Friday 29 November 2013

Really Good Pocket Money

I don't have much knowledge in accounting matters, but I find an article from a blog called Serious Investing very enlightening, at least to me.

It is about free warrants.

I have received free warrants before. Tambun Indah gave free warrants for those who subscribe to its rights issue. I have to fork out money to subscribe to its rights issue. I can choose to subscribe or not to subscribe. If I don't, I don't need to spend more money but I am not entitled to the free warrants.

Now only I realize that there are really "free" warrants. This means that I will get the warrants without paying any extra money.

Even though the mother share price will be adjusted accordingly after the ex-date of free warrants, those who get the free warrants are almost guaranteed to gain due to the speculative nature of warrants trading.

The example given in the said article is Instacom.

Instacom gave free warrants without rights issue attached to it in August with 1:1 conversion at 33sen. On the ex-date (27th Aug), its mother share was traded last at 38sen.

From my calculation, after the ex-date, its mother share should be adjusted to 36sen, and its warrant value should be 36-33= 3sen. I'm not too sure whether this is correct as after ex-date, mother share closed at only 29sen and later warrants closed at 11sen on the first day. 

IF my calculation is correct, though mother share dropped from 36sen to 29sen (-19%), the warrants increased from 3sen to 11sen (+270%). 

This may explain why just 3 days later, Instacom director Mr Ngu started to dispose all his warrants at around 11sen.

Another director Ms Anne is perhaps smarter, she only came into action after the warrant price started to spike above 15sen level in end of October. She started to dispose all the warrants from 7th Nov, average selling price at 15-18sen.

In responding to queries from The Borneo Post, Anne Kung said that she did not sell her shares and is still managing the company. Her sale of warrants only came after the Budget 2014 announcement because there was a certain spike in interest in the company, and she thought it was an opportune time to pocket some money.

All those warrants are obtained absolutely free without paying a single sen. So it's a handsome pocket money indeed.

As far as I know, warrants are a way to raise money for the company. If the company needs money in the near future, it will not issue warrants only as I think not many people will want to take out their money to convert them to mother shares until the expiry date is near.

If the company really need money, they will issue rights. To encourage shareholders to subscribe to the rights, they will give free warrants.

Apparently Instacom is not in urgent need of fund, as it only gave free warrants and the warrants will only expire in year 2018.

What do you think is the purpose of this free warrants?

The executive directors did not want to hold a single warrant of their own company. They are not keen to put more money in. They sold for immediate profit.

       Instacom price chart

Anyway, there is no right or wrong. They are not against the laws. It is for investors to judge.

It does not mean that the management is bad or dishonest by giving free warrants like this. A lot of small shareholders are happy with their gain as well.

For me, I think I have to take another look at Instacom.

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