New shares, issued to somebody else

In June an email arrives from the registrar with the subject line "Notice of postal ballot". There are two items on it. One is routine. The other proposes issuing one crore convertible warrants to a company belonging to the promoter group, at ₹240 each, when the share is trading around ₹300. Nothing is being asked of you, nothing is being taken from you, and your thousand shares will still be a thousand shares next month. The overwhelming majority of these notices are deleted unread, and the reason is that the arithmetic of what they do is genuinely invisible: no money leaves your account, no shares leave your demat, and no price on any screen changes on the day of the resolution.

The routes, and which of them comes to you

The one number that decides whether it cost you anything

Take the market price as a stand-in for the value of the business. That is an assumption rather than a fact, and it is made here deliberately, because it strips out every other argument and isolates the single thing this arithmetic is testing: the issue price against the value per share.

The floor, and why it is not today's price

A company cannot simply issue shares to a chosen person at any price it likes. SEBI's issue regulations prescribe a floor price for both a preferential allotment and a placement to institutions, computed from volume-weighted averages of the market price over defined look-back windows. The issue must be at or above that floor. This is a real and effective protection, and the mechanism inside it is worth seeing clearly, because it is also the reason a lawful issue can still be a large transfer.

• An average over a look-back window lags the price. Every one of these benchmarks is an average of past trading, so after a rally the floor sits below where the share is trading today — and the steeper and the more recent the move, the wider that gap. An issue priced exactly at the floor is then fully compliant and still under the market, which is why preferential allotments cluster after a run-up rather than before one.
• It works the other way too. After a sharp fall, a floor computed from a window that still contains the higher prices can sit above the current market, and a company that genuinely needs the money finds it cannot issue at a price anybody will pay. The rule is symmetrical; it simply feels like a protection in one direction and an obstruction in the other.
• Where more than one average is prescribed, the floor is the higher of them. That is the part doing the work, and it is what stops a company timing an issue into a brief dip: a long average and a short one are both computed, and whichever comes out higher sets the floor. It also joins the two bullets above into one rule — after a sustained rally it is the short average that is higher and binds, so the floor tracks the market reasonably closely; after a fall it is the long average that binds, and the floor sits above the screen. The window lengths are prescribed, have been amended more than once, and are stated in the explanatory statement to the resolution — read that rather than any summary, including this one.
• The averages apply only where the share is frequently traded. Where it is not — and a great many small companies are not — the floor does not come from a market average at all; it comes from the report of a registered valuer. That reverses what the protection actually is. Instead of a number anybody can recompute from published trading data, you are relying on a professional opinion, and the notice is the place it is disclosed.
• The allottee is locked in. Shares issued preferentially cannot be sold immediately; a lock-in applies for a prescribed period, and it is longer for a promoter allottee than for others. The practical consequence is a dated event: on a known day, a large parcel of shares held at a known cost becomes saleable. That is a fact about future supply, and it is public from the day the resolution passes.

The warrant, and the option nobody names

A convertible warrant is the instrument in the notice at the top of this lesson, and it is worth describing in plain terms because the description is not usually offered. The holder pays part of the price on allotment and has a defined period in which to pay the balance and receive the share. If the balance is not paid, the warrant lapses and the amount already paid is forfeited to the company. At least a quarter upfront with the balance inside eighteen months has been the shape of the rule; the proportion and the tenure are prescribed and have been changed before, so the resolution you are being asked to approve is the document that states them.

Where you see it, and what to look at

• The outcome of the board meeting, filed with the exchanges the same day the board approves the proposal. This is the earliest public appearance and it is usually a single page.
• The notice and its explanatory statement. For a preferential issue this document must set out who the allottees are, the price, the basis on which the price was arrived at, and — the table actually worth reading — the shareholding pattern before and after the issue. That last table answers, in two columns, the question everybody asks in prose.
• The shareholding pattern for the following quarter, where the change shows up in the ordinary quarterly filing whether or not you read the notice.
• The lock-in expiry, which follows arithmetically from the date of allotment and the prescribed period, and which nobody announces again nearer the time.