Sebi is planning to allow institutional players like banks, financial institutions, mutual funds and insurance companies to write covered warrants (third party warrants) on stocks they hold in their portfolios. How will the Indian markets respond to such a move? What has been the international experience?

Very soon Indian investors will have an opportunity to invest and trade in covered warrants on the major stock exchanges. Like any other equity-linked instrument, covered warrants may represent the specific number of underlying shares, that is, this option/warrant may be linked to any number of underlying shares. For instance, if a mutual fund holds shares of Infosys, it could issue a warrant on the stock at a certain strike price. These warrants could be bought by anyone and exercised after a certain period of time.

Sebi is also considering to permit index and basket warrants. Basket warrants offer a basket of securities to investors on exercise of warrants held by them. Similarly, index warrants offer the full index to investors on the exercise of the options/warrants, held by them. Therefore, in markets like India where trading in the corporate debt is very thin and the risk of instrument turning junk is high, these options do make tremendous sense. Prof. Sankarshan Basu, Finance and Control, Indian Institute of Management, Bangalore opines that, “Activity in the secondary market should receive a boost with the introduction of covered warrants. This is due to the fact that there will be instruments by which investors will be able to invest in the secondary market but at a much lower cost—hence this will help in pushing up market as well as attract new investors in the market.”

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