WARRANTS AND FINANCIAL INNOVATIONS

PRESENTED BY:GROUP 4CINISH. ABRAHAMNITESH KUMARSANJEEV AGARWALSHRUTI SRINIVASSREENATH.M

WarrantsLatest SEBI GuidelinesADRsGDRsDual Currency BondsOther Financial Innovations

AGENDA

Warrants are frequently attached to bonds or Preferred stock

Used as a sweetenerAre detachable and can be sold independently of

the bond or stockBull Market InstrumentsDominated by smaller companiesToday, 75% of warrants issued by investment

trusts

WARRANTS

Flexible InstrumentsLower Issue CostsLower Servicing CostsBetter than rights issueAppreciated as a “free gift”

ADVANTAGES

No dividend or any other incomeLimited RightsLimited RangeLack of Information

DISADVANTAGES

WARRANTS OPTIONS

Long dated. Usually issued with a 3-5 year life

Short dated. Maximum life 9 months, with activity concentrated in the near (less than 3 months) contract

Warrants are securities issued by companies, and bought by investors

Options are contracts between two investors (i.e. an option is issued - or "written" - by an investor)

Warrant exercise involves new shares being issued by the company (and results in dilution for shareholders)

Option exercise does not create any new shares, and so there are no dilution issues

Warrants are usually traded on a stock exchange

Options are usually traded on an options exchange

DIFFERENCE BETWEEN WARRANTS & OPTIONS

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These regulations replace the Disclosure and Investor Protection (DIP) Guidelines 2000 that now stand rescinded

SEBI REGULATIONS 2009

HDFC

Rs 300 crore was raised through the warrants The price of each warrant has been fixed at Rs 275

3 years Exercise Price:3000/share

EXAMPLES OF EQUITY WARRANTS

Covered Warrants-Speed MerchantsBasket warrantsIndex warrantsCommodity warrantsCurrency warrantsDetachable warrantsNaked warrants

OTHER WARRANTS

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.

WHY "SPEED MERCHANTS" ?

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

RISKY?

Synthetic Zero by Société GénéraleBarclays PLC

UK MarketEquities

3i GROUPAVIVABPCable & WirelessGlaxoSmithKline

EXAMPLES-COVERED WARRANTS

CommoditiesALUMINIUMBRENT 09/2010COPPER 06/2010GOLD

IndexDAX®DJ EUROSTOXX 50DOW JONESFTSE 100HANG SENG (HSCEI)

CurrenciesEUR/USDGBP/CHFGBP/USDUSD/JPY

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

AMERICAN DEPOSITORY RECEIPTS

16

The ADR Mechanism

Local Custodian (Deutsche Bank)

Local Custodian (Deutsche Bank)

Company shares traded in India

Company shares traded in India

Depositary (Deutsche Bank)

Depositary (Deutsche Bank)

US InvestorsUS Investors

For Example...

Actual Shares

DepositaryAgreement

Depositary Receipts

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

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 currencyEntitles the bearer to any dividends and other

benefits associated with the sharesCan be traded like any other security

GLOBAL DEPOSITORY RECEIPTS

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

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.

DUAL CURRENCY BONDS

Financial derivative on local rainfallCosts Rs. 50-250, pays Rs. 500-2000First sold in India in 2003 (Andhra Pradesh)Pioneered in Gujarat by SEWA in 2005Indian monsoon risk uncorrelated with global

financial markets: in principle, insurance rates should be very low

Subsequently copied in dozens of countries

Financial Innovation: Rainfall Insurance

THANK YOU!!!