Chapter - 21

Convertible Debentures
and Warrants
Why Issue Convertible Debenture
 Sweetening debentures to make them
attractive.
 Selling ordinary shares in future at a higher
price.
 Avoiding immediate dilution of earnings.
 Using low cost capital initially.

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Valuation of Convertible Debenture
 A convertible debentures market value depends
on both investment and conversion value.
Market value is higher than both the investment
and conversion value. The difference is the
conversion premium. The premium results
because the convertible debenture offers fixed
income at a low risk of price decline while
assuming the chances of capital gains when the
share prices increases.

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Warrants–Definition
A warrant entitles the purchaser to buy a
fixed number of ordinary shares at a
particular price during a specified time
period. It is similar to an American call
option.

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Warrants–Features
 Exercise Price
 Exercise Ratio
 Expiration Date
 Detachability
 Right

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 Warrants–Valuation
 Theoretical Value
= (Share Price – Exercise Price)* Exercise Ratio
 If the share price is less than the exercise price
the warrants theoretical value is zero.
 The difference between the warrants’ market
value and its theoretical value is called the
premium.
 Black–Scholes Model (after required adjustment)
can be used to value warrants.

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Why Issue Warrants
 Sweetening Debt
 Deferred Equity Financing
 Cash Inflow in Future
 Other Advantages
1. Warrants keep the share prices high.
2. Investor enabled to have access to shares
without investing now.
3. Enables promoters to increase their holdings.

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Zero-Interest Debentures (ZID)
 ZID or zero coupon bonds or deep discount
bonds do not carry an explicit rate of interest.
The difference between the face value of the
bonds and its purchase price is the return to
the investors.
 Mahindra & Mahindra was the first company
in India to issue convertible zero interest
bonds in January 1990.
 The purely zero-interest debenture was
issued by Best and Crompton Engineering
Company in December 1990.
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Secured Premium Notes
 Secured premium note is a secured
debenture redeemable at a premium. It is a
medium to long term debenture. TISCO
issued SPNs with warrants attached in India
for the first time to raise Rs 346.5 Cr.

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