'Warrant holders must be protected from price dilution'

JAKARTA (JP): Warrant holders should be protected from a possible price dilution, which might occur as the impact of share splits or the issuance of rights and bonus shares, says an executive of the Jakarta Stock Exchange (JSX).

JSX's president, Hasan Zein Machmud, said yesterday that such protection is essentially important to ensure a price certainty during the exercising period of warrant trading.

Warrant holders could suffer great losses from an unexpected share split and issuance of rights or bonus shares, he told securities analysts and executives in a seminar on warrant, margin trading and prohibited transactions on Indonesian stock exchanges.

A warrant is a certificate issued by a company as a long-term call option to buy a specific number of stocks at a specific price.

If the publicly listed companies have a plan to split their shares and to issue rights or bonus shares, the intention should be mentioned in the prospectus published to support the warrant issuance, Hasan said, adding that giving information in advance of the possible dilution in the share price is important to inform the investing public of any possible risk of the warrants they want to buy.

Ometraco Corp. and Bank Bali floated detachable warrants on the local bourse early last month as sweeteners of their rights issues.

The two publicly listed firms are the first to benefit from the long-waited ruling of the capital market watchdog on the warrant instrument.

Modern Realty, the listed property division of the Modern Group, had to delay its plan to issue the same type of warrant instruments last year due to the absence of the legal base to regulate the sales of such a capital market instrument.

Hasan said yesterday that for the time being the sales of the derivative instrument on a local stock exchange would be limited only to detachable warrants, given the speculative nature of the certificates.

Bill Foo, president of Schroders Indonesia, said the warrant instruments could give the investing public higher gains than those obtained from the conventional share trading.

"But on other side, investment in warrants could also result in higher loses due to the volatility of their prices," he said at the same seminar.

Confusing

Hasan said that the issuance of warrants on the local market could also confuse the exchange's authority when calculating the level of foreign ownership in the issuing company due to the difference in the exercising term of respective holders.

Warrant holders are allowed to exercise their rights to buy shares at a specific price during the exercising period, which normally lasts for five years.

"It will be more difficult if the exercising is only carried out by foreign investors," he said, adding that under such circumstances, foreign investors could be barred from exchanging their warrants with new shares because the 49 percent shares allocated to foreign buyers could be realized before they have the opportunity to use their rights.

"In this case, warrant issuers should mention such a possibility in the prospectus so that the foreign buyers will anticipate it," he said.

Foreign buyers lodged a complaint last week to the capital market watchdog about their inability to execute their rights to buy Bank Bali's rights shares. Local investors were reported to have sold their rights certificates to foreign buyers off the market, thereby causing an unproportionate increase in the foreign holding to the 49 percent limit.

Hasan said that the capital market watchdog should also cancel its ruling regarding the sales of rights certificates off the market.

Trading outside the bourse, according to him, should be completely banned to ensure a fairer transaction and a fair distribution of shares to foreign buyers.(hen)