SHARE WARRANT – BEARER INSTRUMENT

In last post, we discussed meaning of warrant in with particular reference to share warrant. There are two questions pertinent to issue of share warrant:

1. May Share Warrants be issued under the Companies Act, 2013 as fresh securities without pre – existence of underlying shares? or
2. May share warrants be issued under the Companies Act, 2013 as conversion of underlying shares already existence?

In this post, we will discuss these questions.

In earlier 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.

Whether Share Warrants securities under the Companies Act, 2013

According to Section 2(81) of companies Act, 2013 says “securities” means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956.

According to Section 2(h) of the Securities Contract (Regulation) Act, 1956, Securities include –

• Share, scripts, stock, bond, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or body corporate;
• Derivative;
• Unit or any instrument issued by any collective investment scheme to investors in such scheme;
• Security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 {SARFAESI 2002};
• Units or any other such instrument issued to the investor under any mutual fund scheme; {certain exception there};
• Any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possess any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be;
• Government securities;
• Such other instrument as may be declared by the Central Government to be securities {onshore rupee bond issued by multilateral institutions};
• Rights or interest in securities. [Section 2(h) of Securities Contract (Regulation) Act, 1956]

Clause (ix) of Section 2(h) of the Securities Contract (Regulation) Act, 1956 lists right or interest in securities as securities. Warrants are essentially a right or interest in securities. To create a right or interest in any securities, such underline securities should be in existence.

Warrant bearer instrument
Copyright: Aishwarya Mohan Gahrana

Whether Share Warrants Shares or other Securities under the Companies Act, 2013

In general terms a share warrants are not shares but a right or interest in shares. This simple definition makes share warrant other securities.

However, Explanation (ii) to sub – rule (1) of Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 has indirect mention of share warrant. It reads, “For the purposes of this rule (Rule 13), the expression, “shares or other securities” means equity shares, fully convertible debentures, partly convertible, debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date”.

As shares warrant is a right or interest in underlying shares and it would be convertible into or exchanges with equity shares, it will be technically a “share” under the Rule 13 of these Rules.

Issue of Share warrant

There are two questions pertinent to issue of share warrant:

3. May Share Warrants be issued under the Companies Act, 2013 as fresh securities without pre – existence of underlying shares? or
4. May share warrants be issued under the Companies Act, 2013 as conversion of underlying shares already existence?

Issue of Share Warrants without pre – existence of underlying shares:

The (Indian) Companies Act, 2013 does not “directly” prescribe any law related to Share Warrant.

Explanation (ii) to sub – rule (1) of Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 has indirect mention of share warrant. It reads, “For the purposes of this rule (Rule 13), the expression, “shares or other securities” means equity shares, fully convertible debentures, partly convertible, debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date”.

This explanation make it clear that share warrant, if possible to be issued, shall be issued as an issue for preferential basis as applicable to shares.

In case of fresh issue of share warrant, what will constitute underlying shares? One argument says that a future issue of shares may take place. Then the instrument shall become a fully convertible 0% interest security convertible to shares. This is something akin to 0% fully convertible debenture not share warrants.

Conversion of Existing securities to warrants:

Unlike the Companies Act, 1956 present Companies Act, 2013 or rules made there under do not have any law or procedure for conversion of existing to warrants. It means a full stop? Present Act, do not expressly prohibit share warrants. To arrive at conclusion, we will look into all provisions related to securities and interpret them in context of characteristics of warrants.

If company in its Memorandum of Association may have one of objects to issue share warrant and may prescribe procedure in Articles of Associations.  The Companies Act, 2013 does not prohibit issue of share warrant and therefore such provisions shall not be in contradiction of the Act.

Road Block:

Section 88(1) that Every company shall keep and maintain the following registers in such form and in such manner as may be prescribed, namely:—

(a) register of members indicating separately for each class of equity and preference shares held by each member residing in or outside India;

(b) register of debenture-holders; and

(c) register of any other security holders.

According to Rule 4 of the Companies (Management and Administration) Rules, 2014, “every company which issues or allots debentures or any other security shall maintain a separate register of debenture holders or security holders, as the case may be, for each type of debentures or other securities in Form MGT – 2.”

Form MGT – 2 essentially ask name of securities holder.

Section 88 creates a road block as share warrant is a negotiable instrument freely transferable without executing any instrument or share transfer form.

Treatment of Existing Share Warrant

Share warrant issue under the Companies Act, 1956 are valid up  to the end of their remaining period and shall be convertible to shares as per terms and conditions of their issue. As these shares was already and survives by these share warrant, reconversion of these share warrant shall not be issue of share capital.

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