Warrants: Investment tool or an instrument of abuse?

Warrants are market driven, investor friendly, low risk financial instruments, which give the holder the right but not the obligation to buy a certain quantity of an underlying security at a certain price and future time until the expiry date. A warrant is exercised when the holder informs the issuer of its intention to purchase the security underlying the warrant. The security, usually equity shares, is delivered by the issuing company.

Warrants were devised to generate an immediate flow of funds into the issuing company. In exchange for an upfront cost, also known as the warrant premium, the buyer of a call warrant can profit from large upward movements in stock prices while limiting the downside.

Warrants typically offer high transparency and low cost. They also permit private investors to command a large amount of equity with a relatively small initial investment.

Ranjana Roy Gawai is the managing partner and Vasudha Sen is a team leader at RRG & Associates.