Convertible Debentures and Warrants

Joint stock companies need to source their funding requirements from public at large and various funding institutions. While the capital and other reserves cannot be increased at short term intervals raising funds through debentures, both convertible and non-convertible, and warrants are resorted to. Non-Convertible debentures are like loans which carry higher rates of interest and companies use this tool very sparingly. Convertible debentures and warrants which are converted into equity shares of the company at a definite time are attractive investment opportunities available to investors also.

The reason why a company issues such instruments instead of directly raising equity funds are

a) There are statutory regulations which do not permit companies to raise the equity of the company without fulfilling certain financial parameters. As the companies are constrained to meet such parameters and there is a need for raising resources in short term debentures and warrants come in handy.

b) Companies will be able to charge a better premium on their equity at a future date of conversion depending on the values generated in the company by earnings so as to reduce the interest outgo on such debentures.

c) While debentures are issued carrying fixed interest to be paid till conversion warrants do not normally carry any interest load but the cost of the warrant is fixed at the time of issue. Warrants are normally issued to existing share holders more particularly to promoters to increase their stake in the business debentures are issued to general public and financial institutions.

d) Investing in debentures that are convertible and warrants are beneficial to investors as they can acquire the shares of the company at a better price mostly at a discount to the prevailing market price of the shares thereby ensuring significant capital appreciation of their investments.