Share Warrants Under Companies Act 2013 and SEBI Regulations

While equity shares and convertible securities are the most common routes, listed companies in India also rely on share warrants as a flexible fundraising instrument.

A share warrant gives investors the right (but not obligation) to subscribe to equity shares at a future date, at a pre-agreed price. For companies, it secures upfront capital while deferring dilution until conversion. For investors, it provides an option to lock in future ownership at today’s pricing.

This blog post explains share warrants: what they are, how they’re issued, whether they can be sold, and why private limited companies cannot issue them. It also covers pricing, lock-in, accounting treatment, and common red flags.

What is a share warrant?

A share warrant is a security issued by a listed company that entitles its holder to subscribe to equity shares at a future date, at a predetermined price. Warrants are typically issued through preferential allotments and are governed by SEBI’s ICDR Regulations.

Holders pay a portion of the consideration upfront, with the balance payable on conversion into equity shares within a fixed window (maximum 18 months).

Key features of share warrants under SEBI rules:

• Issued only by public/listed companies through preferential allotments
• Require minimum 25% upfront payment at allotment
• Convertible into equity shares within 18 months
• Subject to lock-in rules (3 years for promoters, 1 year for others)
• Transferable, but only in demat form and subject to SEBI disclosure norms

Can private limited companies issue share warrants under Companies Act, 2013?

The short answer is no. 

Under the Companies Act, 2013, private limited companies are not permitted to issue share warrants. This is a shift from the earlier Companies Act, 1956, where bearer-style share warrants were recognised. The 2013 Act deliberately removed this route to avoid opacity in ownership and strengthen corporate governance.

Why private companies cannot issue warrants

• Governance concerns: Traditional share warrants were transferable like bearer instruments, which created challenges in identifying the true owner. For closely-held private companies, this lack of traceability runs against the Act’s emphasis on transparency in shareholder registers.
  
  
• Regulatory framework: SEBI’s preferential allotment rules (minimum upfront payment, 18-month conversion, lock-in) apply only to listed companies. Without SEBI oversight, warrants in private companies would create a compliance vacuum.

What can private companies use instead of share warrants?

Private companies still have other instruments that achieve similar capital-raising or structuring outcomes:

• CCPS (Compulsorily Convertible Preference Shares) – Common in venture capital funding.  Until conversion they are preference shares with dividend and liquidation priority set in the term sheet/SHA. They then must convert into equity on agreed terms.
• CCDs (Compulsorily Convertible Debentures) – Start out as debt with interest, and convert into equity later. Useful where investors want downside protection plus future ownership.
  

How to issue share warrants in listed/public companies

Step 1: Board approval

• Place the proposal before the board with details of investors, number of warrants, pricing method, and use of proceeds.
• Share pre-issue and post-issue cap table (including full conversion impact)
• Intimate stock exchanges about the board meeting and its outcome, as required under LODR.

Step 2: Shareholder special resolution

• Obtain approval at an EGM or through postal ballot.
• Explanatory statements must disclose investor names, shareholding before and after, pricing basis, lock-in requirements, and conversion terms.
• Allotment must be completed within 15 days of this approval (unless awaiting regulatory clearance).
• Ensure warrants are credited in demat form to eligible investors.

Step 3: Pricing of share warrants

• Issue price determined by SEBI’s formula: higher of the average VWAP (Volume Weighted Average Price) of the past 90 trading days or the past 10 trading days preceding the “relevant date
• Relevant date = 30 days before the shareholders’ meeting.
• Companies must retain calculation workings and obtain merchant banker/valuation certificates for audit and exchange review.

Step 4: Upfront payment

• Minimum of 25% of the warrant price must be collected on allotment.
• The remaining 75% is payable at the time of conversion.
• If investors do not exercise within the window, the upfront money is forfeited.

Step 5: Exchange and ROC filings

• Apply for in-principle approval from stock exchanges for warrants and eventual shares.
• File board/EGM outcomes with exchanges, and submit PAS-3 (return of allotment) with the Registrar of Companies.
• Update RTA/DP records for dematerialised warrants and later for equity conversion.

Step 6: Allotment of warrants

• Complete within 15 days of shareholder approval (or receipt of pending approvals).
• Ensure warrants are credited in demat form to eligible investors.

Step 7: Lock-in rules for share warrants

• Promoter warrants: Preferentially allotted warrants (or other specified securities) and the equity shares arising on their exercise are locked-in for 18 months from the date of trading approval, up to 20% of the company’s total capital. Any promoter shareholding above 20% is locked-in for 6 months.
• Non-promoter warrants: Warrants and the equity shares arising on their exercise are locked-in for 6 months from the date of trading approval.
• Pre-preferential holdings of allottees: The entire shareholding of the allottee existing before the preferential issue must be locked-in from the relevant date until 90 trading days from the date of trading approval.

Companies must track these lock-ins investor by investor to ensure no premature transfer or breach of SEBI norms.

Step 8: Conversion window

• Warrants must be converted into equity within 18 months of allotment.
• Conversion can be done in one or more tranches.
• Unexercised warrants lapse automatically, and the upfront payment is forfeited.

Step 9: Disclosures during the lifecycle

• Continuous reporting to exchanges: allotments, conversions, changes in shareholding.
• Maintain a warrant register capturing issue date, relevant date, lock-in expiry, conversion deadline, and amounts received.
• These records are often requested by auditors and exchanges.

Step 10: Final allotment of equity

• On conversion, equity shares are allotted and listed after exchange approval.
• Update the company’s shareholding pattern and cap table.
• File required intimations with exchanges and ROC for each conversion tranche.

How are share warrants priced?

The pricing of share warrants in India is tightly regulated under SEBI’s ICDR Regulations to prevent misuse and protect existing shareholders. The “relevant date” for fixing the price is thirty days prior to the shareholder meeting that approves the preferential issue.

SEBI requires the conversion price to be based on the higher of two averages:

• the average of the volume-weighted average price (VWAP) over the preceding 90 trading days, and
• the average of the VWAP over the preceding 10 trading days, both counted from the relevant date.

This ensures that neither companies nor investors can time the market to artificially lower the entry price. Once fixed, the price cannot be revised downward, though adjustments are permitted for standard corporate actions such as stock splits, bonuses, consolidations, or rights issues.

Can share warrants be sold or transferred?

Historically, bearer share warrants were freely transferable without recording the owner’s name. However, the Companies Act, 2013 abolished bearer share warrants in India to enhance transparency and curb anonymous ownership.

Today, the prevalent instrument is the convertible share warrant issued by listed companies under SEBI’s ICDR. These are subject to lock-in requirements:

• Promoters / promoter group: Warrants (and the equity shares on exercise) are locked in for 18 months from trading approval, up to 20% of post-issue capital. Any excess promoter holding is locked in for 6 months.
• Non-promoters: Warrants (and the equity shares on exercise) are locked in for 6 months from trading approval.

During the lock-in, transfer is restricted. After the lock-in ends, transfers may be permitted, subject to the issue terms and stock exchange rules.

FAQs

1. What is a share warrant in SEBI terms?‍

A share warrant is a security issued by a listed company that gives its holder the right (not the obligation) to subscribe to equity shares at a future date at a pre-determined price, under SEBI’s preferential issue framework.

2. How do listed companies issue share warrants?‍

Through board and shareholder approvals; pricing as per SEBI ICDR (higher of 26-week or 2-week VWAP on the relevant date); collection of at least 25% upfront; stock-exchange filings and in-principle approvals; allotment (typically within 15 days of shareholder approval, if no regulatory wait); application of lock-in (promoters: 3 years; non-promoters: 1 year); demat credit; and conversion into equity within 18 months.‍

3. Can share warrants be sold/transferred?‍

Only in dematerialised form and not during SEBI lock-in. The lock-in runs from allotment (promoters: 3 years; non-promoters: 1 year) and continues on the equity shares issued on conversion for the balance period. After lock-in ends, transfers may be allowed subject to the issue terms, exchange rules, and disclosure/insider-trading requirements.