There have been no applications by any firm to issue warrants ever since the Securities and Exchange Commission (SEC) regulated it, according to SEC officials.
The SEC regulations issued early this month specify that firms are prohibited from issuing warrants beyond 15% of their stated share capital and will limit their time of warrants issued to two years from the day of issuance, while firms listed on the main board of the Colombo Stock Exchange (CSE) are required to maintain a minimum public float of 25% and those on the second board of the CSE will need to maintain 10% in free float if they’re to apply for warrants.
“After this regulation was imposed, there hasn’t been anyone who has applied for warrants,” an SEC official told the Business Times.
An analyst explained that warrants belong to the category of derivatives referred to as call options. A call option gives the right (but not the obligation) to buy a particular security (say a share) at a particular price (strike price) on a particular date (maturity date).
While a very short term call option is issued to existing shareholders by the issuing company is called a right, when a call option is issued by the company to anybody irrespective of whether they are shareholders or not; they are called warrants. “Warrant maturity is often far removed from the issue date. Hence warrants do have a time value in addition to their intrinsic value,” he said.
“In the absence of a dedicated derivatives market, the share warrants are serving an essential function of providing highly leveraged investment instruments for maintaining an active and a buoyant equity market,” Sarath Rajapakse, Director Capital Trust noted.
Dr Hareendra Dissa Bandara, Director Financial Services Academy at the Securities and Exchange Commission said that many investors cannot comprehend basic debt and equity instruments, which is why there’s low awareness about the capital markets.
He explained that this is a main reason that products such as warrants are not recognised for their true value by investors.
Some analysts pointed out that in the recent past most warrants were announced by less than stellar companies. “While not the most complex of investing instruments, the level of investor knowledge and awareness on these remains low,” another analyst said. |
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