The person who is holding the warrant cannot enjoy the benefits of the equity holder before the conversion of the warrant. The price at which rewards are converted is called exercise price. The exercise price face always greater than the current market price of the respective equity at the time of issue of warrant. When warrants are issued along with host securities and detachable, they are known as detachable warrants. In some cases the warrants can be sold back to the company before the expiry date, such type is known as puttable warrants. Naked warrants are issued separately and not with any host security. The investor has the option to convert it into equity or bond.
Advantages of warrants
1. Warrants make the non convertible debentures and other debentures more attractive and acceptable.
2. The debentures along with the warrants are able to create their own market and reduce the company's dependence on Financial institutions and mutual funds.
3. Since the exercise of the warrants take place at a future date, the cash flow and the capital structure of the company can be planned accordingly.
4. The cost of debt is reduced if warrants are attached to it. Investors are willing to accept lower interest rate in the anticipation of enjoying the capital appreciation of equity values at a later date.
5. Warrants provide high degree of leverage to the investor. He can sell the warrant in the market or convert it into stocks or allow it to lapse. But if the conversion is compulsory, even if there is a fall in the price of the shares, the investor has to shell out money from pocket.
6. Warrants are liquid and they are traded in stock exchanges. Hence, the investor can sell the warrants before exercising them.
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