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Monday April 30, 2012

Warrant poser, cash settlement calculation unfair say some

PETALING JAYA: The calculation of cash settlement for call warrants has come under the spotlight as some investors argue that the current method is unfair.

They argue that the calculation of cash settlement for call warrants should not be determined based on the average closing price of the last five days, but instead be based on the volume weighted average price of the last five days.

Currently under Bursa Malaysia's listing requirements, issuers of structured warrants are able to determine for themselves the calculation of cash settlement based on three options:

(i) The volume weighted average price; or

(ii) The average closing price; or

(iii) The closing price of the underlying share or exchange-traded fund on the market day immediately before the exercise or expiry date.

However, most issuers presently use the average closing price as the method to determine cash settlement. Some dealers feel that this may be unfair because if the closing price of the mother share gets depressed on the last five days, then the cash settlement figure drops. “This has happened in a few instances, so it raises the question of whether a more dynamic price determination ought to be considered,” said one dealer.

He cited examples of Malaysia Building Society Bhd's (MBSB) call warrants which expired on April 18 and the DRB-Hicom-CH which expired on April 26.

“For the last five days where the price of the mother share was being used to determine the cash settlement, the price of MBSB's mother share was depressed at the close of four out of the five days,” said the dealer.

MBSB-CA expired at 5pm on April 18. Looking at the intraday charts of MBSB on April 11, 12, 13, 16, and 17, the share prices closed at the low of its day for April 11, 12, 16 and 17. The share prices started dropping towards 4.30pm.

For example on April 17, MBSB opened at RM2.19 and reached an intraday high of RM2.25. By 4.30pm, however, the share price had started dropping and it eventually closed (at 5pm) at RM2.17.

Basically, the higher the mother share, the higher the cash settlement for the warrant holder.

The exercise ratio was 3 MBSB-CA for every one MBSB mother share at an exercise price of RM1.48.

MBSB's closing price of RM2.18 was the average of the closing prices for the shares on each of the five market days immediately before the expiry date.

In the case of DRB-Hicom-CH, it expired on April 26. On the last five days of its closing before expiry, which were April 20, 23, 24, 25 and 26, its share price also dipped lower from the RM2.60-RM2.68 range it was trading in the last three weeks. For those five settlement days, the stock closed at an average price of RM2.45.

While it only closed at its intra-day low on April 23, it did close near to its day's low for the other four days.

A Bursa official said that Bursa's current rules were in line with those of other exchanges such as Singapore Stock Exchange (SGX) and the Hong Kong Stock Exchange (HKEX).

“However, in the discharge of our obligation to ensure a fair and orderly market, Bursa Malaysia has and will continue to review the effectiveness of its rules to ensure they meet their intended objectives,” said the Bursa official.

He added that SGX and HKEX allowed for options (ii) and (iii) .

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