Chapter 13 - GUIDELINES FOR PREFERENTIAL ISSUES - SEBI (Disclosure and Investor Protection Guidelines) 2000

CHAPTER XIII GUIDELINES FOR PREFERENTIAL ISSUES 13.0 The preferential issue of equity shares/ Fully Convertible Debentures (FCDs)/ Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into or exchanged with equity shares at a later date, by listed companies whose equity share capital is listed on any stock exchange, to any select group of persons under Section 81(1A) of the Companies Act 1956 on private placement basis shall be governed by these guidelines. 13.1 Such preferential issues by listed companies by way of equity shares/ Fully Convertible Debentures (FCDs)/ Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into / exchanged with equity shares at a later date, shall be made in accordance with the pricing provisions mentioned below: 13.1.1 Pricing of the issue 13.1.1.1 1 (Where the equity shares of a company have been listed on a stock exchange for a period of six months or more as on the relevant date, the issue of shares on preferential basis 2 (, other than an issue of shares on preferential basis to Qualified Institutional Buyers not exceeding five in number,) shall be made at a price not less than higher of the following:) i) 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 ii) 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. 3 (13.1.1.2 Where the equity shares of a company have been listed on a stock exchange for a period of less than six months as on the relevant date, the issue of shares on preferential basis 4 (, other than an issue of shares on preferential basis to Qualified Institutional Buyers not exceeding five in number,) can be made at a price not less than the higher of the following: i) The price at which shares were issued by the company in its IPO or the value per share arrived at in a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956, pursuant to which the shares of the company were listed, as the case may be; OR a. The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the period shares have been listed preceding the relevant date; OR b. 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. Provided that on completing a period of six months of being listed on a stock exchange, the company shall recompute the price of the shares in accordance with the provisions mentioned in sub-clause (i) of clause 13.1.1.1 and if the price at which shares were allotted on a preferential basis under clause 13.1.1.2 was lower than the price so recomputed, the difference shall be paid by the allottees to the company.) 5 (13.1.1.3 An issue of shares on preferential basis to Qualified Institutional Buyers not exceeding five in numbers all be made at a price not less than 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.) Explanation: a) relevant date 6 ( 7 (for the purpose of clause 13.1.1)) means the date thirty days prior to the date on which the meeting of general body of shareholders is held, in terms of Section 81(1A) of the Companies Act, 1956 to consider the proposed issue 8 (; provided however that in respect of shares issued on preferential basis pursuant to a scheme approved under the Corporate Debt Restructuring framework of Reserve Bank of India, the date of approval of the Corporate Debt Restructuring package shall be the relevant date). b) stock exchange 9 ( 10 (for the purpose of clause 13.1.1)) means any of the recognised stock exchanges in which the shares are listed and in which the highest trading volume in respect of the shares of the company has been recorded during the preceding six months prior to the relevant date. 13.1.2 Pricing of shares arising out of warrants, etc. 13.1.2.1 (a) Where warrants are issued on a preferential basis with an option to apply for and be allotted shares, the issuer company shall determine the price of the resultant shares in accordance with 11 (Clause 13.1.1) above. (b) The relevant date for the above purpose may, at the option of the issuer be either the one referred in explanation (a) to 12 (Clause 13.1.1) above or a date 30 days prior to the date on which the holder of the warrants becomes entitled to apply for the said shares. 13.1.2.2 The resolution to be passed in terms of Section 81(1A) shall clearly specify the relevant date on the basis of which price of the resultant shares shall be calculated. 13.1.2.3 (a) An amount equivalent to atleast 13 (twenty five percent) of the price fixed in terms of Clause 13.1.1.1 above shall become payable for the warrants on the date of their allotment. (b) The amount referred to in sub-clause (a), shall be adjusted against the price payable subsequently for acquiring the shares by exercising an option for the purpose. (c) The amount referred to in sub-clause (a) shall be forfeited if the option to acquire shares is not exercised. 13.1.3 Pricing of shares on conversion 13.1.3.1 Where PCDs/ FCDs/ other convertible instruments, are issued on a preferential basis, providing for the issuer to allot shares at a future date, the issuer shall determine the price at which the shares could be allotted in the same manner as specified for pricing of shares allotted in lieu of warrants as indicated in Paras 13.1.2.1 13.1.2.2 above. 14 (13.1A The explanatory statement to the notice for the general meeting in terms of Section 173 of the Companies Act, 1956 shall contain: i. the object/s of the issue through preferential offer, ii. intention of promoters/ directors/ key management persons to subscribe to the offer, iii. shareholding pattern before and after the offer, iv. proposed time within which the allotment shall be complete v. the identity of the proposed allottees and the percentage of post preferential issue capital that may be held by them.) 15 (vi. in case of a preferential allotment to which clause 13.1.1.2 is applicable, requirements specified in proviso to clause 13.1.1.2 and proviso mentioned after sub-clause (e) of clause 13.3.1.) 16 ( 17 (13.1B) A listed company shall not make any preferential issue of equity shares, Fully Convertible Debentures, Partly Convertible Debentures or any other instrument which may be converted into or exchanged with equity shares at a latter date if the same is not in compliance with the conditions for continuous listing.) 18 (13.1C A listed company shall not make any preferential allotment of equity shares, FCDs, PCDs or any other financial instrument which may be converted into or exchanged with equity shares at a later date unless it has obtained the Permanent Account Number of the proposed allottees.) 13.2 Currency of financial instruments 13.2.1 In case of Warrants/ PCDs/ FCDs/ or any other financial instruments with a provision for the allotment of equity shares at a future date, either through conversion or otherwise, the currency of the instruments shall not exceed beyond 18 months from the date of issue of the relevant instrument. 13.3 Non-transferability of financial instruments 13.3.1 (a) The instruments allotted on a preferential basis to the promoter / promoter group as defined in Chapter VI in 19 (Explanation I, II and III to clause 6.8.3.2) of these guidelines 20 (and the shares allotted to such promoter / promoter group pursuant to exercise of options attached to warrants issued on preferential basis), shall be subject to lock-in of 3 years from the date of their allotment. (b) In any case, not more than 20% of the total capital of the company, including capital brought in by way of preferential issue, shall be subject to lock-in of three years from the date of allotment. 21 ((c) 22 (The instruments allotted on preferential basis and the shares allotted pursuant to exercise of options attached to warrants issued on preferential basis to the promoter / promoter group of the issuer, in addition to the instruments or shares specified in sub-clauses (a) and (b) of clause 13.3.1, shall be locked-in for a period of one year from the date of their allotment.)) 23 ((c-a) The instruments allotted on preferential basis and the shares allotted pursuant to exercise of options attached to warrants issued on preferential basis to any person other than the promoter / promoter group of the issuer shall be locked-in for a period of one year from the date of their allotment.) 24 ((d)) The lock-in on shares acquired by conversion of the convertible instrument 25 (other than warrants) 26 (Deleted), shall be reduced to the extent the convertible instrument 27 (other than warrants) 28 (Deleted) have already been locked-in. 29 ((e) the lock-in period in respect of the shares issued on preferential basis pursuant to a scheme approved under Corporate Debt Restructuring framework of Reserve Bank of India, shall commence from the date of allotment and shall continue for a period of one year and in case of allotment of partly paid up shares the lock-in period shall commence from the date of allotment and continue for a period of one year from the date when shares become fully paid up. 30 (Provided that where any amount payable by the allottee of shares under the proviso to clause 13.1.1.2 is not paid till the expiry of lock-in period mentioned in sub-clauses (a) to (e) above, lock-in period in respect of the shares issued to such allottee shall continue till the time the company receives such amount from such allottee.) (f) no listed company shall make preferential issue of equity shares / warrants / convertible instruments to any person unless the entire shareholding of such persons in the company, if any, is held by him in dematerialized form. (g) where the shares / warrants/ convertible instruments are issued on preferential basis, the entire pre preferential allotment shareholding of such allottees shall be under lock in from the relevant date upto a period of six months from the date of preferential allotment. (h) where the shares / warrants / convertible instruments are issued on preferential basis, the shareholders who have sold their shares during the six months period prior to the relevant date shall not be eligible for allotment of shares on preferential basis.) 31 (Provided that the Board may, on an application made by the issuer in respect of the preferential allotment of shares fully convertible debentures and partly convertible debentures, grant relaxation from the requirements of this sub-clause if the Board has granted relaxation to the company in terms of Regulation 29A of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.) Explanation: (a) For the purpose of this clause total capital of the company shall mean- (i) equity share capital issued by way of public/ rights issue including equity shares emerging at a later date out of any convertible securities/ exercise of warrants and (ii) equity shares or any other security convertible at a later date into equity issued on a preferential basis in favour of promoter/ promoter groups. (b) (i) For computation of 20% of the total capital of the company, the amount of minimum promoters contribution held and locked-in, in the past as per guidelines shall be taken into account. (ii) The minimum promoters contribution shall not again be put under fresh lock-in, even though it is considered for computing the requirement of 20% of the total capital of the company, in case the said minimum promoters contribution is free of lock-in at the time of the preferential issue. 32 (13.3.2 These locked in shares/instruments may be transferred to and amongst promoter/ promoter group or to a new promoter(s) or person(s) in control of the company, subject to continuation of lock-in in the hands of transferee(s) for the remaining period and compliance of Securities and Exchange Board of India (Substantial Acquisition of shares and Takeovers) Regulations, 1997, as applicable.) 13.4 Currency of shareholders resolutions 13.4.1 Allotment pursuant to any resolution passed at a meeting of shareholders of a 33 (company) granting consent for preferential issues of any financial instrument, shall be completed within a period of 34 (fifteen days) from the date of passing of the resolution. 35 (Provided that where the allotment on preferential basis is pending on account of pendency of any approval of such allotment by any regulatory authority or the Central Government, the allotment shall be completed within 15 days from the date of such approval.) 36 (Provided that where the Board has granted relaxation to the issuer in terms of regulation 29A of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, the preferential allotment of shares, fully convertible debentures and partly convertible debentures, shall be made by it within such time as may be specified by the Board in its order granting relaxation.) 37 (13.4.2 The equity shares and securities convertible into equity shares at a later date, allotted in terms of the above said resolution shall be made fully paid up at the time of their allotment.) Provided that payment in case of warrants shall be made in terms of clause 13.1.2.3 above.) 38 (13.4.2A Nothing contained in clauses 13.4.1 and 13.4.2 shall apply in case of allotment of shares and securities convertible into equity shares at a later date on preferential basis pursuant to a scheme of corporate debt restructuring as per the Corporate Debt Restructuring framework specified by the Reserve Bank of India. 39 (13.4.3) If allotment of instruments and dispatch of certificates is not completed within 40 (fifteen days) from the date of such resolution, a fresh consent of the shareholders shall be obtained and the relevant date referred to in explanation (a) in paragraph 13.1.1.1 above will relate to the new resolution.) 13.5 41 (Other Requirements) 13.5.1 (a) In case of every issue of shares/ warrants/ FCDs/ PCDs/ or other financial instruments having conversion option, the statutory auditors of the issuer 42 (company) shall certify that the issue of said instruments is being made in accordance with the requirements contained in these guidelines. (b) Copies of the auditors certificate shall also be laid before the meeting of the shareholders convened to consider the proposed issue. 43 ((c) In case of preferential allotment of shares to promoters, their relatives, associates and related entities, for consideration other than cash, valuation of the assets in consideration for which the shares are proposed to be issued shall be done by an independent qualified valuer and the valuation report shall be submitted to the exchanges on which shares of the issuer company are listed. Explanation: For the purpose of this clause the word valuer shall have the same meaning as assigned to the term under clause (r) of sub-regulation (1) of Regulation 2 of the SEBI (Issue of Sweat Equity) Regulations, 2002.) 44 (13.5A The details of all monies utilised out of the preferential issue proceeds shall be disclosed under an appropriate head in the balance sheet of the company indicating the purpose for which such monies have been utilised. The details of unutilised monies shall also be disclosed under a separate head in the balance sheet of the company indicating the form in which such unutilised monies have been invested.) 13.6 Preferential allotments to FIIs 13.6.1 Preferential allotments, if any to be made in case of Foreign Institutional Investors, shall also be governed by the guidelines issued by the Government of India/ Board/ Reserve Bank of India on the subject. 13.7 Non-Applicability of the guidelines 13.7.1 Clauses 13.1 to 13.5 shall not be applicable in the following cases: (i) where the further shares are allotted in pursuance to the merger and amalgamation scheme approved by the High court. (ii) (a) where further shares are allotted to a person / group of persons in accordance with the provisions of rehabilitation packages approved by BIFR. (b) In case, such persons are promoters or belong to promoter group as defined in 45 (Explanation I and II 46 (to clause 6.8.3.2)) of Chapter VI of these guidelines, the lock-in provisions shall continue to apply unless otherwise stated in the BIFR order. (iii) where further shares are allotted to All India public financial institutions in accordance with the provision of the loan agreements signed prior to August 4, 1994. 47 (13.7.2 Clauses 13.1 and 13.3 shall not be applicable to shares allotted to any financial institution within the meaning of sub-clauses (ia) and (ii) of clause (h) of section 2 of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (51 of 1993).) 48 (13.7.3 Clause 13.1.1, 13.1.2, 13.1.3, 13.1A, and 13.5.1 shall not be applicable to a preferential allotment of equity shares, fully convertible debenture and partly convertible debentures, where the Board has granted relaxation to the company in terms of Regulation 29A of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997;) 49 (Provided that adequate disclosures about the plan including the process proposed to be followed for identifying the allottees, are given in the explanatory statement to notice for the general meeting of shareholders, in addition to disclosures required in terms of any other law.) ********* 1 Substituted the opening para of clause 13.1.1.1, vide SEBI Circular No. SEBI/CFD/DIL/DIP/25/2007/30/4 dated April 30, 2007, for the following: The issue of shares on a preferential basis can be made at a price not less than the higher of the following: 2 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008. 3 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/25/2007/30/4 dated April 30, 2007. 4 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008. 5 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008. 6 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/25/2007/30/4 dated April 30, 2007, for the words for the purpose of this clause . 7 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008, for the words for the purpose of clauses 13.1.1.1 and 13.1.1.2 . 8 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/25/2007/30/4 dated April 30, 2007. 9 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/25/2007/30/4 dated April 30, 2007, for the words for the purpose of this clause . 10 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008, for the words for the purpose of clauses 13.1.1.1 and 13.1.1.2 . 11 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008, for the words 13.1.1.1 . 12 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008, for the words 13.1.1.1 . 13 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/34/2009/24/09 dated February 24, 2009, for the words ten percent 14 Inserted vide SEBI Circular No. DIP (Compendium) Circular No. 3 dated August 04, 2000. 15 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/25/2007/30/4 dated April 30, 2007. 16 Inserted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003. 17 Renumbered as 13.1B , vide SEBI Circular No. SEBI/CFD/DIL/DIP/14/2005/25/1 dated January 25, 2005. 18 Inserted clause, vide SEBI Circular No. SEBI/CFD/DIL/DIP/28/2007/29/11 dated November 29, 2007. 19 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/23/2006/16/10 dated October 16, 2006 for the words Clause [6.4.2 (m)] 20 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008. 21 Inserted vide SEBI Circular No. DIP (Compendium) Circular No. 3 dated August 04, 2000. 22 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/34/2009/24/09 dated February 24, 2009, for the following: In addition to the requirements for lock in of instruments allotted on preferential basis to promoters/ promoter group and the shares allotted to such promoter / promoter group pursuant to exercise of options attached to warrants issued on preferential basis as per clause 13.3.1 (a) and (b), the instruments allotted on preferential basis to any person including promoters/ promoters group shall be locked-in for a period of one year from the date of their allotment (Deleted). In the abovementioned omitted clause: (i) the words and the shares allotted to such promoter / promoter group pursuant to exercise of options attached to warrants issued on preferential basis , appearing after the words to promoters/ promoter group and before the words as per clause 13.3.1 (a) , were inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008. (ii) the following words appearing at the end were omitted vide SEBI Circular No. SEBI/CFD/DIL/DIP/ 12/2004/8/4 dated April 8, 2004: except on such allotments on preferential basis which involve swap of equity shares / securities convertible into equity shares at a later date, for acquisition . 23 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/34/2009/24/09 dated February 24, 2009 for clause (c). For further details, please refer to the above footnote. 24 Renumbered from sub-clause (c) to sub-clause (d) vide SEBI Circular No. DIP (Compendium) Circular No. 3 dated August 04, 2000. 25 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/34/2009/24/09 dated February 24, 2009. 26 Omitted the words /exercise of warrants vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008 27 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/34/2009/24/09 dated February 24, 2009. 28 Omitted the words warrants vide SEBI Circular No. SEBI/CFD/DIL/DIP/32/2008/28/08 dated August 28, 2008. 29 Inserted clauses (e) to (h) vide SEBI Circular No. SEBI/CFD/DIL/DIP/12/2004/8/4 dated April 8, 2004. 30 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/25/2007/30/4 dated April 30, 2007. 31 Inserted proviso, vide SEBI Circular No. SEBI/CFD/DIL/DIP/34/2009/24/09 dated February 24, 2009. 32 Substituted for the following clause vide SEBI Circular No. RMB (Compendium) series 2003-04 circular no.9 dated May 2, 2003: These locked in shares/instruments can be transferred to and amongst promoter/promoter group subject to continuation of lock-in in the hands of transferees for the remaining period and compliance of Securities and Exchange Board of India (Substantial Acquisition of shares and Takeovers) Regulations, 1997, if applicable 33 Substituted vide vide SEBI Circular No. DIP (Compendium) Circular No. 3 dated August 04, 2000 for the words DFI . 34 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/12/2004/8/4 dated April 8, 2004 for the words three months . 35 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/12/2004/8/4 dated April 8, 2004. 36 Inserted proviso, vide SEBI Circular No. SEBI/CFD/DIL/DIP/34/2009/24/09 dated February 24, 2009. 37 Inserted vide SEBI Circular No. DIP (Compendium) Circular No. 3 dated August 04, 2000. 38 Inserted clause 13.4.2A, vide SEBI Circular No. SEBI/CFD/DIL/DIP/12/2004/8/4 dated April 8, 2004. 39 Renumbered from Clause no. 13.4.1 (b) to Clause no. 13.4.3 vide SEBI Circular No. DIP (Compendium) Circular No. 3 dated August 04, 2000. 40 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/14/2005/25/1 dated January 25, 2005 for the words three months . 41 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the words Certificate from Auditors . 42 Substituted vide vide SEBI Circular No. DIP (Compendium) Circular No. 3 dated August 04, 2000 for the word DFI . 43 Inserted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003. 44 Inserted vide SEBI Circular No. DIP (Compendium) Circular No. 3 dated August 04, 2000. 45 Substituted vide SEBI Circular No. DIP (Compendium) Circular No. 3 dated August 04, 2000 for Clause 6.4.2 (m) . 46 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/14/2005/25/1 dated January 25, 2005 for , Clause 6.4.2.1 . 47 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/25/2007/30/4 dated April 30, 2007. 48 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/34/2009/24/09 dated February 24, 2009. 49 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/34/2009/24/09 dated February 24, 2009.