SEBI REGULATIONS – A BACK OFFICE PERSPECTIVE Seminar Organised by ICSI & RAIN March 19, 2005

SEBI REGULATIONS – A BACK OFFICE PERSPECTIVE Preferential Allotment Delisting

What is Preferential Allotment If shares are issued other than as a ‘rights issue’ or ‘public issue’ or ‘offer for sale’, the issue is commonly referred to as ‘preferential issue’ and necessary compliances are required for the purpose As per DIP Guidelines, “Preferential Allotment” means an issue of capital made by a body corporate in pursuance of a resolution passed under Sub -section (1A) of Section 81 of the Companies Act, 1956.

Preferential Allotment - Regulatory Framework Companies Act, Sections 67, 75, 81 and 173 SEBI (DIP) Guidelines, Chapter XIII : Guidelines for Preferential Issues Listing Agreement SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 SEBI (Prohibition of Insider Trading) Regulations, 1992 Companies (Issue of Share Certificates) Rules, 1960 SEBI (Delisting of Securities) Guidelines, 2003 Depositories Act, 1996 Unlisted Public Companies (Preferential Allotment) Rules, 2003 Stamp Act Guidelines issued by GOI/SEBI/RBI for preferential allotment if made to Foreign Institutional Investors/ Overseas by issuing GDRs/ADRs/FCCBs

Preferential Allotment – Listing Agreement Clause 24(a): In-principle approval –Issuer to obtain ‘in-principle’ approval for listing before issuing further shares or securities. Clause 40A (iii) –No preferential allotment can be made, if such allotment or offer result in reducing the non-promoter holding below the limit of public shareholding specified under DIP Guidelines Clause 43: Quarterly statement –Issuer to furnish a statement on a quarterly basis indicating the variations between projected utilisation of funds and/ or projected profitability statement made by it or object/s stated in the explanatory statement to the notice for the general meeting for considering preferential issue of securities and the actual utilisation of funds and/ or actual profitability.

Preferential Allotment – Listing Agreement Clause 43: Quarterly statement –The statement shall be given for each of the years for which projections are provided in the explanatory statement & shall be published in newspapers simultaneously with the quarterly financial results as required under clause 41. –If there are material variations between the projections and the actual utilisation/ profitability, the company shall furnish an explanation therefor in the advertisement and shall also provide the same in the Directors’ Report. Clause 49 –Quarterly disclosure of uses/application of funds raised by Preferential Allotment –Annual Statement of funds utilised for purposes other than stated purposes – certified by statutory auditors to the Audit Committee till such time, money raised is fully spent

Preferential Allotment – DIP Guidelines Provisions of Chapter XIII Pricing Currency of Shareholders’ Resolution Lock-in Requirements Situations where preferential allotment is prohibited Other Requirements Exemptions

Pricing (13.1.1) Price not less than the higher of the following: –The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; OR –The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date. "relevant date" means the date thirty days prior to the date on which the meeting of general body of shareholders is held Stock Exchange means a stock exchange in which the highest trading volume in respect of the shares of the company has been recorded. Preferential Allotment – DIP Guidelines

Pricing (Contd…) Pricing of Shares arising out of warrants (13.1.2) –While pricing shall be calculated in the same manner, the relevant date at the option of the issuer could be: 30th day prior to date of shareholder meeting 30th day prior to the date of eligibility to apply/get shares against warrants. Pricing of shares on conversion of PCDs/FCDs (13.1.3) –Pricing shall be calculated in same manner as determined for allotment of shares in lieu of warrants Preferential Allotment – DIP Guidelines

Currency of Shareholders resolution (13.4) Shareholders’ resolution for preferential issue of shares/ other instrument is to be implemented (by making allotment and despatch of certificates) within 15 days from the date of passing of the resolution (from the date of regulatory or government approval, if required) If allotment and despatch of certificates are not completed within 15 days from the date of shareholders’ resolution fresh consent will be necessary; consequently the ‘relevant date’ will also change.

Preferential Allotment – DIP Guidelines Lock-in Requirements (13.3) Lock-in of 1 year from the date of allotment shall be applicable for all preferential allotments made to all categories of allottees including promoters Shares allotted on preferential basis to promoters/promoter group shall be locked in for 3 years from the date of allotment Overall lock-in for promoter holding shall not exceed 20% of the post issue capital Lock-in already complied shall be reduced while calculating lock-in on shares arising upon conversion, etc. Pre-preferential allotment holding of the allottee shall also be kept under lock-in from the relevant date up to 6 months from the date of making preferential allotment Locked in securities can be transferred inter se amongst Promoters/Promoter Group or to a new promoter or person in control of the Company subject to SAST and subject to continuation of lock-in the hands of the transferees for the remaining period

Preferential Allotment – DIP Guidelines Situations where Preferential Issue can’t be made (13.3) Conditions for continuous listing not complied with Partly paid-up securities Pre-allotment Shareholding of the allottee not in demat form To those shareholders who have sold their shares during 6 months prior to the relevant date

Preferential Allotment – DIP Guidelines Other Provisions Currency of instruments (Warrants/PCDs/FCDs/Others), with a provision for the allotment of equity shares at a future date, shall not exceed beyond 18 months from the date of issue of the relevant instruments. (13.2) If warrants are allotted, at least 10% of the price fixed shall be payable on allotment of warrant/ PCD; such amount to be adjusted on exercising option. In case option is not exercised, amount will be forfeited. ( ) The statutory auditors of the Company shall certify that the issue is being made in accordance with these Guidelines; the Certificate shall be laid before the general meeting convened to consider preferential issue (13.5)

Preferential Allotment – DIP Guidelines Other Provisions (Contd…) In case preferential allotment is to promoters, their relatives, associates/related entities for consideration other than cash, valuation of assets shall be done by an independent qualified valuer and the valuation report submitted to the exchanges on which shares of the Issuer Company are listed. ( c) Details of money utilised/ non-utilised out of the preferential issue proceeds shall be disclosed under an appropriate head in the Balance Sheet of the Company. (13.5A)

Preferential Allotment – DIP Guidelines Exemptions (13.7) - Guidelines will not be applicable, where shares are issued : In pursuance to the merger and amalgamation scheme approved by High Court In accordance with the provisions of Rehabilitation package approved by BIFR To All India Public Financial Institutions in accordance with the provisions of Loan Agreements

Preferential Allotment – Other Regulatory Provisions SEBI (Substantial Acquisition of Shares and Takeovers) Regulations Shares cannot be allotted to a person, who together with persons acting in concert with him, would be entitled to exercise more than 55% of the voting rights of the Company post-allotment of the share capital Companies Act, 1956 Return of allotment of Shares in Form 2 to be filed with ROC Further listing of securities issued under Preferential allotment with the Stock Exchanges Stamp Act Requisite stamp duty as per State Stamp Act should be paid on the securities issued under preferential allotment

Time Table – Preferential Allotment Relevant Date 30 days General Meeting Offer Open Despatchof ShareCertificates Board meeting Despatch of Individual Notices Offer Close Allotmentof Shares Completion of formalities 25 days 15 days

SEBI REGULATIONS – A BACK OFFICE PERSPECTIVE Delisting of Securities

Delisting - Regulatory Framework SEBI (Delisting of Securities) Guidelines, 2003 Listing Agreement Companies Act, 1956 –Section 61 –Notice of General Meeting, Special Resolution, etc. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 SEBI (Ombudsman) Regulations, 2003

Modes of Delisting Compulsory Delisting –Delisting Guidelines –By Operation of Law eg. Decision of BIFR, Provision of SEBI (Ombudsman) Regulations Voluntary Delisting –Voluntary delisting from one or more of Stock Exchange(s) –Pursuant to Takeover –Pursuant to Rights Issue

Delisting – Listing Agreement Clause 32 –Disclosure stating the fact of delisting together with reasons is required in the Directors Report Clause 36 –Intimation to the Stock Exchanges about Voluntary delisting by the company from the stock exchange(s) Clause 40A –Company shall maintain the level of non-promoter holding at the level of public shareholding as required at the time of listing, on a continuous basis.

Delisting – SEBI Guidelines, 2003 Applicability –Voluntary delisting sought by the promoters –Any acquisition of shares consequent to which the public shareholding falls below the minimum limit specified in the listing conditions or listing agreement –Compulsorily delisting by the stock exchanges –Delisting pursuant to rights issue A Company is not permitted to use Buy Back to reduce public shareholding and get its shares delisted

Concept of ‘Public Shareholding’ Takeover Regulations, 1997: As per these Regulations, “public shareholding” means shareholding held by persons other than promoters as defined under clause (h) of the said Regulations Securities Contract (Regulations) Rules, 1957: One of the requirements of listing is that a Company should offer at least 25% to public. 10% limits are available subject to fulfillment of certain conditions (Rule 19(2)(b)) SEBI DIP Guidelines, 2000 requires the Issuer to comply with Rule 19(2)(b) of Securities Contract (Regulation) Rules, 1957 SEBI Delisting Guidelines, 2003: As per the Guidelines, public shareholding shall be the shareholding in a company held by persons other than the promoter, the acquirer or the persons acting in concert with him and the term ‘public holders of securities’ shall be construed accordingly Relevance: A Listed Company has to ensure that public shareholding does not fall below the minimum level, otherwise the shares will have to be delisted.

Delisting – SEBI Guidelines, 2003 Voluntary Delisting - Provisions A Company listed for a minimum period of 3 years eligible Exit opportunity to be given to investors through a reverse book building mechanism No exit opportunity required in cases where the securities continue to be listed in a stock exchange having nation wide trading terminals Amount of consideration for the tendered and accepted securities shall be settled in cash In case offer resulted in acceptance of fewer number of shares than the total shares outstanding and as a consequence the public shareholding does not fall below the minimum limit specified by the listing conditions or the listing agreement, the offer shall be considered to have failed and no securities shall be acquired pursuant to such offer

Delisting – SEBI Guidelines, 2003 Voluntary Delisting - Provisions Company to intimate to the Stock Exchanges its decision to voluntary delist the securities Prior approval of shareholders by a special resolution necessary Promoters to make a public announcement before making application for delisting from all exchanges Appointment of Merchant Banker Appointment of Trading Members and Bidding Centres Application to Stock Exchanges for delisting after completion of all prescribed formalities

Delisting – SEBI Guidelines, 2003 Exit Price – Provisions for Voluntary Delisting Offer Price shall have a Floor Price and no maximum price Floor Price will be the average of traded price of the preceding 26 weeks from the date of public announcement Final Price shall be the price at which the maximum number of shares has been offered. Example: Offer QuantityOffer PriceRemarks 50120Floor Price Final Price

Time Table – Voluntary Delisting Shareholders Approval By Special Resolution Min 3 days Public Announcement Offer Open Closure ofOffer forholders ofphysicalcertificates Announcement -Within 2 Working Days -Final Price -Acceptance of Price Option to revise bid by shareholders Appointment of Merchant Banker, Trading Members & Bidding Centres Maintenance of Escrow A/c Offer Close FinalSettlementDay 15 days3 days6 months Right of remaining shareholders to tender securities Applicationto StockExchangesfor delisting

Delisting – SEBI Guidelines, 2003 Voluntary Delisting via Rights Issue Promoters/Persons in Control subscribe the unsubscribed portion in a Rights Issue which may result in public holding falling below permissible minimum level Delisting permitted if Promoters/ Persons in control agree to buyout remaining holders at the price of rights issue Promoters/ Persons in control make an ‘Offer for Sale’ within 3 months to raise public shareholding

Delisting – SEBI Guidelines, 2003 Voluntary Delisting via Takeover In case, where post acquisition, public shareholding in the target company would reduce to a level below the limit specified in the Listing Agreement for the purpose of listing on continuous basis, the acquirer may acquire such shares or Voting Rights only in accordance with the guidelines regarding delisting of securities specified by SEBI Acquisition of shares in terms of SEBI (Delisting of Securities) Guideliens, 2003 would not trigger the Takeover Regulations

Delisting – SEBI Guidelines, 2003 Compulsory Delisting - Provisions Stock Exchanges may delist companies –which have been suspended for a minimum period of six months for non-compliance with the Listing Agreement –Other grounds No trading in Company’s securities Non-performance in terms of revenue/income/profits Minimal public interest Negligible tangible assets Unfavourable track record of compliance with the Listing Agreement for the past three years Unfavourable Promoters’ Directors’ track record Company is sick and unable to meet current debt obligations Other relevant information available about the Company, its promoters/directors, project, litigations, etc. In case of compulsory delisting,the promoter of the company shall be liable to compensate the security-holders of the company by paying them the fair value of the securities held by them and acquiring their securities, subject to their option to remain security-holders

Delisting – SEBI Guidelines, 2003 Circumstances under which securities cannot be delisted Minimum listing period of 3 years not completed Outstanding convertible Instruments Minimum number of Shares to be acquired to enable delisting is not tendered under the Exit Offer Additional conditions as may be prescribed by Stock Exchanges not fulfilled

Delisting – SEBI Guidelines, 2003 Reinstatement of delisted securities Reinstatement of delisted securities permitted by Stock Exchanges with a cooling period of 2 years Relisting is based on conditions prevailing at that time and the application for relisting to be scrutinised by Central Listing Authority

Delisting – Other Regulatory Provisions SEBI (Ombudsman) Regulations, 2003 Securities of the Company shall be liable for delisting in case of non-implementation of the Award of SEBI under SEBI (Ombudsman) Regulations, 2003 Companies Act, 1956 A Company shall not, at any time, vary the terms of a contract referred to in the prospectus or statement in lieu of prospectus, except subject to the approval of, or except on authority given by, the company in general meeting. [Section 61]

Back Office Preparation Compilation of Share Prices and calculation of appropriate price, computation of exit price etc. Drafting of Shareholders’ Resolution containing relevant details as specified Calculation of Lock in Shares Drafting of Public Announcement, Advertisement, Application to Stock Exchanges Taking of Auditor’s Certificate Disclosures in Balance Sheet / Director’s Report

Back Office Preparation Projection of funds to be raised, utilisation of funds, variation if any, reasons for material variation etc. Preparation of Quarterly / Annual Statement Obtaining Audit Committee’s Views, if any Appointment of Valuer, if required Allotment and Issue within time

Back Office Preparation Internal and External Interactions –Shareholders –Stock Exchanges –Internal Accounts, Finance Departments –Audit Committee –Statutory Auditors –Valuer - Merchant Banker / CA –Bankers –Brokers, Bidding Centres etc. –Press

AND DON’T FORGET, ALL THIS HAS TO BE DONE BY WE – COMPANY SECRETARIES

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