ACCOUNTING OF WARRANTS ISSUED BY SUBSIDIARY TO PARENT

This article deals with accounting of a derivative instrument issued by a Subsidiary to a Parent, in the separate financial statements of the Parent and the Subsidiary.

FACTS

•    A Ltd holds a 51% stake in B Ltd and has the ability to control all the relevant activities of B Ltd.
•    B Ltd (‘Issuer’ or ‘Subsidiary’) issues 1,000 warrants to A Ltd (‘Holder’ or ‘Parent’) on a preferential basis. Each warrant is issued at a price of INR 100. Each warrant is convertible into 1 equity share of B Ltd (i.e., the fixed conversion ratio of 1:1).
•    An amount equivalent to 5% of the warrant Issue Price shall be payable at the time of subscription /allotment of each warrant and the balance of 95% shall be payable by the Warrant holder on the exercise of the warrant.
•    The warrant is gross settled (i.e., the warrant cannot be net settled). The issuer doesn’t have any contractual or constructive obligation to redeem /buy back warrants. Gross settled means that the contract will be settled by transfer of the underlying and the consideration; whereas, net settled means that the contract will be settled by settling the difference in cash, for example, a warrant to buy a share at INR 100, will be settled by receiving/paying INR 10 in cash, if the value of the share on the date of settlement is INR 110.
•    The Holder is entitled