“There is little likelihood of these getting converted for the reason that all these warrants are out-of-money or the current share price in all these cases is at a discount of between 17% and 77% to the exercise price,” said Jagannadham Thunuguntla, head of equity at SMC Capital.

1. PE firms allowing warrants to expire
by www.indiape.com on Fri 24 Apr 2009 03:24 PM IST
Following the steep decline in the equity market in 2008, some private equity (PE) firms that had invested
in companies through warrants are now left with no option but to let them expire because shares on the
open market are cheaper than the exercise price of the warrants.
Warrants are securities that stakeholders use to purchase or increase equity in a company at a future
date. An investor pays 10% of the value of the investment up front, and acquires the option of converting
the warrants into shares any time within 18 months at a pre-decided price. This price is known as the
exercise price.
A Mint analysis of data provided by Delhi-based investment banking outfit SMC Capital Ltd shows that
there are at least 13 companies in the National Stock Exchange’s S&P CNX 500 index in which PE
investors had warrants exercisable after 1 January 2007. The S&P CNX 500 represents about 95% of the
total market capitalization of the stocks listed on the exchange. This index declined by 57.13% in 2008.
In at least six firms, warrants have been allowed to expire by their PE investors. The six are Abhishek
Industries Ltd, Anantraj Industries Ltd, KPIT Cummins Infosystem Ltd, Nagarjuna Construction Co. Ltd,
RSWM Ltd and S Kumars Nationwide Ltd. These warrants, if converted into shares before they expired,
would have been worth Rs550.04 crore.
For RSWM Ltd, the expiry date of the warrants issued to New Vernon Bharat Ltd, an investment vehicle
of New Jersey-based private equity and hedge fund New Vernon Capital Llc, was 29 May 2007. This
could mean that the conversion did not happen because of some reason other than the market fall, which
began only around January 2008. For the other five, the expiry date was either late last year or early this
year.
Investors have fully converted their warrants into shares in only two companies—KS Oils Ltd and Oracle
Financial Services Software Ltd.
Warrants issued to PE investors in at least five other companies are yet to expire and haven’t been fully
converted. These firms are Everonn Systems India Ltd, Havells India Ltd, Shriram City Union Finance Ltd,
SpiceJet Ltd and Uflex Ltd. The collective value of these warrants, if converted, works out to Rs377.93
crore.
The expiry date for Shriram City Union Finance’s warrants, originally set for mid-May, has been extended
by six months. The investors are Bessemer Venture Partners, Asiabridge Fund I Llc, ICICI Venture Funds
Management Co. Ltd and ChrysCapital. On whether it would convert in that time, senior managing
director of ChrysCapital Ashish Dhawan said in an email: “We don’t need to decide for six months.”

2. “There is little likelihood of these getting converted for the reason that all these warrants are out-of-money
or the current share price in all these cases is at a discount of between 17% and 77% to the exercise
price,” said Jagannadham Thunuguntla, head of equity at SMC Capital.
In February 2009, the capital markets regulator Securities and Exchange Board of India changed the
rules for warrant-conversion, saying that in forthcoming warrant issues, the holder would need to pay 25%
up front. All the companies reviewed by SMC Capital had issued their warrants before February 2009.
However, at Rs1,251 crore, the conversion value of warrants issued to PE investors and exercisable after
1 January 2007 is minuscule compared with those for promoters.
Mint had reported on 15 April that out of warrants worth Rs25,153.04 crore issued to promoters of 34
companies, only Rs3,886.41 crore worth had been converted to equity. This was because the warrants
were out of money, meaning that the share price of these companies was at a steep discount of
anywhere between 15% and 86% to the exercise price of the warrants issued to promoters.