Norms for preferential allotment of equity warrants are learnt to be back under the regulatory scanner, following complaints from institutional investors that this instrument is being misused by promoters.

Equity warrants are mostly issued by promoters to themselves, to increase their stake in the company in a cost-effective manner. An equity warrant gives the holder the option to buy an equivalent number of shares of the company at a predetermined price on the expiry of the warrants.

SEBI is said to be reviewing two aspects: the timeline for converting the warrant into shares and the upfront margin to be paid at the time of allotment of the warrants.

At present, the warrants are due for conversion into shares at the end of 18 months from the date of them having been allotted. Promoters have to pay a 25% upfront margin at the time of issuing the warrants, and stand to lose that amount if they decide not to convert the warrants into shares.

A person familiar with the development said SEBI may cut the time line to 12 months from 18 months, and may increase the upfront margin to be paid, anywhere between 30% and 50%, at the time of allotment of the warrants.

When the stock market was booming, many promoters issued warrants to themselves in the hope that they would be able to convert those into shares at a significant discount to the prevailing market price at that time. But the stock market crash that began in January 2008 upset their calculations.

Many promoters allowed the warrants to lapse as the conversion price was way above the market price when it was time to exercise their option. To rub salt into the wound of minority shareholders, a few companies which had let the warrants lapse, then issued fresh warrants to the promoters at lower prices.

In the last quarter of 2008, promoters of Hindalco and Tata Power were among the big names who forfeited their warrants. In the Q1 of 2009, the list included names like Punj Lloyd, Videocon, Patel Integrated Logistics and Regaliaa Realty.

Prima facie, this does appear to be skewed in favour of the promoter or the warrant holder. However, capital raising is essential for growth. A preferential allotment also assuages promoter worries about control. If the issue is about protecting minority shareholder interest rather than specified groups of people, than the only route to raise capital would be via rights, said a senior investment banker.

There is a perception that this route has taken a backseat after SEBI raised the upfront margin for equity warrants to 25% from 10% in end-February this year. Ravi Ramu, director of Purvankara Projects, believes that such a measure if implemented would be a positive move. It would be a equitable measure for non-promoter shareholders, he told ET.

Taking a contra view is Prime Database MD Prithvi Haldea, who is against the very idea of preferential issue to promoters as he feels all shareholders should have equal rights. If funds are required urgently than promoters should be required to bring all the money in the right away (and not 25% under the warrant route), and monitoring of such fund utilisation should be mandated, he told ET.