Share Warrant, Share Certificate

01/03/2020 0 By indiafreenotes

A share warrant is a negotiable instrument, issued by the public limited company only against fully paid up shares. It is also termed as a document of title because the holder of the share warrant is entitled to the number of shares mentioned in it. There is no compulsion of the issue of share warrants by the company. Although if the public company wants to issue share warrants, then previous approval of the Central Government (CG) is required, along with that the issue of a share warrant must be authorized in the articles of association of the company.

The holder of the share warrant can take a share certificate only if he surrenders the share warrant and pays the required fee for the issue of share certificate. Thereafter, the company will cancel the warrant and issue a new share certificate to him as well as the company will enter his name as the member of the company, in the register of members, after which he will become a member of the company.

Generally, the holder of the share warrant is not the member of the company, but if the articles of association of the company provide it, then the bearer is deemed to be the member of the company.

A share certificate is an instrument in writing, that is a legal proof of the ownership of the number of shares stated in it. Every company, limited by shares, whether it is public or private must issue the share certificate to its shareholders except in the case where the shares are held in dematerialisation system. The share certificate contains the following details in it, they are:

  • Company name
  • Date of issue
  • Details of the member
  • Shares held
  • Nominal value
  • Paid up value
  • Definite number.

The share certificate is issued by the company within 3 months of the allotment of shares to the applicants, which is issued under the common seal of the company. Normally, the holder of the share certificate is regarded as the member of the company.

A share certificate is a written document prepared by the company under its common seal and sent to the members, containing the number of shares held by him/her and the amount paid thereon. The document work as an evidence for the ownership of shares of the shareholder. It is not exactly same as share warrant.

Technically, share warrant, is an instrument, which signifies that the holder of the instrument is entitled to the shares mentioned in it. It a bearer document, which can be transferred by mere delivery.

Many think that these two documents are one and the same thing, which is not true, there is a fine line of difference between share certificate and share warrant which we have discussed in this article.

Share Certificate Share Warrant
Meaning A legal document that indicates the possession of the shareholder on the specified number of shares is known as share certificate. A document which indicates that the bearer of the share warrant is entitled to the specified number of shares is share warrant.
Compulsory Yes No
Issued by All the companies limited by shares irrespective of public or private. Only public limited companies have the right to issue share warrant.
Negotiable Instrument No Yes
Transfer The transfer of share certificate can be done by executing a valid transfer deed. The transfer of share warrant can be done by mere hand delivery.
Original Issue Yes No
Amount paid Issued against fully or partly paid up share. Issued only against fully paid up shares
Approval of Central Government for issue Not Required at all Prior approval of Central Government is required for issuing Share Warrant.
Time Horizon for issue Within 3 months of the allotment of shares. No time limit prescribed.
Provision in Articles of Association Not Required Required

A warrant is a long-term security, issued by a company, which provides the holder with the right to buy a fixed number of company’s ordinary shares at a fixed price during a specified period of time. Warrants are usually issued in conjunction with a bond or a preferred stock. The primary purpose of a warrant is to increase the marketability of the new issue. A warrant can either be a detachable or a non-detachable warrant.

A detachable warrant can be sold separately from the bond or preferred stock to which it was originally attached. A non-detachable warrant cannot be sold separately from the bond or preferred stock to which it is attached. The warrant holders are not entitled to vote or to receive dividends. But once they exercise their right and buy ordinary shares, they become the company’s ordinary shareholders with all such rights.

A warrant usually has no value when it is issued. But, it becomes valuable when the market price of company’s ordinary shares moves above the fixed price at which the investor has a right to buy the common stock. Thus, the market value of a warrant based upon the market price of the ordinary shares and the exercise price.

The following additional conditions apply to more specific circumstances:

  • Option expiration. If the grantor recognizes an asset or expense based on its issuance of warrants to a grantee, and the grantee does not exercise the warrants, do not reverse the asset or expense.
  • Equity recipient. If a business is the recipient of warrants in exchange for goods or services, it should recognize revenue in the normal manner.

The grantor usually recognizes warrants as of a measurement date. The measurement date is the earlier of the date when the grantee’s performance is complete; or the date when the grantee’s commitment to complete is probable, given the presence of large disincentives related to non-performance. Note that forfeiture of the warrant instrument is not considered a sufficient disincentive to trigger this clause.

If the grantor issues a fully vested, nonforfeitable warrant that can be exercised early if a performance target is reached, the grantor measures the fair value of the instrument at the date of grant. If early exercise is granted, measure and record the incremental change in fair value as of the date of revision to the terms of the instrument. Also, recognize the cost of the transaction in the same period as if the company had paid cash, instead of using the equity instrument as payment.

The grantee must also record payments made to it with equity instruments. The grantee should recognize the fair value of the equity instruments paid using the same rules applied to the grantor. If there is a performance condition, the grantee may have to alter the amount of revenue recognized, once the condition has been settled.

Theoretical Value:

The theoretical value of a warrant can be calculated as below:

(a) When the market price of equity share is greater than the exercise price (Ps > Pc):

(i) Theoretical Maximum Value of the Warrant = P × N

(ii) Theoretical Minimum Value of the Warrant = (Ps – Pc) × N

Where, Ps = Current market price of equity share

Pc = Exercise price of warrant

N = Exercise ratio, i.e. number of equity shares per warrant.

(b) When the market price of equity share is less than the exercise price (Ps < Pc):

Theoretical Minimum Value of Warrant = Zero

It means, in such a case, warrant has no market value.