SCHEDULE - III - Fair value - SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999

[1] [Schedule III] (Clause 2.1) (i) The fair value of a stock option is the price that shall be calculated for that option in an arm s length transaction between a willing buyer and a willing seller. (ii) The fair value shall be estimated using an option-pricing model (for example, the Black-Scholes or a binomial model) that takes into account as of the grant date the exercise price and expected life of the option, the current price in the market of the underlying stock and its expected volatility, expected dividends on the stock, and the risk-free interest rate for the expected term of the option. (iii) The fair value of an option estimated at the grant date shall not be subsequently adjusted for changes in the price of the underlying stock or its volatility, the life of the option, dividends on the stock, or the risk-free interest rate. (iv) Where the exercise price is fixed in Indian Rupees, the risk-free interest rate used shall be the interest rate applicable for a maturity equal to the expected life of the options based on the zero-coupon yield curve for Government Securities. (v) The expected life of an award of stock options shall take into account the following factors: (a) The expected life must at least include the vesting period. (b) The average lengths of time similar grants have remained outstanding in the past. If the company does not have a sufficiently long history of stock option grants, the experience of an appropriately comparable peer group may be taken into consideration. (c) The expected life of ESOSs should not be less than half of the exercise period of the ESOSs issued until and unless the same is supported by historical evidences with respect to ESOSs issued by the company earlier. (vi) If the company does not have a sufficiently long history of traded stock prices to estimate the expected volatility of its stock, it may use an estimate based on the estimated volatility of stocks of an appropriately comparable peer group. (vii) The estimated dividends of the company over the estimated life of the option may be estimated taking into account the company s past dividend policy as well as the mean dividend yield of an appropriately comparable peer group. (viii) Justification shall be given for significant assumptions. If at the time of further issue of ESOS/ESPS there are any changes in the assumptions, reasons for the same shall be given. ******** [1] Inserted vide circular no. SEBI/PMD/MBD/ESOP/2/2003/30/06 dated June 30, 2003, w. e. f. June 30, 2003.