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September 13, 2013

Conversion of Share Warrant

A share warrant is a document in which it is stated that the bearer of the warrant is entitled to the shares specified therein. A definition may, thus, be given as follows:

A share warrant is a bearer "document of title" to the shares, issued by the company under its common seal, duly stamped and signed by one or more directors of the company, as per Articles'.

A share warrant is just like a negotiable instrument. In other words, a share warrant represents a bearer share and a bearer share is just like a bearer cheque. Share warrants are not popular in practice because the risk of loss is great. Once it is lost there are very remote chances of recovering the ownership of shares.

Conditions of Issue :
Section 114 lays down the following provisions for the issue of share warrants:
(1) Only a public company limited by shares can issue share warrants.
(2) Share warrants cannot be issued originally. Only share certi­ficates for fully paid shares can be converted into share warrants.
(3) The articles of association must authorize the issue of share warrants.
(4) Approval of Central Government must be obtained for issuing share warrants.

Preparation of the Warrant :
Whenever any holder of fully paid shares wants to convert the share certificate into a share warrant, he has to make a request on printed application form to the company along with the relevant share certifi­cate. He has also to deposit the stamp duty and other prescribed fees and charges.
On receipt of the duly completed application form, the secretary's office sends a Lodgement Ticket to the shareholder concerned acknowledging the receipt of the documents and slating therein that this 'Ticket' is to be exchanged for the share warrant later. The secre­tary now looks to it that all the relevant provisions of the Companies Act relating to the issue of share warrants are duly conformed to. On being satisfied, he issues instructions for the preparation of share warrant (s).
Share warrant forms are usually printed in three parts, one being separated from the other by perforation: (i) the Counterfoil, (ii) the Share Warrant proper, and (iii) the Dividend Coupons. A 'talon' for demanding a fresh set of dividend coupons, when those attached to the warrant have been exhausted, is also provided therein. These forms are completed by the secretary's office, and a meeting of the Board of Directors is convened to pass a resolution for sealing and signing of the warrant(s). Accordingly, the share warrants are then sealed and signed and the applicants are advised by a circular letter to take delivery of the warrants from the registered office of the company in exchange for the 'Lodgement Tickets'.

Effects of the Issue of Share Warrants :
The various effects of the issue of share warrants may be enume­rated as follows:
(1) The company shall strike out of its Register of Members the name of the member then entered therein as holding the shares specified in the warrant, just as if he had ceased to be a member, and shall enter in that register the following particulars:
(a) the fact of the issue of the warrant;
(b) a statement of the shares specified in the warrant, distinguishing each share by its number; and
(c) the date of the issue of the warrant [Sec. 115(1)].
(2) By virtue of Section 115(5) the bearer of share-warrant may or may not be granted all the rights of membership. As such, if the Articles so provide, he may be deemed to be a member to the extent and for the purposes defined in the Articles. His rights of membership are usually curtailed e.g., he cannot present a petition for the winding up of the company. He may not be granted the right to attend general meetings, the right to vote etc.
(3) The share warrant will not constitute the qualification shares for the directors, where one is imposed by the Articles [Sec. 270(4)].
(4) The Annual Return must give particulars of share warrants.

The warrants until they are exchanged for the shares, do not confer on the holder thereof any right to any dividend, interest, bonus or other benefits available to the equity shareholders or debenture holders, nor will such warrant holders have any right to attend and vote at any meetings of the shareholders and debenture holders. The warrant holders will also not be entitled to receive from the company any notice, or annual reports which may be meant for the equity shareholders or debenture holders, trustees, etc.
The Board of directors is authorised to determine and notify a record date and also the period within which a warrant holder should apply for the equity shares to enable him to exercise the right to apply for the equity shares against such warrants held by him. The warrant holder may apply for the equity share(s) by paying to the company the value thereof as may be determined by the Board of directors.

Applicability of s. 81 of the Act. It may be noted that where a public company intends to issue new equity shares or any instruments convertible into, or exchangeable with equity shares to any person(s) (whether such persons are shareholders of the company or not) without offering such shares to all the shareholders on a pro rata basis, such issue must be approved by a special resolution in terms of section 81(1A)(a) [or, alternatively, by an ordinary resolution and approval of the Central Government in terms of section 81(1A)(b)].

Applicability of SEBI Guidelines. Issue of warrants by a listed company on a private placement basis to the promoters must comply with the guidelines set out in Chapter XIII of the SEBI Guidelines on Disclosures and Investor Protection, 2000. To whom shares can be issued on preferential basis is not indicated in the Guidelines. Hence it is for the company’s Board to decide to whom to make an offer and accordingly frame a resolution to be passed under section 81(1A) of the Companies Act.

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