Partly Paid Shares – Whether Doppelganger of Share Warrants?

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– Pammy Jaiswal and Saket Kejriwal | corplaw@vinodkothari.com

Background

In recent times, the use of partly-paid shares has seen some traction[1] where several listed companies[2] came up with issuance of partly-paid shares[3]. While the law provides for the issuance of partly-paid securities, it is important to understand how this instrument has not been used merely as a capital-structuring tool, but arguably, as a regulatory workaround. An analogy may be drawn to a situation where a customer is allowed to purchase a valuable by paying a token money today and pay the full consideration after a period of say 1-2 years at the same price which prevailed at the time of payment of token money. Specifically, promoters and investors appear to be utilizing partly-paid shares as a substitute for share warrants, by paying a minuscule part of the value of shares as a part of application money and the balance payment is allowed to be made at any time in the future, sometimes after an unreasonably long time.

In this article, we argue that the issue of such partly-paid shares is as good as issuing share warrants, However, circumventing the challenges associated with warrants.

Fundamentals of Share Warrants

Ashare warrant is a security issued by a company that grants its holder the right/option to subscribe to equity shares of the company (i.e. Future Equity) at a predetermined price, within  a predetermined period, upon the upfront payment of a token amount referred to as the option premium.

Legal Context

A share warrant, being marketable in nature, provides a right in securities, therefore, it is treated as a security under Section 2(h) of the Securities Contracts (Regulation) Act, 1956. Some of the relevant legal provisions would include:

  • Sections 42, 62 and other relevant provisions of the Companies Act, 2013; and
  • The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Key Features

  • Right to Decide: A share warrant allows an investor to subscribe to the company’s equity shares in the future, typically at a price lower than the anticipated market price at the time of exercise. Conversely, if the market price at the time of exercise falls below the pre‑determined price, the investor may choose not to subscribe, thereby limiting their loss to the option premium paid (i.e., the upfront cost), rather than incurring the full loss arising from the difference between the initial/subscription value and the reduced market price.
  • Option Premium: The upfront amount paid for obtaining this right is called the option premium i.e. if the current market value of shares is Rs.100, then the issuer may issue equity shares immediately at Rs.100, or Issue a share warrant where the investor pays Rs. 10 upfront for the right to subscribe the equity at Rs. 100 in the future. If, at the time of exercise, the market price of the share has risen to Rs. 120, the investor benefits from locking the price at Rs. 100, making the Rs. 10 upfront cost worthwhile. Conversely, if the market price falls to Rs. 50, the investor may choose not to exercise the warrant, limiting the loss to Rs. 10 i.e. option premium. This forms a part of the net worth of the company. For details on option pricing, may refer to our resource on Option Pricing Model.
  • Forfeiture: If the warrant holder chooses not to exercise the right, the upfront option premium is forfeited.

Pricing

The value of option premium is generally determined by Black Scholes Model, Binomial Options Pricing Model or Monte Carlo Simulation Method. The most appropriate method for calculation of option premium, in the context of companies using warrants as a regulatory workaround, is the Simulation Method.

One of the key features of share warrants is that the longer the life of the option, there is a higher probability of its price being high. In accordance with the above models, issuing share warrants for an extended period can raise the option premium to a point where it becomes undesirable. Therefore, it is recommended that the life of a warrant should be just and reasonable, and that it should not be used as a substitute for long‑term convertible instruments such as OCDs, CCDs, CCPS, or other similar securities.

Difference between warrants and partly-paid up shares

While both partly‑paid shares and warrants involve an upfront payment towards a future right in equity shares, they differ significantly on the following points:

Basis of DifferencePartly-Paid SharesShare Warrants
Right and ObligationHolder is obligated to pay the remaining call money when demanded by the company.   Failure to pay will lead to forfeiture of the subscription and call money received by the company.Holder has a right, but not an obligation, to subscribe to equity shares at a future date.
Nature of InvestmentThese are equity shares issued with part of the value paid upfront, making the holder a shareholder of the company.These are options issued for a premium, entitling the holder to subscribe for equity shares in the future.
ValuationShares are subscribed at fair value computed as on the date of making the first subscription/ call moneyShares are subscribed at current fair value on a future date along with payment of option premium
Shareholder RightsPartly-paid equity shareholders enjoy rights proportionate to their paid-up amount.No rights until conversion.

Why are partly-paid shares doppelgangers ?

Partly-paid shares in its usual nature when used for capital needs in tranches serves the permitted purpose for this concept was introduced, however, this benefit becomes a governance concern when it is used as an alternative to share warrants and as evident from the table above, the two differ in various aspects. The primary reason for this mirroring lies in valuation. In the case of share warrants issued with a longer tenor, the cost of the warrant, representing the right to subscribe to future equity, tends to be higher when calculated using fair value methods, making this option impractical. As an alternative, many companies have opted to issue partly-paid shares, allowing an investor to pay only a minimal upfront amount (similar to the option premium in the case of a warrant) as part of the application money and reserving the right with the investor to infuse the remaining funds for a longer period like 5-10 years which would not be possible in case of warrants as the premium will increase drastically, if calculated as per fair value methods.

Token money to secure allotment of shares

It is imperative to note that in case of share warrants, the price paid upfront is the option premium which is basically the price paid to get the equity at the current value at the future date as against in case of partly-paid shares, where the investor becomes a shareholder on the first payment date by even paying a nominal part amount reflecting the fair value (consisting of part face value and proportionate premium) as on the date of making such first payment. The catch lies in the fact that there is no legal prescription on the maximum time within which a company needs to make the final call on such partly-paid shares (except in case of IPOs) which in case of warrants runs up to 18 months for listed securities as well as size of the calls which in the case of listed companies requires at least 25% of the consideration amount calculated as per the formula for exercise price[4] with reference date being the record date shall be received at the time of option premium. 

One may argue that, given the fundamental difference between the two instruments is that one comes with a right (warrants) and the other with the security (partly-paid shares), they can not be used as substitutes as in case of partly-paid shares the right to call money lies with the Board and the investor is obligated to pay on demand, failing which shares may be forfeited, resulting in the loss of upfront amount paid.

On the other hand, a share warrant gives a right to the investor to decide when, or even if, to make the payment. If the investor chooses not to exercise the option, the upfront money paid is still forfeited, with the key difference being that the loss occurs at the investor’s discretion.

The above argument is valid theoretically. However, in practice, this mirroring is frequently used by start‑ups, which are generally incorporated as private companies. In such cases, although the ‘right to call money’ rests with the Board of Directors, the Board itself typically comprises the promoters i.e. the very investors who subscribe to these mirrored partly-paid shares or in the case of external investors/subscribers, their appointed representatives form an integral part of the Board. As a result, the obligation on the subscriber to pay the balance can, in reality, be viewed more as a right, given that it is exercised by a Board largely aligned with the interests of the investors themselves.

Additionally, partly-paid shares provide several benefits to the investor, like proprietary rights, chances to book profits in case of transfer, etc.We have discussed the same below:

Proprietary interest of partly-paid shares

Partly-paid shares are not merely rights in equity shares but allotment of the shares itself. Once an investor pays the subscription money/ first call, the shares are allotted to the investor who becomes a shareholder immediately and gets ownership rights from day one. Having said that, while the benefits arising out of such ownership is proportional to the amount paid up on the shares, it still dilutes the stake of the other investors who hold fully paid up shares.

The investor’s economic risk is lower compared to a fully paid-up shareholder since only part of the share price has been paid, the investor’s capital at risk is limited to the amount actually contributed, while the ownership position in the company already stands created.

Chance to book profits by transfer of partly-paid shares 

If an investor who has paid only a nominal amount intends to sell such shares for reasons like liquidity or apprehension of the investee not doing well for some reason, he stands a chance to make profits on the part payment where the fair value of such shares have appreciated at the time of such transfer. A purchaser can acquire ownership interest by paying only the fair value of the amount paid-up, while the remaining payment is effectively locked in at the historical fair value. This allows the investor to benefit from future upside without proportionately funding the company at the prevailing fair value for the unpaid portion, which remains priced at the value as on the date of issuance.

Imagine a situation where Mr. A invests in the partly-paid up equity shares of XYZ Ltd. The fair value of the equity shares is say INR 150 (face value INR 10) where Mr. A invests only INR 30 as paid up amount. Thereafter he decides to sell these partly-paid shares to another investor after 2 years by which time the balance amount is still uncalled. The transfer of these partly-paid shares would be done at a fair value where lets assume the value of the shares have appreciated and as a consideration, Mr. A receives INR 80 as the sale consideration and also passes on the legacy of holding partly-paid shares to the buyer.

However, this issue does not arise in listed companies, where market mechanisms ensure fair price discovery.

An Ideal partly-paid share

Situation where a partly-paid share shall not be considered as a share warrant

In our view, partly‑paid shares should be supported by a concrete plan or blueprint specifying when the call money is expected to be raised along with its purpose. This includes:

  • A defined timeline for making the call on unpaid money;

  • A specific purpose for which the call money will be used; and

  • An upfront subscription amount that is significant and reflects commitment, rather than being a token.

Even if an exact date cannot be determined, it is advisable to link the call to milestones/events ,such as regulatory approvals, project launches, or specific capital needs, rather than leaving it open-ended. This approach distinguishes a legitimate capital-raising intent from doppelganger design of warrants.

Situation where a partly-paid share shall be considered as a share warrant

A partly-paid share may raise regulatory concerns when above conditions do not exist. This includes situations where the initial application amount is nominal, resulting in minuscule capital infusion. Additionally, if the call structure is vague and lacks a defined timeline or commercial justification, it creates ambiguity around the company’s intention to actually raise the remaining capital. The concern is further amplified when the Board of Directors, which holds the discretion to make the call on these partly-paid shares, is influenced or controlled by the very investors who subscribed to these shares. In such scenarios, the obligation to pay the balance amount may become just theoretical.

Conclusion

The intention behind partly-paid shares is to raise capital while allowing the issuer to secure future source of funding, However, when a minuscule amount is paid at the time of subscription of partly-paid shares and the remaining calls are deferred for a long period without any definite /concrete plan, this raises concern as sighted above and from a valuation perspective may not be seen as a partly-paid shares.

[1] Economic Times

[2] Economic Times

[3] Economic TImes

[4] Regulation 67 of SEBI ICDR, 2018

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Share warrants under cloud – are companies not allowed to issue share warrants?

A Guide for AIF Managers on Investor Eligibility and Regulatory Restrictions

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Simrat Singh, Senior Executive | finserv@vinodkothari.com

Introduction

An AIF raises capital by issuance of units, which are privately placed.  Most AIFs follow a commitment–drawdown model, under which investors agree upfront to commit a specified amount of capital (‘committed capital’). The AIF manager then calls this committed capital, either in full or in tranches, as investment opportunities arise (‘drawdown’). This model helps the AIF to minimise the negative carry that would result from raising investments which are yet to be invested. 

This fund-raising process is shaped not only by SEBI’s AIF framework but also by the oversight of the respective sectoral regulators of the relevant investors. AIFs are meant strictly for sophisticated investors, and as such, various categories of AIF investors, such as insurance companies, pension funds, banks and NBFCs, etc. are subject to their respective regulations. When they invest in an AIF, they must comply with SEBI’s rules as well as the investment norms prescribed by their own regulators, each seeking to regulate how the capital of the investor is deployed. In fact, SEBI regulations are agnostic as to who the investor is, hence, most of the SEBI regulations relate to the AIF or the manager, with limited provisions dealing with investors. For example, whether and to what extent an insurance company or a pension fund can invest in an AIF is driven by the guidelines issued by the sectoral regulators such as IRDAI or PFRDA.

In this article, we try to bring together, in one place, the key regulatory norms imposed by various regulators; while these are primarily meant for the investor, however, it will be useful for the AIF managers to keep in mind these restraints while expecting or inviting investments from different categories of investors.

Categories of investors and regulatory restrictions on each category

Minimum investment norms: Common across all categories

  1. ₹25 crore for investors in Large Value Funds (reduced from ₹ 70 Crore per investor vide SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2025) [Reg. 2(1)(pa)];
  2. ₹1 crore for other investors [Reg 10(c)];
  3. ₹25 lakh for employees or directors of the AIF, manager, or sponsor [Reg 10(c)];
  4. No minimum for units issued to employees solely for profit-sharing (and not capital contribution) [Para 4.6 of AIF Master Circular];
  5. For open-ended AIFs, the initial investment must meet the minimum threshold, and partial redemptions must not reduce the holding below this minimum [Para 4.7 of AIF Master Circular].

Individuals

An AIF may raise funds from individual investors, whether resident, non-resident (NRI), or foreign, through private placement, subject to the following conditions (Refer Reg. 10(a) of AIF Regulations r/w Chapter 4 of AIF Master Circular).

  1. Foreign investors: A foreign investor must:
    1. be a resident of a country whose securities market regulator is a signatory to the IOSCO Multilateral MoU (Appendix A) or has a Bilateral MoU with SEBI; or
    2. be a government or government-related investor from a country approved by the Government of India, even if the above condition is not met.

Additionally, neither the investor nor its beneficial owner1:

  1. May be listed on the UN Security Council Sanctions List; or
  2. may be a resident of a country identified by the FATF as having serious AML/CFT deficiencies or insufficient progress in addressing such deficiencies.

If a foreign investor ceases to meet these conditions after admission, the AIF manager must stop making further drawdowns from that investor until compliance is restored.

  1. Joint Investments: Joint investments, for the purpose of investment of not less than the minimum investment amount in the AIF, are permitted only between:
    1. an investor and spouse;
    2. an investor and parent; or
    3. an investor and child.

A maximum of two persons may invest jointly. Any other combination of joint investors must individually meet the minimum investment threshold. (Refer Reg. 10(c) of AIF Regulations r/w Chapter 4 of AIF Master Circular)

  1. Terms of Investment: The terms agreed with investors cannot override or go beyond the disclosures in the PPM [Para 4.3 of AIF Master Circular].
  2. The total number of investors is limited to 1000 investors per scheme; also note that an AIF cannot make a public offer. AIF units are commonly offered through distributors; but even the distributors cannot make an open offer (Please refer to our resource on Dos and Don’ts for AIF Distributors and AIF Managers).

Insurance Companies

  1. Permissible AIF Categories [Para 1.5 of Investments – Master Circular, 2022 read with IRDAI Circular No. IRDAI/F&I/CIR/INV/074/04/2021 dated 05.04.2021]: 
    1. Category I AIFs: Infrastructure Funds, SME Funds, Venture Capital Funds, and Social Venture Funds (‘Specified Cat I AIFs’);
    2. Category II AIFs: Only where at least 51% of the corpus is proposed to be invested in infrastructure entities, SMEs, venture capital undertakings, or social venture entities (‘Specified Cat II AIFs’).
    3. Investment in a Fund of Fund (‘FoF’) is allowed only if such FoF does not directly or indirectly invest funds outside India (Refer Section 27E of Insurance Act, 1938). This is to be ensured by inserting a clause in the Fund offer Documents executed by FoF to restrain such FoF investing into AIFs which invest in overseas companies/funds. Further, investment is not allowed in an AIF which in-turn has an exposure to a FoF in which the insurer already invested. Lastly, no investment in an AIF is allowed which undertakes leverage/borrowing other than to meet operational requirements. 

Compliance of conditions laid down in (iii) are to be certified by the concurrent auditor of the insurer and filed along with quarterly periodical returns. Notably, insurance companies are prohibited from investing in Cat III AIFs

  1. Prohibited Structures: Insurers shall not invest in AIFs that:
    1. offer variable rights attached to units.
    2. invest funds outside India either directly or indirectly [s. 27E of Insurance Act, 1938];
    3. are sponsored by persons forming part of the insurer’s promoter group;
    4. are managed a manager who is controlled, directly or indirectly, by the insurer or its promoters;
  2. Investment Limits: 
    1. For life insurers, combined exposure to AIFs and venture capital funds is capped at 3% of the relevant insurance fund2.
    2. For general insurers, the cap is 5% of total investment assets3.

Exposure to any single AIF cannot exceed the lower of 10% of the AIF’s corpus or 20% of the insurer’s total AIF exposure. For Infrastructure Funds, the 10% limit is enhanced to 20%.

Banks and other Regulated Entities (REs)

Banks and other REs may invest in Category I and Category II AIFs, subject to layered limits:

  1. Bank level: Not more than 10% of the AIF corpus.
  2. Group level: Up to 20% without RBI approval, and up to 30% with prior RBI approval, subject to capital adequacy and profitability conditions.
  3. System level: Aggregate investments by all regulated entities cannot exceed 20% of the AIF corpus.

Banks must ensure that AIF investments do not circumvent banking regulations by creating prohibited indirect exposures. Banks are not permitted to invest in Category III AIFs, except for the minimum sponsor contribution where a bank subsidiary sponsors such a fund. For a more detailed discussion on Banks’ investment in AIFs, refer to our resource here. 

NBFCs

An NBFC shall not individually contribute more than 10 percent of the corpus of an AIF Scheme. [See Para 8 of RBI ( NBFC –  Undertaking of Financial Services) Directions, 2025]. The system-level investment limit of 20% for all REs shall also apply. Notably, unlike banks, NBFCs can invest in Cat III AIFs. 

Pension, Provident and Gratuity Funds

Pursuant to a 15 March 2021 notification, non-government Provident Funds, Superannuation Funds, and Gratuity Funds may invest up to 5% of their investible surplus in Specified Cat I AIFs and Specified Cat II AIFs, classified as “Asset Backed, Trust Structured and Miscellaneous Investments”.

Key conditions include:

  • Minimum AIF corpus of ₹100 crore;
  • Maximum exposure of 10% to a single AIF (not applicable to government-sponsored AIFs);
  • Investments restricted to India-based entities only;
  • The AIF sponsor and manager must not be part of the fund’s promoter group.

For Government  Sector Schemes such as UPS/NPS/NPA Lite/Atal Pension Yojna and Corporate CG schemes, the conditions are the same as above for non-government pension funds. 

Mutual Funds

Mutual funds are governed by the SEBI (Mutual Funds) Regulations, 1996. The Seventh Schedule to these regulations sets out the permissible investment universe. Units of AIFs are not included, and accordingly, mutual funds cannot invest in AIF units.

  1. beneficial owner as determined in terms of sub-rule (3) of rule 9 of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 ↩︎
  2. The relevant insurance fund would refer to the specific fund of a life insurer from which an investment is made, rather than the insurer’s overall balance sheet. This is because Life insurers maintain separate, ring-fenced funds for different lines of business, such as the life fund, pension fund, annuity fund or ULIP fund and investments must be made out of, and limits calculated with reference to, the particular fund whose money is being deployed. ↩︎
  3. Investment assets would refer to the total pool of assets held by a general insurer that are available for investment, across all lines of non-life insurance business. Unlike life insurers, general insurers do not maintain separate, ring-fenced policyholder funds for each product. Instead, premiums collected from various non-life insurance policies are invested as a consolidated portfolio, and regulatory investment limits such as exposure to AIFs are calculated with reference to the insurer’s aggregate investment assets shown on its balance sheet. ↩︎

See our other resources on AIFs:

  1. CIV-ilizing Co-Investments: SEBI’s new framework for Co-investments under AIF Regulations
  2. Understanding the Governance & Compliance Framework for AIFs
  3. FAQs on specific due diligence of investors & investments of AIFs;
  4. RBI bars lenders’ investments in AIFs investing in their borrowers;
  5. Capital subject to ‘caps’: RBI relaxes norms for investment by REs in AIFs, subject to threshold limits;
  6. Can CICs invest in AIFs? A Regulatory Paradox;
  7. Trust, but verify: AIFs cannot be used as regulatory arbitrage;
  8. 2020 – Year of change for AIFs;
  9. AIF ail SEBI: Cannot be used for regulatory breach;

Keeping It Private: Do’s and Dont’s For AIF distributors

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Simrat Singh and Manisha Ghosh | finserv@vinodkothari.com 

Alternative Investment Funds (AIFs) are privately pooled investment vehicles that are registered with and regulated by SEBI. These funds raise capital from a group of investors and deploy it in accordance with pre-defined investment strategies that are disclosed upfront. The returns generated from such investments, after deducting applicable expenses, are distributed back to the investors.

As per Regulation 4(b) of the SEBI (Alternative Investment Funds) Regulations, 2012, (‘AIF Regulations’) AIFs are explicitly prohibited, through their constitutional documents, from making any public invitation to subscribe to their securities. SEBI has also reiterated this position in its FAQs (see FAQ No. 11). While this preserves the private nature of AIFs, it often limits managers’ ability to reach the right investors, as they cannot publicly advertise their schemes. In many cases, managers first design a specific investment strategy and then seek investors whose risk and investment appetite aligns with it, requiring direct, one-on-one communication. To focus on their core function of managing investments, AIF managers may not want to handle investor outreach directly. Instead, delegate this ‘distribution function’ to intermediaries who already have the required network and access  to investors. Although the AIF Regulations do not explicitly provide for the provisions governing the eligibility, role and responsibilities of the AIF distributors, SEBI, through a 2023 Circular, has acknowledged their role and prescribed a framework for distributor’s commission.

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RPTs: Understanding the exact nature of Omnibus Approval

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– Pammy Jaiswal | corplaw@vinodkothari.com

Understanding the exact nature of Omnibus ApprovalDownload

Click here to watch the related video.

Our other resources:

  1. Related Party Transactions- Resource Centre
  2. SEBI approves relaxed norms on RPTs 
  3. Moderate Value RPTs : Interplay of disclosure norms and impracticalities

Webinar on Loan transfers, BT and Syndication: Guide to Banks and NBFCs

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Our Resources on the same:

  1. 3 Ss of Credit Risk Distribution: Selling, Sharing and Substitution
  2. Do Balance Transfers Count as Loan Transfers?

IBC (Amendment) Bill, 2025: Key Recommendations of the Select Committee

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– Neha Malu, Associate | resolution@vinodkothari.com

In a major overhaul of the IBC, 2016, the IBC (Amendment) Bill, 2025 proposed a set of far reaching changes, introducing several strategic initiatives aimed at addressing structural bottlenecks, strengthening creditor protection and improving the efficiency of the insolvency resolution framework [Read our detailed article on the Amendment Bill here]. The Bill was referred to a Select Committee of Parliament for review, which examined the proposed amendments in detail and made recommendations on several provisions. Below we discuss the key changes suggested by the Select Committee in its Report on the proposals in the Bill: 

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SEBI removes redundancy to ease compliance

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– Team Corplaw | corplaw@vinodkothari.com

SEBI removes redundancy to ease complianceDownload

See our other resources:

  1. SEBI Clears the Way : HVDLEs Set to Move from “High Value” to “Higher Value” 
  2. SEBI fixes the cut-off date for re-lodgement of physical transfers

3 Ss of Credit Risk Distribution: Selling, Sharing and Substitution

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– Anita Baid & Dayita Kanodia | finserv@vinodkothari.com

Guide to loan transfers, balance transfers and loan syndications

Nothing lasts forever. Not the good things, not the bad. So just find what makes you happy, and do it for as long as you can – Ashley Poston.

Background

Loans originated by lenders are not always meant to be retained forever. Banks routinely downsell, share, or reshuffle credit exposures to manage liquidity, optimize balance sheets, rebalance risk, or execute strategic exits. Sometimes, borrowers also change their lenders. This practice has existed all over the world.

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