The BSE has moved a proposal to Sebi to allow trading of third-party share warrants on the bourses. Third-party warrants are derivative instruments issued by entities such as mutual funds, insurers or holding companies against the large underlying shares that it holds in companies. Currently, only warrants issued by a company are listed on the exchanges.
?We have forwarded a proposal to list third-party warrants to Sebi for their consideration,? said James E Shapiro, head of market development, BSE. The proposal if permitted will enable well-capitalised financial institutions such as insurers, mutual funds and banks, among others, to unlock value from their idle portfolio of securities while investors benefit from varied product offerings. According to experts such derivative instruments are very popular in overseas markets such as Hong Kong, Singapore, the US and London, with active participation from big players such as Citibank and HSBC.
In fact, it was Sebi which initially mooted the proposal when it released a discussion paper titled ?Innovations in the Securities Market? way back in 2002, inviting public comments. The idea then was to consider allowing the issue and trading of covered call warrants that are backed by sufficient number of underlying shares.
Covered call warrants bear similar features as that of stock call option with both the holder of the instruments getting the right but not an obligation to convert those instruments into the underlying shares at a pre-determined price. However, unlike the stock call option ? which are standardised exchange traded products ? call warrants allow the issuer the flexibility to design and customise the product, according to investor needs. For instance, it has the flexibility to write different kind of options such as American, Bermuda or Asian options as against European options allowed for the individual stocks. Further, in case of stock option, strike prices are fixed and determined by the exchanges and the participants in the market have no say whatsoever on the subject. However, in case of covered call warrants, different tranches with different features such as different strike prices, maturities and options could be introduced.
Further, stock call options typically have shorter maturities while call warrants are issued typically with a longer maturity of three to five years.
?For trading in warrants to succeed at the Indian stock exchanges, there should be a series of short term stock options which are highly liquid. This will help in better pricing of warrants said TS Harihar, head of institutional derivatives, ICICI Securities. Harihar added that in the absence of a liquid short-term stock options market, it will be very difficult to figure out whether a warrant is under priced or over priced.
