The Covid 19 pandemic has shook the capital markets with stock prices being at their all-time low since 2009 stock market crash. In such difficult times, where the stocks have become illiquid and there is a cash crush in the economy, there pose a situation of dilemma for the holders of warrants of the listed companies, where the conversion period of such outstanding warrants is about to lapse in next month or two.
What is Convertible Warrant:
A warrant, issued on preferential basis under SEBI ICDR Regulations, is a security which is allotted to the warrant holder on payment of upfront 25% of the issue price, with the right to convert those warrants into equity of the listed issuer by making the payment of balance 75% consideration within a period of 18 months.
Since, in the present distressed situation, on one hand the investor/ warrant holder is resistant to put in balance 75% funds on the other hand, if warrants are not being converted within the stipulated 18 months, then 25% funds already invested by the warrant holder shall stand forfeited by the Company, thus leaving the investors in double jeopardized position.
Apart from the uncertain markets, there can be other reasons as well, which might delay the balance fund infusion like where investor and issuer face geographical barriers and it is difficult arrange funds from one end to the other end due to world-wide lockdown. In such a situation again, it might not be possible for the investors/ warrant holders to convert such warrants within the mandated 18 months as per SEBI ICDR Regulations.
Recently, SEBI has, in the case of one of a BSE & NSE listed company, has granted a rare relaxation in timeline for conversion of warrants beyond the 18 months’ timeframe under Chapter V of SEBI ICDR Regulations. This Company, in October 2018, allotted warrants to Promoters of the Company which were pending for conversion as on date, has approached SEBI on the request of the warrant holder to extend the approaching deadline for warrant conversion in light of current uncertain times.
In the past, many a companies have gone to SEBI to seek extension in conversion of warrants, however, the Regulator is quite clear that the 18 months period is a sacrosanct period and should be adhered to in all circumstances.
This decision of SEBI in the aforesaid case, has given the ray of hope to the stuck warrant-holders of listed companies to plan out their conversion timeline on account of covid-constraints. However, any decision by SEBI will be given on case to case basis.
Since, Covid-19 pandemic is no less than a black swan event which is extreme rare having severe uncertain impact, we can expect many more such relaxations coming from SEBI during this pandemic period.
For any discussions, feel free to call:
Ms. Anjali Aggarwal
Partner & Head – Capital Market Services
M: +91 9971673336