Chapter - 21

Convertible Debentures and Warrants

Why Issue Convertible Debenture 
Sweetening debentures to make them

attractive.  Selling ordinary shares in future at a higher price.  Avoiding immediate dilution of earnings.  Using low cost capital initially.

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Valuation of Convertible Debenture 
A convertible debentures market value depends

on both investment and conversion value. Market value is higher than both the investment and conversion value. The difference is the conversion premium. The premium results because the convertible debenture offers fixed income at a low risk of price decline while assuming the chances of capital gains when the share prices increases.

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A warrant entitles the purchaser to buy a fixed number of ordinary shares at a particular price during a specified time period. It is similar to an American call option.

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Exercise Price  Exercise Ratio  Expiration Date  Detachability  Right

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Theoretical Value = (Share Price ± Exercise Price)* Exercise Ratio  If the share price is less than the exercise price

the warrants theoretical value is zero.  The difference between the warrants¶ market value and its theoretical value is called the premium.  Black±Scholes Model (after required adjustment) can be used to value warrants.
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Why Issue Warrants 

Sweetening Debt Deferred Equity Financing Cash Inflow in Future Other Advantages
1. 2.


Warrants keep the share prices high. Investor enabled to have access to shares without investing now. Enables promoters to increase their holdings.

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Zero-Interest Debentures (ZID) 
ZID or zero coupon bonds or deep discount

bonds do not carry an explicit rate of interest. The difference between the face value of the bonds and its purchase price is the return to the investors.  Mahindra & Mahindra was the first company in India to issue convertible zero interest bonds in January 1990.  The purely zero-interest debenture was issued by Best and Crompton Engineering Company in December 1990.
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Secured Premium Notes 
Secured premium note is a secured

debenture redeemable at a premium. It is a medium to long term debenture. TISCO issued SPNs with warrants attached in India for the first time to raise Rs 346.5 Cr.

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