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WARRANTS AND

FINANCIAL INNOVATIONS
PRESENTED BY :
GROUP 4
CINISH. ABRAHAM
NITESH KUMAR
SANJEEV AGARWAL
SHRUTI SRINIVAS
SREENATH.M
AGENDA
Warrants
Latest SEBI Guidelines
ADRs
GDRs
Dual Currency Bonds
Other Financial Innovations
WARRANTS
Warrants are frequently attached to bonds or
Preferred stock
Used as a sweetener
Are detachable and can be sold independently
of the bond or stock
Bull Market Instruments
Dominated by smaller companies
Today, 75% of warrants issued by investment
trusts

ADVANTAGES
Flexible Instruments
Lower Issue Costs
Lower Servicing Costs
Better than rights issue
Appreciated as a “free gift”


DISADVANTAGES
No dividend or any other income
Limited Rights
Limited Range
Lack of Information

DIFFERENCE BETWEEN WARRANTS & OPTIONS
WARRANTS OPTIONS

Long dated. Usually Short dated. Maximum life


issued with a 3-5 year life 9 months, with activity
concentrated in the near
less than
Warrants are securities (Options 3 contracts
are  months)
issued by companies, and contract
between two
bought by investors investors  (i.e. an option
Warrant exercise is issued
Option - or "written
exercise  " -
does not
involves new shares  being by an investor
create any new) shares,
issued by the company (and and so there are no
results
Warrantsinaredilution for dilution issues
Options are
shareholders
usually traded) on a usually traded on an
stock exchange options exchange
SEBI REGULATIONS 2009
Promoters forfeiture of upfront payments on
unexercised warrants
This is contained in its recently notified Issue of
Capital and Disclosure Requirements (ICDR)
Regulations 2009
These regulations replace the Disclosure and
Investor Protection (DIP) Guidelines 2000 that
now stand rescinded
EXAMPLES OF EQUITY WARRANTS
 HDFC

Ø Rs 300 crore was raised through the warrants


The price of each warrant has been fixed at
Rs 275
Ø 3 years
Ø Exercise Price:3000/share

OTHER WARRANTS
 Covered Warrants-Speed Merchants
 Basket warrants
 Index warrants
 Commodity warrants
 Currency warrants
 Detachable warrants
 Naked warrants

WHY "SPEED MERCHANTS" ?
 Commerzbank Euro/US Dollar 09/02,
 Currency call warrants translated a 13% increase in the euro
over the last three months into a huge profit of 933% on
the warrants
 Goldman Sachs S&P500 09/02,
 Put warrants converted a 27% drop in the market over three
months into a 784% gain for the warrants
 BNP Paribas Deutsche Telekom 03/03,
 Call warrants rose by 467% in response to an 18% rise in the
share price over just one month
 SG Oracle 09/02
 Call warrants increased 115% after an 11% share price rise
over the month
 JPMorgan Alitalia 09/02
 Put warrants which have flown up by 205% after the shares
dropped by 24% over the month.

RISKY?
Covered warrants tend to be more highly
geared
They tend to be shorter-dated
There is an additional layer of credit risk from
the issuers as the counterparty to
transactions

EXAMPLES-COVERED WARRANTS
Synthetic Zero by Société Générale
 Barclays PLC
UK Market
 Equities
3i GROUP
AVIVA
BP
Cable & Wireless
GlaxoSmithKline

 Commodities
 ALUMINIUM
 BRENT 09/2010
 COPPER 06/2010
 GOLD
 Index
 DAX®
 DJ EUROSTOXX 50
 DOW JONES
 FTSE 100
 HANG SENG (HSCEI)


 Currencies
EUR/USD
GBP/CHF
GBP/USD
USD/JPY


AMERICAN DEPOSITORY RECEIPTS
An American Depositary Receipt (or ADR)
represents ownership in the shares of a non-
U.S. company and trades in U.S. financial
markets

Advantages
 -cross-border & cross-currency
 - trading & settlement of foreign securities
 - pay dividends in US dollars

The ADR Mechanism
For Example...

Company
Companyshares
sharestraded
tradedin
inIndia
India US Investors

Actual Shares Depositary Receipts

Depositary
Local
LocalCustodian
Custodian(Deutsche
(DeutscheBank)
Bank)Agreement Depositary
Depositary(Deutsche
(DeutscheBank)
Bank)

16
Name Last Trade

Infosys Technologies Ltd. 56.61


HDFC Bank Ltd. 132.70
ICICI Bank Ltd. 36.7702
Mahanagar Telephone Nigam Ltd. 3.64

PATNI COMPUTER SYS 22.14


REDIFF.COM INDIA ADS 2.86

Satyam Computer Services Ltd. 5.72

Sify Ltd. 1.74


Tata Motors Ltd. 16.84
Wipro Ltd. 22.85
GLOBAL DEPOSITORY RECEIPTS
A certificate issued by
a bank representing shares of a stock the
bank holds in trust but that are traded on a
foreign stock exchange
Denominated in the local currency
Entitles the bearer to any dividends and other
benefits associated with the shares
Can be traded like any other security
Shields the investor from foreign exchange
risk and any applicable tariffs he/she would
have had to pay if he/she had bought the stock
outright
Also exempts the investor from any
requirements the foreign exchange might have
levied

DUAL CURRENCY BONDS
 Bond denominated in one currency, but paying interest in
another currency at a fixed exchange rate
 Dual currency bonds are attractive to borrowers who operate in
the redemption currency, since they may limited long-term
exchange rate risks - while interest payments come in thee
lender's preferred currency.
 Dual Currency Bonds are common in the Eurobond market and
are an effective way to raise capital for multinational
corporations.
 Japanese firms have been big issuers with coupons in yen and
principal in dollars.
 Good option for a MNC financing a foreign subsidiary.
Financial Innovation: Rainfall Insurance
Financial derivative on local rainfall
Costs Rs. 50-250, pays Rs. 500-2000

 First sold in India in 2003 (Andhra Pradesh)

 Pioneered in Gujarat by SEWA in 2005

 Indian monsoon risk uncorrelated with global

financial markets: in principle, insurance rates


should be very low
Subsequently copied in dozens of countries
THANK YOU!!!