In India it is very common for the promoters to sell substantial stake in the company when the price is right. Then immediately after that do a preferential allotment to themselves or kins and relatives.
Often this preferential allotment is made in form of warrants. Promoters, who subscribe to such warrants, are required to pay upfront only a small portion of the warrant issue size and pay the balance amount in 18 months. Promoters, in most cases, exercise the option of converting these warrants into shares only if the share price of the company is higher than the pre-fixed price of the equity warrant.
By law each and every investor is an equal partner in any company. So why were the common investors not allowed to subscribe to this issue?
The management of all Indian companies are always rewarded generously for their efforts. They are given huge salaries, bonus, perks and even stock options (ESOS) I am OK with that, but these warrants are embezzlements. They dilute the holdings of the common investors at a throw away price and wipe out all the profits which we had expected. What hurts me the most is that most people are oblivious to this malpractice.
One of the biggest problem faced by Indian stock market is that even though by law, the investors are an equal partner, in the promoter’s minds, it still belongs to him.