March 20: The latest additions to the trading list of the National Stock Exchange (NSE) are the four detachable warrants of the swadeshi soap king Nirma on March 9, 1998. On the Bombay Stock Exchange (BSE), however, the same warrants have been traded since January 6, 1998.The detachable warrant is a stand-alone instrument which is freely transferable, much like the equity share of Nirma. The important difference between an equity share and a warrant is that the former represents membership of the company while the latter only confers a right to acquire the membership of the company. In the context of the move to introduce derivative trading in the country, it may be of interest for the readers to note that buying a warrant is equivalent to acquiring a call option contract.
At the time of conversion of the warrant into equity, if the price of the underlying equity falls below its exercise price, it may be beneficial for the warrant holder to allow the warrant to lapse. In such an event, the warrantholder loses his entire investment in the warrant. On the contrary, if at the time of conversion the price of the underlying equity is above the sum of the acquisition cost of the warrant and the exercise price, it may be in the interest of the warrant-holders to exercise their right to acquire the share. However, if at the time of conversion the price of the underlying equity is hovering between the exercise price and the sum of the acquisition cost of the warrant and the exercise price, it could represent a partial loss for the warrant-holder.
It may be recalled that between August and September 1996, Nirma had come out with a rights issue of 81,41,750 17% non-convertible debentures (NCDs) and/or SPNs of the face value of Rs 200 each, along with four detachable warrants per NCD/SPN aggregating to Rs 162.84 crore in the ratio of one NCD/SPN for every two equity shares held by its shareholders on August 9, 1996, the record date fixed for the purpose. The company collected only Rs 50, that is 25% of theface value on application. Another Rs 50 was to be paid on allotment. The balance Rs 100 was to be collected on call within a period of 12 months. The NCD/SPN holders were entitled to receive the detachable warrants only after the NCD/SPN was fully paid-up. The NCDs/SPNs were allotted by the company on October 15, 1996. Though all the four detachable warrants, which were named as Warrant-I, Warrant-II, Warrant-III and Warrant-IV were to be issued simultaneously within a year of the NCD/SPN issue, as per the terms of the issue, the four warrants were to get one share each at the end of the fourth, fifth, sixth and seventh year at a uniform "exercise price" of Rs 50 per share, including a premium of Rs 40 per share.
Meanwhile, subsequent to the rights issue of NCDs/SPNs, Nirma amalgamated Nilnita Chemicals Ltd (NCL) with effect from April 1, 1994 and three more group companies, Nirma Detergents Ltd (NDL), Nirma Soaps & Detergents Ltd (NSDL) and Shiva Soaps & Detergents Ltd (SSDL) with effect from September1, 1996. Accordingly, Nirma allotted 176 lakh equity shares to the erstwhile members of the amalgamating companies, thereby taking the paid-up equity of the company to Rs 33.88 crore. Since the amalgamation of NCL with Nirma was effective from April 1994, that is prior to the rights issue of NCDs/SPNs, the erstwhile members of NCL were also offered 32,50,000 NCDs/SPNs along with four detachable warrants each. Thus, a total of over 4.55 crore warrants were issued to the NCD/SPN holders in the latter part of calendar 1997.
As per the offer document, the Nirma warrants as well as the NCDs/SPNs were to be listed on its regional stock exchange, ie Ahmedabad along with BSE and NSE. Nonetheless, even after a lapse of a few months, the warrants are yet to be traced on the company's regional stock exchange. But, on the BSE it has been promptly traded since January 6, 1998 though the priceline of the warrants, after opening at dizzy heights, has progressively moved southwards. For instance, Warrant-I opened fortrading on January 6 at a high of Rs 220 but shed exactly half its value by March 19. As regards Warrant-II, III and IV, which also opened for trading on January 6 alongside Warrant-I, the decline was far more pronounced from Rs 210 to Rs 95, Rs 200 to Rs 73.25 and Rs 190 to Rs 71.25 respectively. In terms of volume at the higher end, Warrant-I attracted a cumulative trading volume of 2,802 warrants over 17 sessions while Warrant-III attracted 1,252 warrants over 13 sessions at the lower end.
On the NSE, Warrant-II opened for trading for the first time on March 9 at a price of Rs 96 in a solitary deal involving 50 warrants. There was no further trading in Warrant-II till March 18 when it opened at Rs 93 and closed the day at a marginally improved Rs 95 with just two trades involving 150 warrants. Warrant-I made its NSE debut on March 18 at an opening price of Rs 127 with a single trade of 50 warrants. As regards Warrant-III and Warrant-IV, they are yet to find a place on the NSE. As mentioned earlier,Warrant-I, II, III and IV are convertible into one equity share each as on October 15 of 2000, 2001, 2002 and 2003 at a price of Rs 50 per share. Assuming that all warrants are converted into equity shares by October 2003, the equity capital of Nirma shall increase to Rs 79.45 crore. This could further go up by another Rs 10 crore, since the fresh issue of equity contemplated by Nirma in October 1997 through the book-building route, but deferred because the discovered price fell short of the targeted price, is likely to materialise in due course.
Investar has computed the cost of acquisition of Nirma's equity (see table) on conversion of the warrants by imputing a notional interest of 18% per annum, compounded annually, to the latest BSE price of each warrant. Readers will notice that these conversion prices compare quite favourably with the current market price of Rs 360 for the Nirma scrip. Interestingly, since it made its market debut, the share price of Nirma has never fallen below Rs 289, whichwas recorded on October 14, 1996. Against this backdrop, the seemingly high discount of over 35 per cent to the market prices of Nirma's warrants when compared with its current equity price is quite intriguing.
(Arranged by Investar -- The Aarthik News & Research Syndicate)
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
