More Indian companies are turning to partly-paid shares again. At first glance, this appears to be a standard approach to raising capital. But dig a little deeper and in some cases, these instruments are starting to behave a lot like share warrants without the checks and balances that usually apply to warrants. That raises real questions for investors around risk, dilution, valuation, and governance.
The Big Picture
Partly-paid shares are equity shares where investors pay only part of the price upfront, with the remainder due later when the company makes a ‘call’. There’s nothing inherently wrong with this; it’s a long-standing and legal structure.
What’s changing is how they’re sometimes being used—especially in unlisted companies and start-ups. In a growing number of cases, partly-paid shares are being designed to look and feel like share warrants. The worry isn’t the instrument itself, but the intent behind it.
In some structures, investors—often promoters or closely aligned investors—put in a small amount today and effectively lock in the current valuation. Most of the actual cash commitment is pushed far into the future, with no real certainty on when, or even whether, it will be called.
How Share Warrants Normally Work
A share warrant is essentially an option on equity:
- You pay an option premium upfront.
- You get the right—but not the obligation—to buy shares later at a fixed price.
- If the share price goes up, you exercise the option and benefit.
- If it doesn’t, you walk away, losing only the premium.
Because warrants give this kind of optionality, regulators impose guardrails: pricing rules, fair-value option pricing, and clear time limits (typically up to 18 months for listed companies).
Where Partly -paid Shares Start To Resemble Warrants
On paper, partly-paid shares and warrants are very different. In real life, the line can get blurred.
In theory:
- With partly-paid shares, investors are supposed to pay future calls when asked.
- They become shareholders immediately.
- Their risk is limited to what they’ve paid so far, but the obligation to pay remains.
In practice, some structures look very different:
- The upfront payment is tiny—almost like an option premium.
- There’s no clear timeline for future calls, sometimes stretching five to ten years.
- The board deciding on calls is controlled or heavily influenced by the same investors holding these shares.
In these cases, the ‘obligation’ to pay later exists mostly on paper. Economically, the investor enjoys warrant-like upside with very limited downside—without paying a fair price for that optionality.
Why Investors Should Care
- Limited Downside, Full Upside
The investor risks only a small upfront amount but gains immediate ownership exposure. That creates a very asymmetric payoff. - Immediate Dilution for Others
Even though only part of the money comes in, the shares are issued upfront. Existing shareholders get diluted long before the company actually receives the full capital. - Governance Red Flags
If promoters or friendly investors control the board, calls on unpaid capital can be postponed indefinitely. What looks like committed funding quietly turns into an option. - Easy Arbitrage in Unlisted Companies
In unlisted firms, partly-paid shares can be transferred:
• An investor who paid very little upfront can sell later at a higher valuation.
• The buyer inherits upside exposure while the unpaid amount remains locked in at old prices.
This allows value capture without matching capital infusion—something that wouldn’t be allowed with warrants in listed markets.
A Simple Example
Suppose a share is valued at ₹150. An investor pays just ₹30 upfront through a partly-paid share. Two years pass, no further calls are made, and the company’s valuation improves. The investor sells the partly-paid share for ₹80.
The outcome: the investor makes a profit after funding only a fraction of the company’s needs, while the unpaid amount remains priced at the old valuation.
In listed markets, price discovery limits this distortion. In unlisted or closely held companies, the effect can be material.
When Partly-paid Shares Make Sense
Not all partly-paid shares are problematic. They work well when:
- There’s a clear timeline or milestone-linked plan for future calls.
- The use of unpaid capital is clearly defined—say, project execution or regulatory approvals.
- The upfront payment is meaningful and signals genuine commitment.
In these cases, partly-paid shares do what they’re supposed to do: enable staged capital raising.
When they become a concern
Alarm bells should ring when:
- The initial payment is nominal.
- Calls are open-ended with no commercial logic.
- The people who benefit from delaying payment also control the decision-making.
At that point, the instrument stops looking like equity funding and starts looking like a back-door warrant.
The Bottom Line
Partly-paid shares aren’t inherently bad. But when they’re structured loosely, they can quietly shift risk away from a few investors and onto the company and its other shareholders.
If you’re evaluating such an issuance, ask three simple questions:
- How much real money is coming in today?
- When, and under what conditions, will the rest be called?
- Who controls that decision?
If the answers are vague, what’s being called a partly-paid share may, in substance, be a warrant in disguise, thus raising legitimate concerns for existing investors and highlighting potential gaps in corporate governance.
(Pammy Jaiswal is a partner, while Saket Kejriwal is an assistant manager at Vinod Kothari & Company)
