Answer to the basic knowledge of warrants: the role of warrants in share reform

What role can warrants play in the share trading solution?

Warrants provide a new form of payment for the consideration of negotiable rights. In the absence of warrants, non tradable shareholders can only pay the consideration for tradable rights in stock or cash, and the choice is relatively simple. In addition, some stocks have very low P/B ratio or non tradable share ratio, and the cash flow of non tradable shareholders is not very sufficient. It is difficult to pay the consideration in stock or cash. At this time, The holders of non tradable shares can pay the consideration according to the value of the warrants by issuing warrants.

The value creation function of warrants can provide a means for the third party to pay the consideration and reduce the consideration payment cost of non tradable shareholders. In addition to the intrinsic value, the value of warrants also includes the time value, which will be included in the market transaction price. The warrants obtained by the holders of tradable shares can be sold in the market for cash, and the time value of the warrants is paid by the warrant purchasers. The third-party payment method is introduced in the consideration payment, which also provides investors other than the original shareholders with the opportunity to participate in the value-added benefits of the tradable rights brought by the share reform.

For the holders of non tradable shares who issue warrants, the payment of consideration by warrants actually allows the holders of non tradable shares to pay the current consideration by the future value of the shares, while the payment of consideration by shares or cash can only be made by the current value. Relatively speaking, warrants reduce the cost of consideration payment for holders of non tradable shares, and can also realize deferred payment of consideration.

The management incentive tool function of warrants can improve the motivation of listed companies to make share trading schemes. Warrants are a common management incentive tool in the world. The use of warrants can combine share reform with management incentive, which helps to improve the motivation of listed companies to actively participate in the process of share reform. (Ge Xinyuan, Guosen Securities Economic Research Institute)