Warrants and some legal risks toward the owner of warrants

 Date: 27 December 2021

Writer: Thu Tran

Warrants have brought many outstanding benefits to securities investors such as low investment capital, flexible trading mechanism, no deposit, fixed maximum losses, and being a lever. In fact, the warrant market is growing, especially the number of large warrant codes such as MBB, CPNJ, MWG, HPG, FPT, etc. More benefits more risks, especially the legal risks that the owner of warrants should take note of. BLawyers Vietnam will raise underneath.


1. What is a warrant?

Warrant by law is a type of security issued together with bonds or preference shares and bestow upon their holders the right to buy a certain price of common shares at a specified price over a specific period.

In which, a covered warrant is a type of security secured by collateral and issued by a securities company. They allow their holders to have the right to buy (call option) or the right to sell (put option) securities to their issuer at a specified strike price prior to or on a specified date or receive the difference between the strike price and the underlying security price at that time.

However, pursuant to the regulations attached to Decision No. 72/QD-UBCK of State Securities Commission (“SSC”), the Vietnamese stock market only accepts the call option based on the underlying securities that are listed shares and exercises European-style rights and has a method of payment in money currently.

Read more: ESOP: The list of 30 FQAS under viewpoint of securities and employment

2. Legal risks toward the owner of warrants

Firstly, the owner has some restricted rights to the issuer

The owner of the warrant does not have the rights as a shareholder of a joint-stock company. Accordingly, he/she will not have the rights such as attending the General Meeting of Shareholders, the right to vote, the right to receive dividends or buy additionally issued shares, or other rights arising from the underlying securities.

Therefore, the owner will not control the operation of the issuer nor know the adverse and beneficial information about the owned warrant.

Secondly, a covered warrant may be de-listable

One of the largest risks toward the owner of a covered warrant is that it is forced to be delisted under the following case:

  1. Underlying securities are delisted or securities index cannot be determined;
  2. The application for the offering of covered warrants contains incorrect information, omits important information that may affect investment decisions and cause damage to investors; or the issuer fails to pay the deposit or there is no payment guarantee of the bank;
  3. The ratio of the total quantity of underlying securities converted from the issued warrants of all issuers to the total quantity of transferable underlying securities exceeds the limit established by SSC;
  4. The issuer fails to fulfill its obligations to risk management or the market maker’s obligations and have to stop operating as a market maker;
  5. The covered warrants have been fully executed or renewed;
  6. The listed organization has its Certificate of Enterprise Registration or operation license revoked; and
  7. The listed organization ceases to exist due to re-organization, dissolution, or bankruptcy.

In case a covered warrant is delisted, the issuer is obliged to buy back the warrant from the investor at the payment price approved by the Stock Exchange. As such, the owner will not be guaranteed profitability for the underlying securities and the rights of the owner also terminate.

Third, the warrant may be suspended from trading

The warrant can be suspended from trading in the following case:

  1. The calculation of the underlying index of the warrant is suspended;
  2. The underlying securities of the warrant are suspended from trading;
  3. Force majeure such as natural disasters, fire, or technical errors in the trading system or payment system; and
  4. Stock Exchange considers suspension necessary to protect investors’ interests with the approval of the State Securities Commission.

The suspension of the transaction of warrants is detrimental to the owner in terms of the exercise of the right to buy or sell his/her warrant at the right time.

Should you have any questions about the above contents, please revert to BLawyers Vietnam at consult@blawyersvn.com. We are more than happy to hear from you!

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