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Malaysian Negotiable Instruments– Share Warrants -Understanding the Relationship Between Bills of Exchange, Cheques, Promissory Notes, Banker’s Drafts, Bank Notes, Treasury Bills and Share Warrants
Before studying Share Warrants, it is important to understand that Share Warrants belong to a different category of financial instruments.
The negotiable instruments discussed in previous chapters were mainly used for:
Instead of being used to pay debts, a Share Warrant gives its holder certain rights relating to a company’s shares under the terms on which it is issued.
Why Were Share Warrants Created?
Companies frequently require additional capital to:
This encourages investment while allowing investors the opportunity to participate in the company’s future growth.
8.1 Comparison Note – Treasury Bills and Share Warrants
A Treasury Bill is a short-term Government debt security.
Its purpose is to allow the Government to borrow money.
A Share Warrant is issued by a company.
Its purpose is to provide investors with rights relating to company shares and to assist the company in raising capital.
Memory Tip
Treasury Bill = Government borrowing.
Share Warrant = Company investment.
8.2 Comparison Note – Shares and Share Warrants
Many students confuse ordinary shares with Share Warrants.
They are not the same.
A shareholder already owns part of the company.
The shareholder usually enjoys rights such as:
Instead, the holder possesses rights under the warrant, which may include the right to obtain shares in accordance with the warrant’s terms.
Only after those rights are properly exercised and shares are issued does the holder become a shareholder.
Memory Tip
Share = Ownership today.
Share Warrant = Opportunity to obtain ownership in the future.
8.3 Comparison Note – Bank Notes and Share Warrants
A Bank Note is legal tender.
It is money.
A Share Warrant is not money.
It cannot normally be used to purchase goods or services.
Instead, it represents an investment opportunity.
Memory Tip
Bank Note = Spend it.
Share Warrant = Invest it.
8.4 Comparison Note – Promissory Notes and Share Warrants
A Promissory Note records a promise to repay money.
A Share Warrant does not promise repayment.
Instead, it grants rights connected with company shares.
Memory Tip
Promissory Note = Debt.
Share Warrant = Equity opportunity.
Case Scenario
ABC Manufacturing Berhad plans to build a new production facility costing RM300 million.
Instead of immediately issuing additional ordinary shares, the company issues Share Warrants to investors.
John purchases several Share Warrants.
Two years later, ABC Manufacturing Berhad performs exceptionally well.
Its ordinary share price increases significantly.
John decides to exercise his rights under the Share Warrants and receives ordinary shares at the predetermined exercise price.
John benefits because the market value of the shares is now much higher than the price payable under the warrants.
This illustrates why Share Warrants are attractive to investors expecting future growth.
Introduction
A Share Warrant is a financial instrument issued by a company that gives its holder specified rights relating to the company’s shares.
Unlike ordinary shares, a Share Warrant does not automatically confer shareholder status.
Instead, it provides an opportunity to acquire shares in the future according to the terms and conditions contained in the warrant.
Share Warrants are frequently used by companies to attract investment while providing investors with potential opportunities to benefit from future increases in share prices.
Questions and Answers
Q1. What is a Share Warrant?
A Share Warrant is a financial instrument issued by a company giving the holder rights relating to the acquisition of the company’s shares under specified terms and conditions.
Q2. Why do companies issue Share Warrants?
Companies issue Share Warrants to:
Q3. Is a Share Warrant the same as a share?
No.
A Share Warrant is not an ordinary share.
Holding a Share Warrant does not automatically make the holder a shareholder.
Q4. Who issues Share Warrants?
Share Warrants are issued by companies, usually as part of a corporate fundraising exercise.
Q5. Who may purchase Share Warrants?
Depending upon the terms of issue and applicable laws, Share Warrants may be acquired by:
Q6. Can Share Warrants be transferred?
Many Share Warrants are transferable according to their terms and the applicable legal and regulatory framework.
Transferability increases their attractiveness as investment instruments.
Q7. Do Share Warrant holders receive dividends?
Generally, No.
Only shareholders receive dividends when declared by the company.
A Share Warrant holder normally becomes entitled to dividends only after becoming a shareholder through the proper exercise of the warrant.
Q8. Do Share Warrant holders have voting rights?
Generally, No.
Voting rights usually belong to shareholders rather than holders of Share Warrants.
Legal Mechanism – How Share Warrants Work
Step 1 – Company Requires Capital
ABC Manufacturing Berhad plans to expand its operations.
Legal Position
The company needs additional financing.
Step 2 – Company Issues Share Warrants
The company issues Share Warrants under specified terms.
Legal Position
Investors are invited to purchase the warrants.
Step 3 – Investors Purchase the Share Warrants
John purchases Share Warrants issued by the company.
Legal Position
John becomes the lawful holder of the Share Warrants.
He does not yet become a shareholder.
Step 4 – Company Performs Well
The company’s business expands successfully.
Its ordinary share price rises.
Legal Position
The Share Warrants become more valuable because exercising them may now be commercially advantageous.
Step 5 – Holder Exercises the Share Warrant
John decides to exercise his rights under the warrant.
He pays the exercise price according to the warrant’s terms.
Legal Position
The company issues ordinary shares to John.
Step 6 – John Becomes a Shareholder
After the shares are issued,
John acquires shareholder status.
Legal Position
John now enjoys shareholder rights according to company law and the company’s constitution.
Rights and Liabilities
The Company
Responsible for:
The Share Warrant Holder
Entitled to:
Shareholders
After the warrant has been exercised and shares issued, the holder generally becomes entitled to:
Practical Example
XYZ Berhad issues Share Warrants to finance the construction of a new manufacturing plant.
Investors purchase the warrants.
Three years later, the company’s share price has doubled.
Many investors exercise their Share Warrants and become shareholders, benefiting from the company’s growth.
Why Do Investors Buy Share Warrants?
Investors often purchase Share Warrants because they provide:
Practical Applications
Share Warrants are commonly used for:
Examination Tips
Whenever analysing Share Warrants, ask:
Memory Tips
Treasury Bill
“Government borrowing.”
Share
“Company ownership.”
Share Warrant
“Future opportunity to become a shareholder.”
Conclusion
A Share Warrant is an investment instrument that provides its holder with rights relating to the future acquisition of a company’s shares. Unlike an ordinary shareholder, the holder of a Share Warrant does not automatically enjoy voting rights or dividend entitlements. Those rights generally arise only after the warrant is validly exercised and the company issues the corresponding shares. Share Warrants therefore serve as an important corporate financing tool by helping companies raise capital while giving investors an opportunity to participate in future business growth.
Quick Revision Summary
Before studying Share Warrants, it is important to understand that Share Warrants belong to a different category of financial instruments.
The negotiable instruments discussed in previous chapters were mainly used for:
- making payments;
- facilitating trade;
- borrowing money; or
- Government financing.
Instead of being used to pay debts, a Share Warrant gives its holder certain rights relating to a company’s shares under the terms on which it is issued.
Why Were Share Warrants Created?
Companies frequently require additional capital to:
- expand their business;
- construct new factories;
- develop new products;
- finance acquisitions;
- strengthen working capital.
This encourages investment while allowing investors the opportunity to participate in the company’s future growth.
8.1 Comparison Note – Treasury Bills and Share Warrants
A Treasury Bill is a short-term Government debt security.
Its purpose is to allow the Government to borrow money.
A Share Warrant is issued by a company.
Its purpose is to provide investors with rights relating to company shares and to assist the company in raising capital.
Memory Tip
Treasury Bill = Government borrowing.
Share Warrant = Company investment.
8.2 Comparison Note – Shares and Share Warrants
Many students confuse ordinary shares with Share Warrants.
They are not the same.
A shareholder already owns part of the company.
The shareholder usually enjoys rights such as:
- voting at general meetings;
- receiving dividends (when declared);
- sharing in the company’s assets upon winding up after creditors have been paid.
Instead, the holder possesses rights under the warrant, which may include the right to obtain shares in accordance with the warrant’s terms.
Only after those rights are properly exercised and shares are issued does the holder become a shareholder.
Memory Tip
Share = Ownership today.
Share Warrant = Opportunity to obtain ownership in the future.
8.3 Comparison Note – Bank Notes and Share Warrants
A Bank Note is legal tender.
It is money.
A Share Warrant is not money.
It cannot normally be used to purchase goods or services.
Instead, it represents an investment opportunity.
Memory Tip
Bank Note = Spend it.
Share Warrant = Invest it.
8.4 Comparison Note – Promissory Notes and Share Warrants
A Promissory Note records a promise to repay money.
A Share Warrant does not promise repayment.
Instead, it grants rights connected with company shares.
Memory Tip
Promissory Note = Debt.
Share Warrant = Equity opportunity.
Case Scenario
ABC Manufacturing Berhad plans to build a new production facility costing RM300 million.
Instead of immediately issuing additional ordinary shares, the company issues Share Warrants to investors.
John purchases several Share Warrants.
Two years later, ABC Manufacturing Berhad performs exceptionally well.
Its ordinary share price increases significantly.
John decides to exercise his rights under the Share Warrants and receives ordinary shares at the predetermined exercise price.
John benefits because the market value of the shares is now much higher than the price payable under the warrants.
This illustrates why Share Warrants are attractive to investors expecting future growth.
Introduction
A Share Warrant is a financial instrument issued by a company that gives its holder specified rights relating to the company’s shares.
Unlike ordinary shares, a Share Warrant does not automatically confer shareholder status.
Instead, it provides an opportunity to acquire shares in the future according to the terms and conditions contained in the warrant.
Share Warrants are frequently used by companies to attract investment while providing investors with potential opportunities to benefit from future increases in share prices.
Questions and Answers
Q1. What is a Share Warrant?
A Share Warrant is a financial instrument issued by a company giving the holder rights relating to the acquisition of the company’s shares under specified terms and conditions.
Q2. Why do companies issue Share Warrants?
Companies issue Share Warrants to:
- raise future capital;
- attract investors;
- encourage long-term investment;
- enhance fundraising exercises.
Q3. Is a Share Warrant the same as a share?
No.
A Share Warrant is not an ordinary share.
Holding a Share Warrant does not automatically make the holder a shareholder.
Q4. Who issues Share Warrants?
Share Warrants are issued by companies, usually as part of a corporate fundraising exercise.
Q5. Who may purchase Share Warrants?
Depending upon the terms of issue and applicable laws, Share Warrants may be acquired by:
- individual investors;
- institutional investors;
- investment funds;
- corporations.
Q6. Can Share Warrants be transferred?
Many Share Warrants are transferable according to their terms and the applicable legal and regulatory framework.
Transferability increases their attractiveness as investment instruments.
Q7. Do Share Warrant holders receive dividends?
Generally, No.
Only shareholders receive dividends when declared by the company.
A Share Warrant holder normally becomes entitled to dividends only after becoming a shareholder through the proper exercise of the warrant.
Q8. Do Share Warrant holders have voting rights?
Generally, No.
Voting rights usually belong to shareholders rather than holders of Share Warrants.
Legal Mechanism – How Share Warrants Work
Step 1 – Company Requires Capital
ABC Manufacturing Berhad plans to expand its operations.
Legal Position
The company needs additional financing.
Step 2 – Company Issues Share Warrants
The company issues Share Warrants under specified terms.
Legal Position
Investors are invited to purchase the warrants.
Step 3 – Investors Purchase the Share Warrants
John purchases Share Warrants issued by the company.
Legal Position
John becomes the lawful holder of the Share Warrants.
He does not yet become a shareholder.
Step 4 – Company Performs Well
The company’s business expands successfully.
Its ordinary share price rises.
Legal Position
The Share Warrants become more valuable because exercising them may now be commercially advantageous.
Step 5 – Holder Exercises the Share Warrant
John decides to exercise his rights under the warrant.
He pays the exercise price according to the warrant’s terms.
Legal Position
The company issues ordinary shares to John.
Step 6 – John Becomes a Shareholder
After the shares are issued,
John acquires shareholder status.
Legal Position
John now enjoys shareholder rights according to company law and the company’s constitution.
Rights and Liabilities
The Company
Responsible for:
- issuing Share Warrants lawfully;
- complying with applicable corporate and securities laws;
- issuing shares when valid warrants are exercised.
The Share Warrant Holder
Entitled to:
- hold the warrant;
- transfer the warrant where permitted;
- exercise the warrant according to its terms;
- receive shares after proper exercise.
Shareholders
After the warrant has been exercised and shares issued, the holder generally becomes entitled to:
- voting rights;
- dividends (when declared);
- other rights attached to the shares.
Practical Example
XYZ Berhad issues Share Warrants to finance the construction of a new manufacturing plant.
Investors purchase the warrants.
Three years later, the company’s share price has doubled.
Many investors exercise their Share Warrants and become shareholders, benefiting from the company’s growth.
Why Do Investors Buy Share Warrants?
Investors often purchase Share Warrants because they provide:
- exposure to future share price growth;
- investment flexibility;
- potential capital appreciation;
- opportunities to participate in corporate expansion.
Practical Applications
Share Warrants are commonly used for:
- corporate fundraising;
- business expansion;
- attracting long-term investors;
- investment portfolio diversification;
- capital market transactions.
Examination Tips
Whenever analysing Share Warrants, ask:
- Who issued the Share Warrant?
- Does the holder already own shares?
- Has the warrant been exercised?
- Has the company issued the shares?
- Has the holder become a shareholder?
Memory Tips
Treasury Bill
“Government borrowing.”
Share
“Company ownership.”
Share Warrant
“Future opportunity to become a shareholder.”
Conclusion
A Share Warrant is an investment instrument that provides its holder with rights relating to the future acquisition of a company’s shares. Unlike an ordinary shareholder, the holder of a Share Warrant does not automatically enjoy voting rights or dividend entitlements. Those rights generally arise only after the warrant is validly exercised and the company issues the corresponding shares. Share Warrants therefore serve as an important corporate financing tool by helping companies raise capital while giving investors an opportunity to participate in future business growth.
Quick Revision Summary
- Share Warrants are issued by companies, not by the Government or banks.
- They are investment instruments, not payment instruments.
- Holding a Share Warrant does not automatically make the holder a shareholder.
- The holder generally becomes a shareholder only after exercising the warrant and receiving shares.
- Share Warrants help companies raise capital and attract investors.
- Golden Rule: A Share Warrant gives a right to acquire shares, whereas an ordinary share represents ownership of the company.
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