“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. SATURDAY, APRIL 25, 2009
PE firms allowing warrants to expire
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.

2. 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.”
“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.