or numbered applied mainly to international equities. Recently leaked Panama Papers, talk lot about bearer shares.

This is interesting to note that due to cultural differences warrants are slightly different securities in corporate law jurisdiction of United Kingdom and India on one hand and financial jurisdiction in United States and India on the other hand. In the (Indian) Companies Act, 1956 and the (United Kingdom) Companies Act, 2006 share warrant is more like limited period bearer shares. Warrants, in Indian and United State financial market, are different securities in the nature of sweetener. A sweetener may be of two kind; warrants or rights, which allow its holder to either convert it into shares at a later date or purchase security at below market price. Warrants talked about in SEBI Regulation are example of Sweetener.

Warrant vs Warrant

In this post, we will discuss Share Warrants as in the (Indian) Companies Act, 1956 and the (United Kingdom) Companies Act, 2006. Term “Share Warrant” used in the (Indian) Companies Act, 2013 also refers to existing share warrant as defined in the Companies Act, 1956.

The (Indian) Companies Act, 1956 specifically prescribed the law and procedure for issue of Share warrant. Section 114(1) read, “A public company limited by shares, if so authorised by its articles, may, with the previous approval of the Central Government, with respect to any fully paid-up shares, issue under its common seal a warrant stating that the bearer of the warrant is entitled to the shares therein specified, and may provide, by coupons or otherwise, for the payment of the future dividends on the shares specified in the warrant.” Section 114 and 115 of the Companies Act, 1956 deals with law related to the Share Warrant.

Under the Companies Act, 1956 share warrant may be issued:

1. With respect to any fully paid – up shares,
2. Bearer of the warrant is entitled to the shares therein,
3. May provide for payment of the future dividends by coupons or otherwise.

Present Companies Act, 2013 used term “Share Warrant” in two places only; once in Section 57 which talk about ownership of share warrant and in Schedule III which has mentioned it in format of Balance Sheet. It seems both place, the Act accommodate existing Share warrants.

According to Section 122(1) of the (United Kingdom) Companies Act, 2006:

On the issue of a share warrant the company must—

(a) enter in the register of members—

(i) the fact of the issue of the warrant,

(ii) a statement of the shares included in the warrant, distinguishing each share by its number so long as the share has a number, and

(iii) the date of the issue of the warrant,

and

(b) amend the register, if necessary, so that no person is named on the register as the holder of the shares specified in the warrant.

Sub – section (3) of Section 122 of the (United Kingdom) Companies Act, 2006 further add that the bearer of a share warrant may, if the articles of the company so provide, be deemed a member of the company within the meaning of this Act, either to the full extent or for any purposes defined in the articles. Sub – section (4) of Section 122 of the (United Kingdom) Companies Act, 2006 add that subject to the company’s articles, the bearer of a share warrant is entitled, on surrendering it for cancellation, to have his name entered as a member in the register of members. Sub – section (4) of Section 122 of the (United Kingdom) Companies Act, 2006 add that on the surrender of a share warrant, the date of the surrender must be entered in the register.

Sections 779, 780 and 781 of the (United Kingdom) Companies Act, 2006 further elaborate the provisions related to Share Warrant.

The (South Africa) Companies Act, 2008 and the (Pakistan) Companies Bill, 2015 mentioned that there is no requirement of instrument of transfer for shares in respect of which share warrant has been issued.

In the above discussion, following characteristics of share warrant emerge:

1. Pre – existence of underlying Shares,
2. Issue of warrant by conversion of these underlying shares, which cease physical existence for the period of existence of warrant,
3. Warrant may have mentioned number of shares and distinctive numbers of shares underlying it – as underlying shares or their distinctive numbers are not cancelled,
4. Deletion of name of members in relation to these shares or securities and entering of the fact of issue of share warrant,
5. Coupon to claim dividend,
6. Right of bearer of warrant to claim to be a registered shareholder or securities holder in respect of underlying shares or securities,
7. Share warrant shall on request or after its period shall be re – converted into shares, and
8. Share warrant, being a negotiable security, may be transferred without transfer instrument or deed.

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