(f) Readers may go through this 23-page order for more
detailed reasoning; however, I offer quick comments on some
observations/decisions of SEBI.
1. SEBI, justifying the low 10% deposit amount on Share
Warrants, says “I also note that in other jurisdictions, the option premium is
generally in the range of 10% to 15% for trading of long dated options.”. I
find this justification difficult to accept in the Indian context. The basic
important elements of the Black-Scholes option valuation formula (who, I
believe, got the Nobel Prize for this) are interest rates and volatility. Is
it plausible that interest, in India, is only 10% for a total period of 18
months? It is even less plausible — in fact consistently found untrue in every
option valuation I have come across — to believe that the volatility is 10%
over an 18 month period. And mind you, option value is at least the total of
the interest and volatility (and a few other factors).
2. Then, SEBI says that, from just 8 companies listed, a sum of Rs.1515 crores received as deposits from Promoters have been forfeited when they did not exercise the Share Warrants. SEBI seems to imply that far from the Company and the public losing, the Company has actually gained such a huge amount – it says – “it may be incorrect to argue that the Promoters stand to gain at the cost of the Company and its shareholders.” But is not the reality exactly the opposite? In fact, this shows that the companies granted options to exercise Rs. 15150 crores since the deposit amount is just 10%.
3. Further, of these Rs.1515 crores, effectively a significant portion goes back to the Promoters to the extent of their holding in the Company. If the average holding is, say, 50%, then Rs.758 crores goes back effectively to the Promoters!
4. SEBI then goes on to say,
“It is also noted that of the 4934 listed companies, there had been 1108 preferential allotments since April 2007, of which only 360 were preferential allotments of warrants. Out of the said 360 cases, there were only 100 companies where promoters did not fully exercise the option on the warrants issued to them. Considering the total number of listed companies and number of preferential allotments made during the above period, it is seen that the instances of reissue of warrants to the promoters have not been significant or frequent.”
5. Again, I find it disturbing that as many as 360 companies allotted Share Warrants apparently to Promoters since April 2007. Further, in as many as 100 companies, the Promoters allowed their deposits and Share Warrants to lapse. While the 8 companies referred to ear-Her may be the larger of these companies, note that in just 8 companies, the amount lapsed was totally Rs.1515 crores!
6. On the issue raised by the petitioner that ‘issue of further securities should be only against full payment’, SEBI says, “the same would discourage the companies to raise funds through the allotment of warrants and also indirectly restrict the issue of capital to only shares of the company. Considering the nature of the said instruments (warrants) and the fact that only a few instances (as brought out in Para 10 above) were noticed where the warrants issued to the Promoters had not been exercised, it would be a retrograde step to disable a product which is accepted universally as a fund-raising tool. Such a restriction on issuance of warrants may also deprive the operational and capital structuring flexibility for Indian companies.” I find it difficult to believe that there would be anything wrong in prohibiting the issue of Share Warrants at a mere 10/25% deposit exclusively to Promoters – I find it even more difficult to believe it would be a retrograde step and would “deprive the operational and capital structuring flexibility for Indian companies”. What is wrong with a demand that if Share Warrants are to be issued, issue them to all shareholders – let each shareholder decide whether he wants to subscribe or not? Why are Promoters being preferred and given an exclusive deal and why banning such exclusive sweet deals will be a retrograde step?
7. In the end, SEBI does not find that the circumstances warrant any immediate ban and on a related aspect has stated that it “initiates a consultative process …. to suggest policy changes, if required …. “,
Conclusion:
All in all, while I personally feel SEBI has missed an opportunity to carry out a complete rehaul, it is also true that SEBI on its own cannot prevent mis-use of such instruments by the Promoters. The Promoters should remember that they would suffer in the long run if they lose their credibility and loss of credibility will eventually impact the capital market as a whole. Having said that, I raise a question:
‘Isn’t retaining and restoring the credibility of the capital market the function of SEBI?’
I feel SEBI has failed so far as the question of issue of Share Warrants to Promoters is concerned.
