warrants, adr, gdr, innovative financial products
TRANSCRIPT
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These regulations replace the Disclosure and Investor Protection (DIP) Guidelines 2000 that now stand rescinded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
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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!!!