A warrant is an option to buy a stated number of shares at a specified price over a given time period. Warrants are generally issued in conjunction with debentures (or sometimes preference shares) as "sweeteners". They are issued by financially weaker companies to attract investors.

 7.1 FEATURES OF WARRANTS

 (a) Exercise Price

The exercise price (which is the price at which holders of warrants can purchase common shares) remain constant over the life of the warrant.

(b) Exercise Ratio

The exercise ratio (which states the number of common shares that can be purchased at the exercise price per warrant) is usually 1:1.

(c) Expiry date

Warrants have an expiry date after which they cannot be exercised.

(d) Nature

A warrant can either be detachable or non-detachable. Detachable warrants can be sold separately from the debenture (or preference share) to which it was originally attached. A non-detachable warrant cannot be sold separately from the debenture to which it was originally attached.

(e) Theoretical Value

The theoretical value of warrants depend on the market price of the ordinary shares. It is given by the following formulas:

 Theoretical Value =(Market share price — Exercise Price) Exercise Ratio of warrant

 When the share price is less than the exercise price, the warrants theoretical value will be zero. This is because warrants are options rather than contracts and therefore warrant holders will not exercise them if their value is negative.