CSE News Updates

Jan 06, 2012 (LBO) - For the second time in a year, Sri Lanka's Environmental Resources Incorporated (ERI) plans to delay warrants that were to be converted to shares whose price has slumped to the conversion price, amid anticipation of selling pressure.
The company, which was fined last year for providing misleading information, said in a stock exchange filing its board of directors decided on January 5 to recommend extending the cut off date of is 2012 warrants from February 03, 2012 to September 6, 2013.

It also recommended extending the expiration date of the warrants from February 24, 2012 to September 26, 2013.

It said the board of ERI was "of the view that it would be in the best interests of the company if the 2012 warrants were fully exercised."

Stock market analysts said the company was trying to buy time and that there was also speculation that ERI's controlling shareholder Lionhart Investments, had not taken up its full subscription of warrants.

Lionhart Investments, a UK-based fund, has about 80-90 percent of both shares and warrants of ERI.

"The February 2012 warrants are coming at 33 rupees. Today's share price is already 33," said an analyst.

"Furthermore, the 2011 warrants are to be converted and getting traded next week at 24 rupees which is at a discount to 33 rupees.

"So the market perception is of further selling pressure on ERI with speculation also that the controlling shareholder has not taken up their full subscription of the warrants.

"There will be sellers among those who acquired shares at 24 rupees through conversion of 2011 warrants. At today's price a conversion at 33 rupees next month is probably not going to successful."

The 2011 warrants were also delayed by six months with the conversion date changed from May - June to July and December 2011, a move ERI director Kosala Heengama told LBO at the time was due to "adverse market conditions".

According to the September 2011 interim results of ERI, a prolific issuer of warrants, the exercise date for conversion of 104.3 million 2011 warrants was extended to July 7, 2011 and December 21, 2011 from the original date of June 3, 2011.

A note to the accounts said 2,532,590 warrants were exercised on July 7, 2011 and the company raised 60.8 million rupees with the option given to warrant holders who had not yet exercised, to exercise on December 21, 2011.

The market valuation of warrants can be skewed in a firm which is closely held by insiders, whose underlying shares can also be suffering the same fate, compounding the problem.

Illiquid companies are known to be a favourite targets of price manipulators.

An equity warrant gives a holder the right to buy a new share in a company at a future date at a predetermined price although any exercised warrants would dilute the value of the ordinary share.

Crudely valued, a warrant is worth at least the difference between the current price of an ordinary share and the specified price at which it is exercised.

If the market price of the ordinary share is lower than the exercise price at the exercise date, the warrants would expire without diluting the capital.

The uncertainty makes warrants highly speculative and unless a firm is on track to make increasingly higher profits every year, a warrant would be worthless.