CHAPTER-6

SEBI GUIDELINES FOR

INVESTOR PROTECTION
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CHAPTER-6

SEBI GUIDELINES FOR INVESTOR PROTECTION

ing of Securities

Listing means the enlistment of shares/ debentures/ other securities of

>ublic limited company, on any recognized stock exchange so that the
urities may be dealt thereon.
Listing of securities is necessary to ensure free marketability and
,sferability of securities. Listed securities can be readily purchased and
j at a fair price, determined by the market forces. Besides, listing is legally
:essary in terms of Section 73 of the Companies Act.
Listing of shares of a company on a stock exchange is not compulsory
ong as no public offer is made.
Sub section (1) of Section 73 of the Companies Act makes listing of
•res and debentures of all public companies compulsory with one or more
ognized stock exchanges. This sub section provides that every company,
•nding to offer shares or debentures to the public for subscription, by the
,e of a prospectus, shall, before such issue, make an application to one or
·e recognized stock exchanges for permission for the shares or
entures intending to be so offered to be dealt with and quoted at the said
;k exchange( s).
From the opening words of the section, it appears that the provisions
•ained therein are not applicable to the following issues -
(a) Issues made otherwise than through a prospectus.
(b) Issues of other instruments, which do not tantamount to issue of
capital, for example, issue of only warrants or coupons.
Further, if the issue amount exceeds Rs 5 crores, the company has to
e arrangements for listing on one more stock exchange besides the,
10nal Stock Exchange.

llifications for Listing

Companies going in for listing of securities on a recognized stock

,ange must fulfill the following qualifications.
.a) Minimum Issued Capital of the company shall be Rs 3 crores and the
minimum public offer of equity capital shall be Rs 75 lakhs. The
Mumbai Stock Exchange has however raised the threshold limit of paid
up capital for listing of companies to Rs 10 crores wet 27/2/1996.
Some other exchanges have also enhanced the limit to Rs 5 crores.
b) The company shall be obliged to pay interest on excess application
money @ 15% for the delayed period beyond 10 weeks. However
under the directions of SEBI the stock exchanges have reduced the
period of 10 weeks to 30 days.
:) The listing norms laid down by SEBI are as under -
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(i) If the post issue paid up capital of the company is less than
Rs 3 crore, the company shall be eligible to be listed only on
the Over The Counter Exchange Of India (OTCEI).
(ii) In case of a company with commercial operation of less than
2 years and post issue paid up capital of Rs 3 crores but not
more than Rs 5 crores, the company shall be eligible for
listing only on stock exchanges with screen based trading.
(iii) In case of a company with post issue paid up capital of more
than Rs 5 crores, the shares may be listed on either the
OTCEI or any other stock exchanges.
(d) If the post issue paid up capital of a company is more than Rs 5 crores,
the securities shall be listed on at least one more stock exchanges
besides the regional stock exchange.
(e) The Articles of Association of the Company must be in tune with the
sound corporate practices.
(f) The totral cost of public issue must not exceed the ceilings laid down in
this regard by Ministry Of Finance.
(g) The shares allotted under the promoters quota shall not be sold/
hypothecated/ transferred for a period of three years. A certificate from
the auditors/ practicing company secretary to the effect that the share
certificates have been stamped "Not transferable for three years" ,
shall be furnished alongwith listing application.
(h) The company must adhere to the code of Advertisement and restriction
laid down in this regard by Ministry Of Finance.
(i) A company with less than two years of commercial operation and post
issue paid up capital between Rs 3 crore to Rs 5 crore shall apply
market maker on all the stock exchanges where the securities are
listed/ proposed to be listed. The market makers shall offer a
continuous two way quote with a minimum depth of three marketable
lots, for a minimum period of 18 months. The bid ask spread shall not
at any time exceed 10% and the inventory of the market maker shall,
as on the date of allotment of securities, comprise of at least 5% of the
post issue capital of the company.
U) SEBI has specified that there shall be at least 5 public shareholders for
every Rs 1 lakh of net capital offer made to the public, and in case
offer for sale there will be at least 10 public share holders for every Rs
10 lakh of equity offered to the public.

Procedure for Listing

The various steps involved in the listing of securities are as under -

(1) Initial discussion between the Secretary of the company and the
Exchange authorities for having an overall idea of the various
compliances with regard to listing.
(2) Articles of Association shall be, if necessary, amended to provide that-
(a) A common form of transfer shall be used.
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(b) The fully paid shares shall be free from all lien and that in case
of partly paid shares, the company's lien shall be restricted to
amount payable in respect thereof.
(c) The calls in advance will carry interest but not entitled to
participate in dividends.
(d) The company will not forefeit dividend unless barred by law.
Any provision in the Articles which restricts free dealings in
securities or is not in tune with sound corporate practices, shall be suitably
corrected or removed.
(3) Approval of Draft Prospectus.
(4) Submission of Application.
(5) Additional documents- the companies should submit the following
additional documents alongwith the application for listing -
(a) Acknowledgement card or letter indicating observations on draft
prospectus or letter of offer by SEBI.
(b) Certificate from a Merchant Banker acting as the Lead Manager
to the issue reporting positive compliance by the company of
requirements on Disclosure and Investor Protection issued by
SEBI.
(6) Listing Fees.
(7) Deposit to be kept with Stock Exchange before an Issue- One percent
of the public offer shall be deposited with the Regional Stock Exchange
before the opening of public offer.
(8) As soon as the subscription list is closed, intimate the stock exchange
the date of the closure of subscription list.
(9) Allotment of Shares- The basis of allotment (in case of
oversubscription) is determined and submitted to the Regional Stock
Exchange for approval. A copy of the approved Basis of Allotment is
then sent to other stock exchanges where shares are to be listed. The
allotment of securities is to be made strictly in accordance wit the
approved basis, and a certificate to that effect from the auditors or a
practicing company secretary is furnished to the Stock Exchange.
The company shall then arrange for preparation and dispatch of
letters of allotment/ regret letters and refund orders to the applicants.
As per SEBI guidelines, this process shuld be completed within 30
days from the close of subscription list otherwise interest @15% shall
be payable on refund amount for the delay period.
The date of completion of posting of the letters of allotment and
refund orders should be intimated to the Stock Exchange.
(10) After completion of aforesaid procedure, the company shall make the
final listing application to all the stock exchanges in the listing
agreement from available from the concerned stock exchange.
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Disclosure in prospectus

Prospectus is the basic document for raising funds from the public.
"Prospectus" means any document described or issued as a prospectus and
includes any notice, circular, advertisement or other document inviting
deposits from the public or inviting offers from the public for the subscription
or purchase of any shares in, or debentures of, the company.
A public company cannot issue shares or debentures unless it issues a
Prospectus. The prospectus is an invitation to the public to take shares or
debentures of the company. Where a public company does not invite public
subscription, it is required to file with the Registrar a statement in lieu of
prospectus. The prospectus has to be issued in the prescribed format revised
wef 1/11/1991 . Moreover wef November 1, 1991 every company is
mandatorily required to issue abridged prospectus in the prescribed Form 2A
alongwith the application for issue of securities.

Prospectus by Implication

Section 64 lays down that where a company allots or agrees to allot

shares or debentures being offered for sale to the public, any document by
which the offer for sale to the public is made, shall, for all purposes, be
deemed to be a prospectus issued by the company and all Acts and Rules of
law as to contents of prospectus and as to the liability in respect of
statements in and omissions from prospectuses or otherwise relating to the
prospectuses, shall apply and have effect as if the shares or debentures had
been offered to the public for subscription and as if the persons accepting the
offer in respect of any shares or debentures were subscribers to these shares
or debentures.
This means that where a company allots or agrees to allot any existing
shares or debentures with a view to these being offered for sale to the public
is made for all purposes be deemed to be a prospectus issued by the
company.
An offer for sale is also issued when the company proposes to allot its
shares/ debentures to its existing shareholders/ debenture holders as rights
issue.
The offer for sale must set out all the details required to be inserted in
a prospectus. It should also state the net amount of consideration received by
the company on the shares or debentures to which the offer relates; and state
the place and time at which the relevant contracts may be inspected.
Sub section 4 lays down that the persons making the offer by a
prospectus by implication will be deemed to be the persons named therein as
directors of the company.
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Legal Requirements for Prospectus

Section 55 of the Companies Act, 1956, make sit obligatory that a

prospectus shall be dated and that date shall, unless the contrary is proved,
be taken as the date of publication of the prospectus.
Section 56 of the Act lays down, among other things, that every
prospectus shall state the matters specified in Part-I of Schedule II and set
out the reports specified in Part II of that schedule; and the said Parts I and II
shall have effect subject to the provisions contained in Part Ill of that
schedule.
Section 57 of the Act lays down that a prospectus shall not include a
statement of an expert unless the expert is a person who is not, and has not
been, engaged or interested in the formation or promotion, or in the
management, of the company.
According to Section 58, a prospectus including a statement purporting
to be made by an expert shall not be issued unless he has given his consent
in writing to the issue thereof with the statement included in the form and
context in which it is included and has not withdrawn his consent before the
delivery of a copy of the prospectus for registration and a statement that he
has given and has not withdrawn his consent as aforesaid appears in the
prospectus.
Section 60(3) lays down that the Registrar of Companies shall not
register a (prospectus of a company unless the requirements of Section 55,56
57 and 58 and sub sections (1) and (2) of Section 60 are complied with and
prospectus is accompanied by the consent in writing of the person, if any,
named therein as the auditor, legal advisor, attorney, solicitor, banker or
broker of the company or intended company, to act in that capacity.
A prospectus sets the terms of contract for allotment of shares in a
company to the investors. Section 65 provides that:
(a) A statement included in the prospectus shall be deemed to be untrue,
if the statement is misleading in the form and content in which it is
included
(b) Where the omission from a prospectus of any matter is calculated to
mislead, the prospectus shall be deemed, in respect of such omission,
to be a prospectus in which an untrue statement is included.

The effect of the aforesaid provisions is that even where specified

statements are literally true, the prospectus may nevertheless be false, if by
suppression of other facts it conveys a false impression. In case the allottee
of shares can avoid the contract on the grounds of untrue statement included
in the prospectus.
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Main Contents of Prospectus

The main contents of the prospectus are to be as per Schedule II of

the Companies Act, 1956. as per this schedule, the prospectus should
contain details under the following heads-
(1) General information about the company viz name, address, enlistment
at stock exchanges, lead managers, credit rating obtained etc.
(2) Capital structure of the company.
(3) Terms of present issue.
(4) Particulars of the issue.
(5) Company, Management and project, that is, company's brief history
and present business, background of promoters and details of the
project to be set up, financial performance of the company for the last
5 years, information whether institutional dues of the company have
been paid upto date, as also the managements perception of the risk
factors.
(6) Particulars in regard to the company and other listed companies under
the same management.

Disclosures in Prospectus as per SEBI Guidelines

Besides fulfilling he requirements prescribed by Schedule II of the

companies Act, 1956, a company issuing prospectus should also comply with
the SEBI guidelines enumerated below with regard to Disclosure in
Prospectus.
(1) An index to the contents of the Prospectus.
(2) Details of -
(a) Actual expenditure incurred on the project (in cases of
companies raising capital for a project) upto a date not earlier
than 2 months of filing the prospectus with SEBI or Registrar of
Companies, whichever is later.
(b) Means and source of financing such expenditure.
(c) Yearwise break-up of the expenditure proposed to be incurred
on the said project.
(3) Details of "bridge loann or other financial arrangement, if any, for
incurring expenditure on the project and which would be repaid from
the proceeds of the issue.
(4) The following details in case of companies undertaking major
expansion or new projects
(a) Technology.
(b) Market.
(c) Competition.
(d) Managerial competence.
(e) Capacity build up.
(5) Where an appraisal is made for the purpose of the issue by a financial
institution, bank or lead manager, the name of the agency and the
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purpose of appraisal should be prominently disclosed. Besides, future

projections based on the report should be disclosed in the offer
document.
(6) Where the financial projections are based on the appraisal report of the
lending institution/ bank, the issuer may, if he so desires, also give his
own projections together with the underlying assumptions along with
reasons/ justifications for variations from the projections of the
appraising institution.
(7) Capacity Utilisation - In the case of an existing company, projections
as to capacity utilization for the period from the date of commencement
of commercial production upto the date of filling of offer documents
with ROC or the stock exchange or, for a period of three years prior to
the date of such filing, whichever is less, shall be disclosed in the offer
documents. This requirement is in addition to future projections on
capacity utilization made as at present. Where the projected capacity
utilization is much higher than the actual average capacity utilization
during the previous years, the company should also state, how it
proposes to achieve optimum capacity utilization in the past.
(8) Particulars of other income - The offer document shall disclose details
of other income in all cases where such income exceeds 20% of the
net profit before tax, including-
(a) The source and other particulars of that income.
(b) An indication as to whether such income is recurring or non
recurring, or has arisen out of business activities/ other than
normal business activities.
(9) The turnover disclosed in the Profit or Loss statement shall be
bifurcated into -
(a) Turnover of products manufactured by the company.
(b) Turnover of products traded by the company.
(c) Details of products not normally dealt in by the company but
included in (b) above shall be mentioned separately.
(10) The statement of assets and liabilities prepared after deducting the
amount of revaluation reserve from both fixed assets and reserves and
the net worth arrived at after such deduction.
(11) Wherever statements of assets and liabilities prepared after deducting
the amount of revaluation reserve from both fixed assets and reserves
and the net worth arrived at such after deduction.
(12) Changes (with quantification wherever possible) in the activities of the
issuer which may have had a material effect on the statement of profit/
loss for the five years. Disclosure of these changes in the activities of
the company shall include discontinuance of lines of business, loss of
agencies or markets and similar factors.
(13) All significant accounting policies followed in the preparation of the
financial statements.
(14) All financial information given in the offer document including
accounting ratios shall be audited.
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( 15) The information regarding other ventures/ companies promoted by the

same promoters shall be required to be made only in respect of five
listed companies as determined by market capitalization one month
before the date of filing offer document with SEBI.
Besides similar information shall also be given in case of any
other listed company promoted by the promoters which has become a
BIFR company or is under winding up or has a negative net worth.
(16) Profits after tax are often affected by the tax shelters which are
available. Some of these are of a relatively permanent nature while
others may be limited in point of time. Tax provisions are also affected
by timing differences which can be reserved in the future. For a proper
understanding on the future tax incidence these factors shall be
identified and explained through proper disclosures.
(17) The following accounting ratios for each of the accounting periods for
which financial information is given
(a) Earning per share.
(b) Return on net worth.
(c) Net asset value per share.
(18) Sales or purchase between companies in the promoter group when
such sales or purchases exceed in value in the aggregate 10% of the
total sale or purchase of the issuer and also disclose material items of
income or expenditures arising out of transactions in the promoter
group.
(19) A forecast of the estimated profits for the financial year ending
immediately before the date of the offer document (if such information
is not already given in the offer document) and for the financial year
ending immediately after the date of the offer document duly supported
by an auditors certificate which lists the major assumptions on which
the forecast is based and gives assurances on the arithmetical
calculations derived from such assumptions.
(20) A capitalization statement which shows total debt and net worth and
the debt/ equity ratios before and after the issue is made. Where there
has been a change in the share capital since the date as of which the
financial information has been disclosed in the offer document, there
shall be a note explaining the nature of the change.
(21) Management discussion and analysis of the financial condition and
results of the operations as reflected in the financial statements.
(22) Adverse events - All adverse events affecting the operations of the
company such as withdrawal or lapse of technical collaboration
agreement, shut down of plants on account of labour disputes
exceeding one month, problems in utility supplies, pollution control,
problems etc occurring within one year prior to the date of filing of the
offer documents with the Registrar of Companies/ Stock Exchange
should invariably be disclosed.
(23) A statement by the directors whether there have, in their opinion,
arisen since the date of the last financial statements disclosed in the
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prospectus any circumstance that materially and adversely affect or is

likely to affect the trading or profitability of the company, or the value of
its assets, or its ability to pay its liabilities within the next twelve
months.
(24) Material change in the key managerial personnel - Any change
otherwise than by way of retirement in the normal course in the key
senior managerial personnel particularly incharge of production,
planning, finance and marketing within one year prior to the date of
filing the offer document with the Registrar of Companies/ Regional
Stock Exchange should be disclosed.
(25) The details of -
(a) The aggregate shareholding of the Promoter Group and of the
directors of the Promoter, where the promoter is a body
corporate.
(b) Aggregate number of securities purchased or sold by the
promoter Group and the Directors of the promoter during a
period of six months preceding the date on which the draft
prospectus is filed with SEBI and to be updated by incorporating
the information in this regard till the time of filing the prospectus
with the Registrar of Company.
(c) The maximum and minimum price at which the purchase and
sales referred to in (b) above were made along with the relevant
dates. In the event of it not being possible to obtain information
regarding sales and purchases of any relative of the promoters,
a statement to that effect should be made in the prospectus and
disclosures regarding the sale and purchases of such relative
shall be made in the prospectus on the basis of the transfers
recorded in the books of the company.
(26) Details regarding major shareholders.
(27) Disclosure on market prices for listed companies - The offer
documents should mention high, low and average market prices of the
shares of the company during the last three years and also monthly
high and low prices for the last six months prior to the date of filing the
offer documents with the ROG/ concerned stock exchange. The
number of shares traded on the day(s), when the high and low prices,
were recorded in the relevant Stock Exchange during said period of six
months should also be disclosed.
(28) Particulars of -
(a) High, low and average market prices of the shares of the
company during the preceding three years.
(b) Monthly high and low prices for the six months preceding the
date of filing the draft prospectus with SEBI which shall be
updated till the time of filing the prospectus with the Registrar of
Company/ Stock Exchange concerned.
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(c) Number of shares traded on the days when the high and low
prices were recorded in the relevant stock exchange during the
said period of (i) and (ii) above.
(d) The stock market data referred to above shall be shown
separately for periods marked by a change in capital structure,
with such period commencing from the date the concerned
stock exchange recognizes the change in the capital structure.
(e) The market price immediately after the date on which the
resolution of the Board of Directors approving the issue was
approved.
(f) The volume of securities traded in each month during the six
months preceding the date on which the issue opens for
subscription.
(29) Under the heading " Basis for issue price " the following information
shall be disclosed -
(a) (i) Earnings per share i.e. EPS pre issue for the last three
years (as adjusted for changes in capital).
(ii) PIE pre issue and comparison thereof with industry PIE
where available (giving the source from which the industry
PIE has been taken).
(iii) Average return on net worth in the last three years.
(iv) Minimum return on increased net worth required to
maintain pre issue EPS.
(v) Net Asset Value per share after issue and comparison
thereof wit the issue price.
Provided that projected earnings shall not be used as a
justification for the issue price in offer document.
(b) The accounting ratios disclosed in the offer document in support
of basis of the issue price shall be calculated after giving effect
to the consequent increase of capital on account of compulsory
conversions outstanding, as well as on the assumption that the
options outstanding, if any, to subscribe for additional capital will
be exercised.
(30) Details of all "buy back" and stand by and similar arrangements for
purchase of securities by promoters, directors and lead merchant
bankers. It may be noted that no buy back or stand by or similar
arrangements shall be allowed with the persons for whom securities
are reserved for allotment on a firm basis.
(31) A statement by the lead managers that in their opinion the assets of
the underwriters are adequate to meet their obligations.
(32) Disclosure on investor grievances and redressal system - The offer
documents should disclose the arrangements or any mechanism
evolved by the company for redressal of investors' grievances. By way
of additional information, the company should disclose the time
normally taken by it for disposal of various types of investor
grievances. It should also disclose the number of times its name had
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appeared in the press releases issued by SEBI relating to maximum

number of complaints received from the investors. Similar disclosure
should be made in regard to the listed companies under the same
management within the meaning of Section 370 (18) of the Companies
Act during the period of 3 months prior to the date of filing of the offer
documents with ROC/ Stock exchange.
(33) Risk Factors - The lead managers may classify the risk factors broadly
into those which are specific to the project and internal to the issuer
company and those which are external and not under the control of the
issuer company. Such classification is necessary to introduce some
element of objectivity to the disclosures in this regard.
(34) Management perception of the internal and external risk factors, which
shall be given immediately after each of the risk factors and not as a
separate heading under management perception.
(35) Following information regarding persons with whom technical and
financial agreements have been entered into and in particular-
(a) Place of registration and year of incorporation.
(b) Issued share capital.
(c) Turnover of the last financial year of incorporation.
(d) General information regarding such persons relevant to the
issuer.
(36) A statement to the effect that the issuer accepts no responsibility for
statements made otherwise than in the prospectus or in the
advertisement or any other material issued by or at the instance of the
issuer and that any other material issued by or at the instance of the
issuer and that any one placing reliance on any other source of
information would be doing so at his own risk.

Underwriting

Underwriting is a contract, by means of which a person gives an

assurance to the issuer company that the former would subscribe to the
securities offered in the event of non subscription by the persons to whom it
was offered, which in case shall not exceed the commitment extended by that
person, for a consideration.
The person who assures is called an "underwriter° and the
consideration for the assurance is called "underwriting commission".
Thus, underwriting is in nature of an insurance against the possibility of
inadequate subscription so that the project is assured of the funds it needs.
SEBI guidelines originally envisaged that underwriting would be
mandatory for full issue (excluding reserved/ preferential allotment to
reserved categories). However, with a view to reduce the cost of the issue,
sine October 1994 companies making public issues have been given option
to decide whether the issue is to be underwritten or not. However, if the issue
is not underwritten and the minimum subscription of 90% of the offer to the
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public is not received, the entire amount received as subscription will have to
be refunded in full.
The requirement of minimum subscription of 90% of the issue amount
is mandatory for each issue of capital to the public. It is also applicable for a
rights issue with a right of renunciation. However, the requirement of 90%
minimum subscription will not apply in case of exclusive debt issues provided
the issuer makes adequate disclosure about the alternate source of finance
that have been tied up.
If the company does not receive 90% of the issue amount from public
subscription plus accepted devolvement from underwriters, within 120 days
from the date of opening of the issue, the company shall refund the amount of
subscription to the public and the underwriters.

Numbers of underwriters

The issuer in consultation with the lead managers shall decide the
number of underwriters. It will also depend upon the amount of issue which, in
the opinion of issuer and Lead Managers, should be underwritten and the
underwriting commitments made by the underwriters.

The underwriters must be registered with SEBI. Besides, Stock brokers

and Merchant Bankers of categories I,II and Ill, holding a valid certificate of
registration from SEBI are also entitled to act as underwriter.

Underwriting of issues

During the year 1999-00, underwriting activity increased substantially

probably due to large number of issues of IPOs. In 1999-2000, 18 issues
were underwritten for Rs.2,257crore and 47 issues for Rs.4,000 crore were
not underwritten as compared to 7 issues underwritten for Rs.227 crore and
25 issues not underwritten for Rs.4,791crore, respectively, during 1998-99. Of
the total amount of Rs.6,257 crore, the underwritten amount constituted 36
per cent in 1999-2000 as compared to a meagre 5 per cent in the previous
financial year (Table 15).

Table-15 • : Amounts Underwritten / Not Underwritten (Rs. crore)

Public No. of Issues and Amount Percentage Share in Total

Issues
1999-2000 1998-1999 1999-2000 1998-1999
No. Amt. No. Amt.
Underwritten 18 2,257.01 7 227.53 36.07 4.53
Not 47 3,999.50 25 4,791 .37 63.93 95.47
underwritten
Total 65 6256.51 32 5018.90 100.00 100.00

• Source - Economic Survey of India, 1999-00

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SEBI (UNDERWRITER) RULES AND REGULATIONS, 1993 •

The SEBI (Underwriters) Rules, 1993 stipulate that registration of an

underwriter is compulsory and is subject to specified conditions. The SEBI
(underwriter) Regulations, 1993, besides listing the considerations for grant of
registration also stipulate obligations and responsibilities of underwriters,
capital adequacy requirement as well as procedures for inspection by SEBI,
and contain a code of conduct. The salient provisions of the rules and
regulations are as under -

Registration

No person can carry on any activity as an underwriter unless he is

registered with SEBI. However, stock brokers and merchant bankers holding
a valid certificate of registration from SEBI do not need separate registration
to act as underwriters.
The registration certificate shall be granted on considerations specified
in the regulations and subject to specified conditions.

Net worth requirement

Underwriters would need to have a minimum netwroth of Rs 20 Lakhs.

Underwriting obligations

The total underwriting obligations of an underwriter, at a point of time

shall not exceed 20 times his net worth.

Other obligations

In order to ensure transparency in the operations of underwriters,

several obligations and responsibilities have been imposed encompassing the
need to enter into agreement with each body corporate on whose behalf
underwriting is done.
The underwriter shall not derive any other benefit from underwriting the
issue except the brokerage or commission payable under the underwriting
agreement. The underwriter shall maintain proper books of account.

Code of conduct

The underwriters shall also abide by a code of conduct. The code of

• Source- Nabhi's SEBI law, procedures and guidelines.

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conduct debars underwriters from divulging any confidential information about

the issuer company and from dealing in the securities of any issuer company
without making disclosure to SEBI as also to the Board of Directors of the
issuer company. Every underwriter shall be expected to observe high
standards of integrity and fairness in all dealings with clients and other
underwriters.

Inspection by SEBI

The Regulations empower SEBI to inspect underwriters to ensure that

proper books of accounts are maintained or that all statutory provisions are
complied with, or to investigate into any complaint or in the interest of
securities business or of investors.

Suspension or cancellation of Registration certificate

SEBI may suspend the registration of an underwriter if there are

violations of the law or if the underwriter fails to furnish business information
sought by SEBI, or if the underwriter indulges in manipulation or price rigging
or fails to maintain capital adequacy.
Where deliberate manipulation or price rigging or cornering activities
are manifest, SEBI is also empowered to cancel the registration of the
underwriter.
The penalty of suspension or cancellation of registration can be
imposed by SEBI only after holding an inquiry and giving sufficient opportunity
to the underwriter of being heard.
However, in order to give an opportunity to the underwriters to make
up the deficiencies in their functioning and to strengthen their machinery,
SEBI may issue warning letters or penalty point advices by which
underwriters would be forewarned in respect of their omission.

Criteria for appointing underwriters

Since the contract of underwriting involves an act ending in pecuniary

liability, financial strength of a prospective underwriter shall be a major
consideration, in selecting an underwriter. The net wroth of the underwriters
can be verified from their financial statements. The other aspects that are to
be considered in evaluating an underwriter, are-
1. Experience in the Primary market.
2. Past underwriting performance and defaults.
3. Outstanding underwriting commitments which can be easily verified
from the monthly statements furnished by underwriters to SEBI.
4. Network of investor clientele of the underwriters.
5. Overall reputation.
 137

Evaluation of underwriters is also legally necessary as a declaration is

required to be made in the prospectus that the underwriters have sufficient
resources to discharge their respective obligations.
On the other hand the underwriters should also evaluate the company
and extend their underwriting commitment after thoroughly evaluating the
proposal. In case the issue is taken up without any devolvement, the
underwriter can safely walkout by earning a smart sum of underwriting
commission. However, if an issue does not get full subscription, and there is a
devolvement on his part, he shall have to subscribe for the securities that he
promises to subscribe.

Underwriting Agreement

The underwriters are required to enter into a legally binding

underwriting agreement with the issuers, stipulating amongst other things, the
following -
1. The period for which the agreement shall be in force.
2. The amount of underwriting obligations.
3. The period within which the underwriter shall subscribe to the issue
after being asked to do so by the body corporate.
4. The precise commission payable to the underwriter.
5. The details of arrangements made by the underwriter for fulfilling the
underwriting obligations.

As per SEBI guidelines, the underwriting agreements may be filed with the
stock exchanges.

Model Underwriting Agreement

The SEBI has formulated a model underwriting agreement to provide a

clear regulatory framework for underwriters and issuer companies. The model
agreement seeks to standardize the legal relationship between the two and
will provide clear guidelines for resolving the contentious issues.
The salient features of the model agreement are enumerated
hereunder-
1. The agreement stipulates that subscription list for public issue shall
open within three months from the date of agreement. This clause has
been included due to the underwriters grievance that corporates
launch issues according to their own convenience and often issues
devolve due to bad timing.
2. The agreement stipulates that the subscription list shall, unless the
issue is fully subscribed, be kept open by the company for a maximum
period of 1O days failing which the underwriter shall not be bound to
discharge the underwriting obligations.
3. The company shall have to make available a final copy of the
prospectus to underwriters before its registration with Registrar of
 138

Companies, in order to provide them an opportunity to satisfy

themselves with the terms and disclosures before giving consent.
4. All obligations of the company and underwriters are subject to the
condition that time, wherever stipulated is the essence of the
agreement. Any failure to adhere to the time limits shall discharge the
other party of his obligations.
5. The underwriter shall have the option to terminate the agreement any
time before opening of the issue if any statements made by the
company in the prospectus, application form or agreements are found
to be incorrect.
6. The model agreement also provides that the number of application
forms and prospectus to be supplied to underwriters shall be indicated,
the procedure for computation of devolvement, the rate of underwriting
commission shall be indicated etc.

The issuer company and underwriters are free to suitably modify the
agreement depending upon the circumstances in each case.

Promoters' Contribution
The term 'Promoter' in relation to securities offered to the public
generally refers to persons who are in over-all control of the company and
instrumental in the formulation of a plan or programme pursuant to which the
securities are offered to the public and are named as such in the prospectus.
However, for the purpose of SEBI Guidelines, 'promoters' include directors,
friends and relatives of promoters.

Meaning of promoters' Contribution

SEBI has laid down detailed guidelines with regard to "promoters'

contribution" in a public issue. For the purpose of these guidelines,
'promoters' contribution' will mean contribution by promoters, directors,
friends, relatives and associates, obtained by private placement No private
placement of the promoters' quota shall be made by solicitation of share
contribution from unrelated investors through any kind of market
intermediaries.
Eartier, in the case of professionally managed companies with no
identified promoters, the promoters' contribution was required to be brought in
by the persons in charge of the management of the affairs of the company to
the extent of specified percentage either by themselves or from other persons
including their friends, relatives and associates. However, w.e.f. 4.3.1996, the
requirement of promoters' contribution has been waived in such cases.

SEBI Guidelines
According to the SEBI guidelines, the amount of promoters'
contribution in a public issue and the conditions attached thereto, shall vary
 139

depending upon whether the company is new or existing one, whether the
company has a track record of profitability and whether the issue is at par or
at premium etc. Besides, the requirement of promoters' contributions has
been waived in certain cases.
The guidelines issued by SEBI with regard to promoters' contribution
have been discussed hereinafter.

Minimum Promoters' Contribution

(1) The promoters' contribution to be subscribed in any issue to the

Public should not be less than 25% of the total issue of equity capital upto Rs.
100 crores and 20% of the issues above Rs. 100 crores. However, in certain
cases, the minimum promoters' contribution shall be 50%. See (2) letter.

Note : For reckoning the minimum specified percentage of 25% or 20%,

Any issue (other than bonus) of shares made at par by an
existing
Private/closely held/other unlisted company during the preceding
12 months prior to the proposed public issue would not be taken
Into account, if the proposed issue to the public is to be made at
Premium. However, this would not apply, if such proposed issue
to the public is also to be made at par.
(2) The promoters' contribution shall not be less than 50% of the
equity capital, in following cases:
(Q Where a new company is set up by existing companies with a
five-year track record of consistent profitability and the issue is
proposed to be made at a premium.
However, where a new company proposes to issue equity
capital exceeding Rs. 100 crores at a premium not exceeding
the face value of the shares (i.e. premium of Rs. 10 in case of
equity shares having face value of Rs. 10 each), the promoting
companies' contribution shall be computed at the following slab
rates-
On first Rs. 100 crore of issue 50%
Next Rs. 200 crore 40%
Next Rs. 300 crore 30%
Balance issue amount 15%
The aggregate contribution shall, however, be not less than
21 % of the expanded capital i.e. total equity to be issued ~ncluding
premium) at present and in future upon conversion of optionally
convertible instruments, including premium. Thus, the amount to be
computed against the last slab shall be so adjusted that on average
promoters' contribution is not less than 21% of the expanded capital
after conversion.
 140

The benefit of slab system mentioned above shall be available subject to

under noted conditions :
(i) Promoters contribution shall be at the same price as applicable
to the investing public.
(ii) Lock-in-period of 5 years from the date of allotment or
commencement of commercial production, whichever is later,
shall be applicable even in respect of equity acquired on
conversion of optional instruments in future.
(iii) Projects should be appraised by the lending development
financial institutions.
(iv) EPS, book value, etc. given in the offer documents for future
projections should be calculated with reference to the expanded
capital.
The following principles shall apply for computation of promoters contribution
in the above cases :-
(a) Where the issue of capital, in addition to initial issue of equity
envisages issue of a financial instrument together with warrants
convertible into equity at par and/or premium at present or at a
future date, the promoters' contribution shall be at the uniform
prince and shall be computed on the basis of post-issue capital,
i.e. on the expanded equity base assuming full conversion of
instruments into equity at any time during currency of the
instrument. If the promoters' contribution calculated with
reference to the slab rates exceeds Rs. 100 crore, the
promoters should bring in not less than 50 per cent of their
contribution including premium before opening of the issue and
bring the balance 50 per cent pro-rata in advance before calls
are made on the public.
(b) Where convertible instruments are issued with an option to
convert them into equity at a premium, the promoters shall have
an option either to bring in the required contribution in advance
by way of equity in proportion to the convertible portion of the
optional instruments or to participate in the same contribution,
including premium, to the equity in the total expanded
instruments issued to the public. However, in either case, the
promoters' capital (after conversion), shall not be less than the
amount arrived at by applying the slab rates indicated above.
(ii) Where an existing private/closely-held/other unlisted company
does not have a three-year track record, but has been promoted
by other company (ies) with a five-year track record of
consistent profitability, and the issue is proposed to be made at
a premium.'For reaching minimum percentage of 50%, if the
promoting company has to take additional equity out of the
public issue, it will be at the same price at which the shares are
offered to public.
 141

For the reckoning the minimum promoters' contribution of 50% to be

brought in by the promoting company(ies) , only such portion of the issued
capital as have been held by the promoting company (ies) pursuant to the
allotment made prior to the 12 months of the proposed public issue would be
taken into account. Accordingly, in cases where it is not possible for the
promoting company (ies) to bring in additional equity to make up the specified
percentage of 50% in the issued capital, after excluding the allotment of
shares made within 12 months prior to the proposed public issue, such public
issue shall be made only at par.

Promoters' Contribution in case of Disinvestment

Where private/closely held/other unlisted companies having three-year

track record of consistent profitability desire to get listed through
disinvestment of the existing shareholdings, i.e. without raising additional
capital, such companies may freely price their shares offered to the public
provided the promoters' shareholdings after disinvestment shall not be less
than 25% of the total issued capital of the company.

Promoters' Contribution in case of Bought Out Deals on OCTEI

In a brought out deal, where the shares of a company have been taken
by the sponsor, such shares may be offered to the public at a later date at
such price as the sponsor may deem fit in accordance with the OCTEI norms,
provided the promoters after such offer retain at least 25% of the total issued
capital.

Promoters' Contribution in case of Issue of FCDs/PCDs

In the case of issue of FCDs or PCDs , the promoters' contribution

shall be one-third of the issue amount or the convertible portion, respectively.
Alternatively, out of the total issue of FCDs/PCDs , the promoters can take
25% or 20%, as the case may be, of the equity. However, in case of a new
company being set up by the existing company(ies) having five years track
record of consistent profitability, the total contribution of the promoting
company (ies) shall not be less than 50% of the total equity after the
conversion of FCDs/PCDs.
The promoters may bring in their contribution either by way of
additional equity or by way of subscription to FCDs/PCDs, so that contribution
of the promoters is not less than 50%, 25% or 20%, as the case may be, of
the equity after the conversion of FCDs/PCDs.
If the promoters' contribution is by way of participation in FCDs/PCDs,
it shall be at the same conversion price as applicable to public.
If the promoting companies desire to contribute by way of equity and
the public offer is by way of FCDs/PCDs, which are to be converted in more
than one stage with conversions falling due before and after 18 months,
 142

promoters' contribution shall be 50% of each part of the equity capital on

conversion due before 18 months and after 18 months respectively and issue
price to be paid by the promoters for participation by way of equity shall be
the same price at which the subscribers to FCDs/PCDs are entitled to
conversion due on or before 18 months and after 18 months from the date of
allotment. In other words, the issue price for equity to be paid by the
promoters shall be the same as paid by the debenture holders for equity on
conversion. The promoters can either contribute by way of equity to the extent
of conversion due before 18 months and participate by way of FCD/PCD in
respect of amount due for conversion beyond 18 months. Alternatively, full
equity to the extent of minimum specified percentage maybe brought in
advance by the promoters on the basis of weighted average price of equity on
conversion offered to the public which may be arrived at after taking into
account pre-determined conversion price at various stages.
Where an issue of FCDs/PCDs is to be made with conversion(s) at
premium, for reckoning the minimum promoters' contribution of 50%, 25% or
20%, as the case may be, to be brought in by the promoting company (ies),
only such portion of the issued capital as have been held by the promoting
company (ies) pursuant to the allotment made prior to the 12 months of the
proposed public issue would be taken into account.

Minimum Subscription from Friends, Relatives, etc.,

Minimum subscription by each of the friends/relatives and associates

like distributors and dealers, under promoters quota should not be less than
Rs. 25,000. However, in respect of contributions made by firms or corporate
bodies not being business associates like dealers and distributors, the
minimum amount shall be Rs. 1,00,000.

Promoters' Contribution to be Received in Advance

Promoters must bring in their full subscription to issues (including

premium) in advance before public issue.
However, in case the promoters' contribution exceeds Rs. 100 crores
the promoters shall be permitted to bring in 50% of their contribution including
premium, if any, before opening of the issue to the public and the balance
50% shall be brought in by the promoters in advance pro rata before the calls
on the public are made.
A compliance certificate shall be furnished to the lead manager/SEBI
to the effect that the company has received the money in advance, i.e., before
opening of the public issue towards subscription of shares/convertible
instruments, as the case may be. The Board shall pass a resolution allotting
the shares/convertible instruments to promoters against the money received.
A copy of the resolution shall also be filed along with the compliance
certificate with the lead manager/SEBI.
 143

The Compliance Certificate shall be furnished by the chartered

accountanUstatutory auditor/company secretary in practice .

Lock-in-Period

The promoters contribution shall be not be diluted for a lock-in-period

of five years from the date of commencement of production or date of
allotment, whichever is later. In case of issue by non-manufacturing
companies, the lock-in-period shall commence from the date of allotment in
the public issue. The share certificates issued to promoters, friends, relatives
and associates, etc. should carry the inscription " not transferable" for a
period of five years from the date of commencement of production or date of
allotment, whichever is later.
Where the aggregate percentage held by the promoters prior to the
proposed issue is equivalent to or exceeds the minimum specified percentage
of the promoters' contribution in the post-issue capital and the promoters do
not contribute in the proposed issue, the lock-in-period in respect of such prior
holdings to the extent of minimum specified percentage shall be five years as
reduced by the period of such prior holding subject to a minimum of two
years.
Where any shareholding of the promoting companies has not been
taken into account for minimum specified percentage of promoters
contribution, it shall be subject to lock-in-period of 3 years from the date of
allotment.
In case of issue of FCDs/PCDs, the lock-in-period of 5 years shall
apply from the date of allotment of debentures and in respect of the shares
accruing on conversions of such debentures from the date of allotment of
debentures. If the contribution is brought in advance by way of equity, the
lock-in-period shall commence from the date of allotment or commencement
of production, which-ever is later.
Lock-in-period of five years from the date of allotment or
commencement of commercial production, whichever is later, shall be
applicable even in respect of equity acquired on conversion of optional
instruments in future.
In case of disinvestments of existing shareholdings, the promoters'
shareholding shall be subject to lock-in-period of five years. Similarly, in case
of a bought out deal, the shares retained by promoters shall be subject to
lock-in-period of five years from the date of the sponsor taking up the shares.

Pledging of Shares

The shares held by promoters may be pledged with Bank/ Financial

Institutions (Fis) as additional security for loans granted by such banks/Fis
provided the pledge of shares is one of the terms of sanction of loan and a
disclosure to this effect is made in the offer document.
 144

Transfer of Shares

Transfer of shares amongst promoters specifically described as such

in the prospectus is also permissible but the requirement relating to lock-in-
period, could continue to apply to the extent initially prescribed.

Promoters' Contribution in a Rights Issue

In a rights issue of shares at a premium or of FCDs/PCDs carrying a

term for conversion at a premium on allotment or at a future date (including
warrants convertible into shares at a premium at a future date) , the following
requirements in regard to promoters' contribution in the equity of the company
shall be fulfilled :
(a) The promoters shall ensure that their equity holdings do
not fall below 20% of the expanded capital (including
convertible portion of debentures/warrants).
(b) If the promoters existing equity holding is less than 20%
of the issued capital, in the event of the rights issue not
being fully subscribed, the promoters shall subscribe to the
un subscribed portion ( i.e. the portion of the right issue,
which has not been taken up by the existing shareholders
or by the renounces) in the following manner :
(i) The promoters additional contribution to the un
subscribed portion of rights may be to such extent as is
necessary to enable them to reach at least 20% of the
expanded capital and the balance may be disposed of by
the Board of Directors of the company in such manner as
they may deem fit:
(ii) If the unsubscribed portion is not sufficient to enable the
promoters to reach 20% of the issued capital, the
promoters shall take the entire unsubscribed portion of
the rights issue.
(c) The promoters' shareholdings to the extent of 20% of the post-
.issue capita
. I shall be subject to lock-in-periods as follows :
(i) Shareholdings falling under clause (a) Two years from the
date of allotment in
riahts issue
(ii) Shareholders falling under clause (b)- Two years from the
Shareholdings prior to the rights issue date of allotment in
the rights issues.
Shares acquired by way of
additional contribution to the Three years from the
 145

unsubscribed portion of the rights issue. date of allotment in

the ri hts issue.

The above requirements shall not apply to a rights issue by a

professionally managed company i.e. if there is no identified persons or
groups as promoters or shareholders who have control over the management
of the affairs of the company.

Waiver of Promoters' Contribution and Lock-in-Period'

The mandatory requirement as to minimum promoters' contribution and

lock-in of the same, has been removed in the case of following companies :
(a) A listed company for atleast three years and having a
three-years track record of dividend payment out of
preceding five years. The promoters will, however, have to
continue to disclose the extent to which they are
participating in the public or rights issue.
(c) A company where no identifiable promoter or promoter
group exists.

Bonus Issue

The purpose of the bonus issue is the capitalise the free reserves by
issuing capital as fully paid up shares without any payment in cash from the
share holders.

SEBI Guidelines on Bonus Issue •

SEBI has issue following modified guidelines for bonus issues which
are not applicable to bonus issues made by existing private/closely held or
other unlisted companies.

(1) These guidelines are applicable to existing listed companies who

shall forward a certificate duly signed by the issuer and duly
countersigned by its statutory auditor or by a company secretary in
practice to the effect that the terms and conditions for issue of
bonus shares as laid down in these guidelines have been complied
with.
(2) Issue of bonus shares after any public/rights issues is subject to

* Source- Nabhi's SEBI law, procedures and guidelines.

 146

the condition that no bonus issue shall be made which will dilute the
value or rights of the holders of debentures convertible fully or
partly.
In other words, no company shall, pending conversion of
FCDs/PCDs issue any shares by way of bonus unless similar
benefit is extended to the holders of such FCDs/PCDs, through
reservation of shares in proportion to such convertible part of FCDs
or PCDs. The shares so reserved may be issued at the time of
conversion( s) of such debentures on the same terms on which the
bonus issues were made.
(3) Bonus issue is made out of free reserves built out of the
genuine profits or share premium collected in cash only.
(4) Reserves created by revaluation of fixed assets are not
capitalised.
(5) No bonus can be declared in lieu of dividend.
(6) No bonus issue can be made unless the partly paid shares, if
any, existing are made fully paid-up.
(7) The company has not defaulted in payment of interest or
principal in respect of fixed deposits and interest on existing
debentures or principal on redemption thereof. It should also
have sufficient reason to believe that tit has not defaulted in
respect of the payment of statutory dues of the employee such
as contribution to provident fund, gratuity, bonus etc.
(8) The proposal to make bonus issue must be implemented within
six months from the date of approval of the Board of Directors.
There is no option to change the decision of the Board of
Directors regarding issue of bonus shares.
(9) The Articles of Association of the company should provide for
capitalisation of reserves. If necessary, suitable amendment
may be made by passing a general body resolution.
(10) If consequent upon the issue of bonus shares subscribed and
paid up capital exceeds the authorised share capital a resolution
shall be passed by the company at its General Body Meeting for
increasing the authorised capital.

Check List on Bonus Issue*

The SEBI has issued a detailed check list on issue of bonus shares,
providing for matters relating to applicability of SEBI guidelines, time interval
between a bonus issue and a public/right issue, rights of FCDs/PCDs holders,
capitalisation of free reserves excluding revaluation reserves, bonus issue not
to be made in lieu of dividend, bonus shares to be fully paid-up, no default in

•Vol. 1 Of Nabhi's Manual Of Sebi Guidelines On Capital Issues. Euro Issues, Merchant
Banking And Mutual Funds.
 147

respect of fixed deposits/debentures/statutory dues of the employees, bonus

issue to be implemented within six months, articles of association and
compliance certificate.
Prohibition on Issue of Bonus Shares out of Revaluation Reserve'
The Department of Company Affairs has prohibited all companies,
including existing private/closely held and unlisted companies, from issuing
any bonus shares out of the reserves created by revaluation of fixed assets.

Debentures

Debenture is a document which creates or acknowledges a debt. It is

issued by the company and is in the form of a certificate of indebtness. It
usually specifies the date of redemption and also provides for the repayment
of principal and interest at specified date or dates. Debentures may be of the
following types:

SEBI Guidelines on Debentures *

1) Issue of fully convertible debentures (FCDs) having a conversion

period of more than 36 months will not be permissible unless
conversion is made optional with "put " and "call" option.
2) Any conversion in part or whole of the debenture will be optional at the
hands of the debenture holder, if the conversion take place at or after
18 months from the date of allotment, but before 36 months.
3) Compulsory credit rating will be required if conversion is made for
FCDs after 18 months.
4) Premium amount on conversion, time of conversion in stages if any,
shall be predetermined and stated in the prospectus. The interest rates
for above debentures will be freely determined by the issuer.
5) Issue of debentures with maturity of 18 months or less are exempt
from the requirement of appointing of debenture trustee or creating a
Debenture redemption Reserve.
6) With effect from March 3, 1996, offer documents for debt issues which
have no provision of convertibility into equity are required to be filed
with SEBI but no acknowledgement qard is required to be obtained. If
SEBI does not give its observations within 21 days the issuer can go
ahead with the issue. This will apply provided the debtor has been
rated as adequately safe by a rating agency and a category I Merchant
Banker, has been appointed to manage the issue. Now wet
10/12/1996, the vetting of offer documents has been completely
dispensed with by SEBI, in all cases. No acknowledgement card is
required to be obtained but the offer documents shall continue to be
filed with SEBI, as stated herein above.

• Source- Nabhi's SEBI law, procedures and guidelines.

 148

7) In case of issue of FCDs/ PCDs, the promoters are required to bring

their contribution in the form of equity over and above the proposed
issued amount, to the extent of 1/3rd of the issue amount in case of
FCDs or the convertible amount in the case of PCDs. If the terms of
issue of FCD/PCD provided for conversion into equity at premium, the
promoters' contribution will be at weighted average price of the
predetermined conversion price at various stages offered to the public.
Alternatively, out of the total issue of FCDs/ PCDs, promoters can take
their quota of 25% of the issue above Rs 100 crores at the time of
issue, with the same conversion price as stipulated for public. The
promoters' contribution shall be locked in for a period of 5 years from
the date of allotment of debentures and in respect of the shares
allotted on conversion of debentures from the date of allotment of
debentures.
8) In case of NCDs/ PCDs credit rating is compulsory when maturity
exceeds 18 months.
9) Premium amount at the time of conversion for the PCD shall be
predetermined and stated in the prospectus. Redemption amount,
period of maturity, yield on redemption for the PCDs/ NCDs shall be
indicated in the prospectus.
10)The discount on the non- convertible portion of the PCDs in case they
are traded and procedure for their purchase on spot trading basis must
be disclosed in the prospectus.
11 ) In case, the non convertible portion of PCDs/ NCDs are to be rolled
over with or without change in the interest rate a compulsory option
should be given to those debenture holders who want to withdraw and
encash from the debenture programme. Roll over shall be done only in
cases where debenture holders have sent their positive consent and
not on the basis of the non receipt of their negative reply.
12)Before roll over of any NCO or non-convertible portion of the PCDs,
fresh credit rating shall be obtained within a period of six months prior
to the due date of redemption and communicated to debenture holders
before roll over and fresh trust deed shall be made.
13)Letter of information regarding roll over shall be vetted by SEBI with
regard to the credit rating, debenture holder resolution, option for
conversion and such other items which SEBI may prescribe from time
to time.
14)The disclosure relating to raising of debentures will contain amongst
other things, the existing and future equity and long term debt ratio,
servicing behaviour on existing debentures, payment of due interest on
due dates on term loans and debentures, certificate from a financial
institution or bankers about their no objection for a second or pari
passu charge being created in favour of the trustees to the proposed
debenture issues.
 149

Debenture Trustee Rules and Regulations

The Government has notified Rules and Regulations for Debentures

Trustees under the SEBI Act, 1992. the Rules stipulate that no person can act
as a debenture trustee without obtaining a certificate of registration from the
SEBI. The Regulations contain provisions regarding registration of Debenture
Trustees, responsibilities and obligations of debenture trustees, inspection,
and disciplinary proceedings, procedure for action in case of default. They
also contain code of conduct for debenture trustees.

Under the regulations, debenture trustees are required to enter into a

trust deed with a body with a body corporate before the debentures are
offered for subscription, containing provision relating to redressal of
grievances of debenture holders, obligations of the body corporate to the
debenture trustees and debenture holders, rights of debenture holders,
redemption of debentures and obligations of the body corporate to convert
debentures into equity in accordance with the terms of issue. They are also
required to ensure that refund monies are paid and debenture certificates are
dispatched in accordance with the provisions of the Companies Act, interest
warrants for interest due on the debentures are despatched to the debenture
holder on or before the due dates, and debenture holders are paid the monies
due to them on the date of redemption of debentures. Debentures trustees
are required to exercise due diligence to ascertain whether or not the assets
of the body corporate which are available by way of security are sufficient or
likely to become sufficient do discharge the claims of debenture holders.
Under the Code of Conduct specified in the regulations, every
debenture trustee is expected to observe high standards of integrity and
fairness in discharging his functions. The Code of Conduct debars debenture
trustees from indulging in any unfair competition which is likely to harmful to
the interest of other debenture trustees of debenture holders and from making
untrue statements.

The regulations empower SEBI to inspect books of accounts and other

documents of debenture trustees and to suspend the registration of a
debenture trustee if there are violations of the provisions of the SEBI Act,
Rules or Regulations or if the debenture trustee fails to furnish business
information sought by SEBI. Where deliberate manipulation or price rigging or
cornering activities are manifest, SEBI is also empowered to cancel the
registration of the activities are manifest, SEBI is also empowered to cancel
the registration of the debenture trustee. The penalty of suspension or
cancellation of registration can be imposed by SEBI only after holding an
inquiry and giving sufficient opportunity to the debenture trustees of being
heard.
 150

Procedure relating to Issue of Convertible Debentures

1. The Board of Directors should exercise the power to issue convertible

debentures only at the meeting of the board by passing a resolution for
the same. The Board cannot delegate the power to any of its
committees, Managing Director, Manager etc.
2. The issue should be in conformity with the guidelines issued by SEBI
from time to time.
3. The offer document for the issue shall be submitted to SEBI, by the
lead manager who shall be a merchant banker approved by SEBI.
4. As the issue would involve allotment of equity shares to persons other
than the existing shareholders, the proposal should be got approved by
a special resolution of the shareholders under section 81 .
5. The Stock Exchange has to be notified where the shares of the
company are enlisted as per the listing agreement.
6. As the debentures are to be secured by a mortgage or charge on the
assets of the company, necessary resolution obtaining consent of the
members in the general meeting as per Section 293(1 )(a) of the Act is
required. Creation of mortgage or charge is considered as disposing of
the whole or substantially the whole of the undertaking of the company.
Hence, the above said resolution is recommended.
7. raising money by issuing debentures is a kind of borrowing. Therefore
where the money is to be borrowed by issuing debentures together
with the money already borrowed exceed the aggregate of the paid up
capital and free reserves of the company, resolution is required to be
passed in the general meeting of the company in terms of Section
293(1 )(d).
8. where the company has obtained any financial assistance from public
financial institutions and where the agreement between the company
and the institutions provide that prior consent is to be obtained for
issue of debentures, necessary consent must be obtained from them.
9. At the Board meeting, the proposal to issue debentures, will be
considered and approved. The Board will also finalise and approve the
Debenture Trust Deed and the prospectus. Before finalizing the
prospectus, approval of the stock exchange and the underwriters are
also to be obtained.
10. the Board will also authorize the Company Secretary to convene the
general meeting for adopting the necessary resolutions fixing the date,
time and venue of the meeting. The Board will also authorize the
company secretary to make the draft offer document in consultation
with the lead manager.
11 . On the appointed day the general meeting will be held and the
necessary resolution be passed.
12. where any special resolution is passed in the general meeting, Form
23 should be filled with the Registrar along with the filing fees and the
necessary enclosures within 30 days.
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13. Necessary arrangements will also have to be made for printing of

prospectus.
14. the debenture trust deed, as approved by the board, has to be
executed under the common seal of the company and registered under
the Indian Registration Act.
15. As per Section 125, the company should register the particulars of
charges with the Registrar within 30 days of the creation of the charge.
16. The printed copy of the prospectus must be registered with the
Registrar of Companies before publication. The copy sent for
registration must be signed by every director of the company or by his
agent authorized in writing.
17. Where the debentures are to be Iisted on the stock exchange the
procedure relating thereto should be complied.
18. the company shall notify for the information of the public regarding the
debenture issue in the news papers as per SEBI guidelines.
19. The applications for the debentures will be processed and the
allotment list will be approved by the Board. Where there is over
subscription the mode of allotment will be decided in consultation with
the stock exchange.
20. Where the company intends to allot debentures to non residents,
necessary approval of the RBI should be obtained under the FERA,
1973.
21 .Arrangements should be made for issuing debenture certificates to the
allottees within 3 months after allotment or within the period mentioned
in the Debenture Trust Deed.
22. The company should also maintain the register and index of
debenturehold and enter the particulars as required by Section 152.

EMPLOYEE STOCK OPTION SCHEME

SEBI (Employee stock Option Scheme and Employee Stock Purchase

scheme} Guidelines, 1999 *

• As per these guidelines ESOS means a scheme under which a

company grants option to employees and ESPS means a Scheme
under which a company offers shares to employees as part of public
issue or otherwise.

• Source- Nabhi's SEBI law, procedures and guidelines.

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• Promoters of the company and directors and relatives of the company

who have holding of more than 10 per cent are not eligible under either
of the schemes.
• The company will have to constitute a Compensation Committee to
formulate detailed terms and conditions of ESOS and ESPS as the
case may be. The said Committee will have to look into the quantum of
option to be granted, conditions, exercise period within which
employees have exercise their option, rights at the time of termination
of employment etc.,
• The Compensation Committee shall see to that SEBI (Insider Trading)
Regulations and SEBI (Prohibition of Fraudulent and Unfair Trade
Practices relating to the securities market) Regulations are complied
with.
• The company will have to pass a special resolution in the general
meeting approving the grant of ESOS and ESPS as the case may be.
The notice of the meeting in detail should contain details of the number
of options to be granted or shares to be offered as the case may be,
identification of classes of employees and the maximum time period
within which options shall be vested or the shares may be held.
• The terms of ESOS and ESPS as the case may be can only be
changed only after passing a special resolution in the general meeting
pertaining to only terms which were not yet exercised by the employee.
• The shares or the options as the case may be are subjected a lock-in
period of one year and are non-transferable however shares issued or
options granted pursuant to such issue or option are not subject to
lock-in period.
• The Board of Director's either in their report or in the Annexure of the
report all the details regarding to the issue of shares or grant of options
as the case may be.
• The company shall comply with the Accounting policies specified in
Schedule I.
• The company will have to obtain a certificate from the auditors that the
scheme has been implemented and place it before the shareholders in
the general meeting.

1. Short title and commencement:

1.1 These Guidelines have been issued by Securities and Exchange Board of
India under Section 11 of the Securities and Exchange Board of India Act,
1992.
 153

1.2 These Guidelines may be called the Securities and Exchange Board of
India (Employee Stock Option Scheme and Employee Stock Purchase
Scheme), Guidelines, 1999.

2. Definitions:

2.1 In these Guidelines, unless otherwise defined;-

( 1)"employee" means

a) a permanent employee of the company working in

India or out of India; or

b) a director of the company, whether a whole time

director or not; or

c) an employee as defined in sub-clauses (a) or (b) of a

subsidiary, in India or out of India, or of a holding
company of the company.

(2)" employee compensation" means the total cost incurred by the

company towards employee compensation including basic salary,
dearness allowance, other allowances, bonus and commissions
including the value of all perquisites provided, but does not include :

(a) the fair value of the option granted under an

Employee Stock Option Scheme; and
(b) the discount at which shares are issued under an
Employee Stock Purchase Scheme.

(3) "employee stock option scheme (ESOS)" means a scheme under

which a company grants option to employees.
(4) "employee stock purchase scheme (ESPS)" means a scheme
under which the company offers shares to employees as part of a
public issue or otherwise.
(5)"exercise" means making of an application by the employee to the
company for issue of shares against option vested in him in pursuance
of the ESOS.
(6) "exercise period" means the time period after vesting within which
the employee should exercise his right to apply for shares against the
option vested in him in pursuance of the ESOS.
(7) "exercise price" means the price payable by the employee for
exercising the option granted to him in pursuance of ESOS.
(8)" grant" means issue of option to employees under ESOS.
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(9)"independent director" means a director of the company, not being a

whole time director and who is neither a promoter nor belongs to the
promoter group.
(1 O)"market price" of a share on a given date means the closing price
of the shares on that date on the stock exchange on which the shares
of the company are listed.
[ Explanation: If the shares are listed on more than one stock
exchange, but quoted only on one stock exchange on the given date,
then the price on that stock exchange should be considered. If the
share price is quoted on more than one stock exchange, then the stock
exchange where there is highest trading volume on that date should be
considered. If share price is not quoted on the given date, then the
share price on the next trading day should be considered.]

(11 )"option" means a right but not an obligation granted to an

employee in pursuance of ESOS to apply for shares of the
company at a pre- determined price.

(12)"promoter'' means;

(a) the person or persons who are in over-all

control of the company;

(b) the person or persons who are instrumental in

the formation of the company or programme
pursuant to which the shares were offered to the
public;

(c) the persons or persons named in the offer

document as promoter(s).
Provided that a director or officer of the company,
if they are acting as such only in their professional
capacity will not be deemed to be a promoter.

[Explanation: Where a promoter of a company is

a body corporate, the promoters of that body
corporate shall also be deemed to be promoters of
the company.]

(13) "promoter group" means

(a) an immediate relative of the promoter (i.e.

spouse of that person, or any parent, brother,
sister or child of the person or of the spouse);
 155

(b)persons whose shareholding is aggregated for

the purpose of disclosing in the offer document
"shareholding of the promoter group".

( 14)"share" means equity shares and securities convertible into

equity shares and shall include American Depository Receipts
(ADRs), Global Depository Receipts (GDRs) or other depository
receipts representing underlying equity shares or securities
convertible into equity shares.

(15)"vesting" means the process by which the employee is

given the right to apply for shares of the company against the
option granted to him in pursuance of ESOS.

(16) "vesting period" means the period during which the vesting
of the option granted to the employee in pursuance of ESOS
takes place.

2.2 All other expressions unless defined herein shall have the same meaning
as have been assigned to them under the Securities and Exchange Board of
India Act, 1992 or the Securities Contracts (Regulation) Act, 1956 or the
Companies Act, 1956, SEBI ( Disclosure and Investor Protection ) Guidelines,
or any statutory modification or re-enactment thereof, as the case may be.

3. Applicability
3.1 These Guidelines shall apply to any company whose shares are listed on
any recognised stock exchange in India.

PART-A- ESOS
4. Eligibility to participate in ESOS

4.1 An employee shall be eligible to participate in ESOS of the company.

4.2 An employee who is a promoter or belongs to the promoter group shall
not be eligible to participate in the ESOS.
4.3 A director who either by himself or through his relative or through any
body corporate, directly or indirectly holds more than 10% of the outstanding
equity shares of the company shall not be eligible to participate in the ESOS.

5. Compensation Committee

5.1 No ESOS shall be offered unless the company constitutes a

Compensation Committee for administration and superintendence of the
ESOS.
5.2 The Compensation Committee shall be a Committee of the Board of
Directors consisting of a majority of independent directors.
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5.3 The Compensation Committee shall, inter alia, formulate the detailed
terms and conditions of the ESOS including;-

(a) the quantum of option to be granted under an ESOS per

employee and in aggregate.

(b)the conditions under which option vested in employees may

lapse in case of termination of employment for misconduct;

(c) the exercise period within which the employee should

exercise the option and that option would lapse on failure to
exercise the option within the exercise period;

(d) the specified time period within which the employee shall
exercise the vested options in the event of termination or
resignation of an employee.

(e) the right of an employee to exercise all the options vested in

him at one time or at various points of time within the exercise
period;

(f) the procedure for making a fair and reasonable adjustment to

the number of options and to the exercise price in case of rights
issues, bonus issues and other corporate actions;

(g) the grant, vest and exercise of option in case of employees

who are on long leave; and

(h)the procedure for cashless exercise of options.

5.4 The Compensation Committee shall frame suitable policies and systems
to ensure that there is no violation of ;-

a) Securities and Exchange Board of India ( Insider Trading )

Regulations,1992; and

b) Securities and Exchange Board of India ( Prohibition of

Fraudulent and Unfair Trade Practices relating to the Securities
Market ) Regulations,1995,

by any employee.
 157

6. Shareholder approval
6.1 No ESOS can be offered to employees of a company unless the
shareholders of the company approve ESOS by passing a special resolution
in the general meeting.
6.2 The explanatory statement to the notice and the resolution proposed to be
passed in general meeting for ESOS shall, inter alia, contain the following
information:

(a) the total number of options to be granted;

(b) identification of classes of employees entitled to participate

in the ESOS;

(c) requirements of vesting and period of vesting;

(d) maximum period (subject to clause 9.1) within which the

options shall be vested;

(e) exercise price or pricing formula;

(f) exercise period and process of exercise;

(g) the appraisal process for determining the eligibility of

employees to the ESOS;

(h) maximum number of options to be issued per employee and

in aggregate;

(i) a statement to the effect that the company shall conform to

the accounting policies specified in clause 13.1.

6.3 Approval of shareholders by way of separate resolution in the general

meeting shall be obtained by the company in case of ;

(a) grant of option to employees of subsidiary or holding

company and,

(c) grant of option to identified employees, during any one year,

equal to or exceeding 1% of the issued capital
(excluding outstanding warrants and conversions) of the
company at the time of grant of option.
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7. Variation of terms of ESOS

7 .1 The company shall not vary the terms of the ESOS in any manner which
may be detrimental to the interests of the employees.
7.2 The company may by special resolution in a general meeting vary the
terms of ESOS offered pursuant to an earlier resolution of a general body but
not yet exercised by the employee provided such variation is not prejudicial to
the interests of the option holders.
7.3 The provisions of clause 6.3 shall apply to such variation of terms as they
do to the original grant of option.
7.4 The notice for passing special resolution for variation of terms of ESOS
shall disclose full details of the variation, the rationale therefor, and the details
of the employees who are beneficiary of such variation.

8. Pricing

8.1 The companies granting option to its employees pursuant to ESOS will
have the freedom to determine the exercise price subject to conforming to the
accounting policies specified in clause 13.1.

9. Lock-in period and rights of the option-holder

9.1 There shall be a minimum period of one year between the grant of options
and vesting of option.
9.2 The company shall have the freedom to specify the lock-in period for the
shares issued pursuant to exercise of option.
9.3 The employee shall not have right to receive any dividend or to vote or in
any manner enjoy the benefits of a shareholder in respect of option granted to
him, till shares are issued on exercise of option.

10. Consequence of failure to exercise option

10.1. The amount payable by the employee, if any, at the time of grant of
option;-

(a) may be forfeited by the company if the option is not

exercised by the employee within the exercise period; or

(c) the amount may be refunded to the employee if the option

are not vested due to non-fulfillment of condition relating to
vesting of option as per the ESOS.
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11. Non transferability of option

11 . 1 Option granted to an employee shall not be transferable to any person.

11 .2

(a) No person other than the employee to whom the option is

granted shall be entitled to exercise the option.

(b) Under the cashless system of exercise, the company may

itself fund or permit the empanelled stock brokers to fund the
payment of exercise price which shall be adjusted against the
sale proceeds of some or all the shares, subject to the provision
of the Companies Act.

11.3 The option granted to the employee shall not be pledged, hypothecated,
mortgaged or otherwise alienated in any other manner

11.4 In the event of the death of employee while in employment, all the option
granted to him till such date shall vest in the legal heirs or nominees of the
deceased employee.
11 .5 In case the employee suffers a permanent incapacity while in
employment, all the option granted to him as on the date of permanent
incapacitation, shall vest in him on that day.
11 .6 In the event of resignation or termination of the employee, all options not
vested as on that day shall expire. However, the employee shall, subject to
the provision of clause 5.3 (b) shall be entitled to retain all the vested options.

12. Disclosure in the Directors' Report

12.1 The Board of Directors, shall, inter alia, disclose either in the Directors
Report or in the annexure to the Director's Report, the following details of the
ESOS:

(a)options granted;

(b )the pricing formula;

(c)options vested;

(d)options exercised;

(e)the total number of shares arising as a result of exercise of

option;

(f)options lapsed;
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(g)variation of terms of options;

(h)money realised by exercise of options;

(i)total number of options in force;

U)employee wise details of options granted to;-

(i)senior managerial personnel;

(ii)any other employee who receives a grant in any

one year of option amounting to 5% or more of
option granted during that year.

(iii)identified employees who were granted option,

during any one year, equal to or exceeding 1% of
the issued capital (excluding outstanding warrants
and conversions) of the company at the time of
grant;

(k)diluted Earnings Per Share (EPS) pursuant to issue of shares

on exercise of option calculated in accordance with International
Accounting Standard (IAS) 33.

13. Accounting Policies

13.1 Every company that has passed a resolution for an ESOS under clause
6.1 of these guidelines shall comply with the accounting policies specified in
Schedule I.

14. Certificate from Auditors

14.1 In the case of every company that has passed a resolution for an ESOS
under clause 6.1 of these guidelines, the Board of Directors shall at each
annual general meeting place before the shareholders a certificate from the
auditors of the company that the scheme has been implemented in
accordance with these guidelines and in accordance with the resolution of the
company in the general meeting.

15. Options outstanding at Public Issue

15.1 The provisions of the Securities and Exchange Board of India

(Disclosure and Investor Protection) Guidelines prohibiting initial public
offering by companies having outstanding warrants and financial instruments
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shall not be applicable in case of outstanding option granted to employees in

pursuance of ESOS.
15.2 If any option is outstanding at the time of an initial public offering by a
company, the promoters' contribution shall be calculated with reference to the
enlarged capital which would arise on exercise of all vested options.
15.3 If any options granted to employees in pursuance of ESOS are
outstanding at the time of initial public offering, the offer document of the
company shall disclose all the information specified in clause 12.1.

PART-B- ESPS

16. Eligibility to participate in ESPS.

16.1 An employee shall be eligible to participate in the ESPS.

16.2 An employee who is a promoter or belongs to the promoter group shall
not be eligible to participate in the ESPS.
16.3 A director who either by himself or through his relatives or through any
body corporate, directly or indirectly holds more than 10% of the outstanding
equity shares of the company shall not be eligible to participate in the ESPS.

17. Shareholder Approval

17.1 No ESPS shall be offered to employees of the company unless the

shareholders of the company approve ESPS by passing special resolution in
the meeting of the general body of the shareholders.
17.2 The explanatory statement to the notice shall specify

(a) the price of the shares and also the number of shares to be
offered to each employee.

(b) the appraisal process for determining the eligibility of

employee for ESPS.

17.3 The number of shares offered may be different for different categories of
employees.
17.4 The special resolution shall state that the company shall conform to the
accounting policies specified in clause 19.2.

18. Pricing and Lock-in

18.1 The company shall have the freedom to determine price of shares to be
issued under an ESPS, provided they conform to the provisions of clause
19.2.
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18.2 Shares issued under an ESPS shall be locked in for a minimum period of
one year from the date of allotment.
18.3 If the ESPS is part of a public issue and the shares are issued to
employees at the same price as in the public issue, the shares issued to
employee pursuant to ESPS shall not be subject to any lock-in.

19. Disclosure and Accounting Policies

19.1 The Directors' Report or Annexure thereto shall contain, inter alia, the
following disclosures:-

(a) the details of the number of shares issued in ESPS;

(b) the price at which such shares are issued;

(c) employee-wise details of the shares issued to;

(i) senior managerial personnel;

(ii) any other employee who is issued shares in

any one year amounting to 5% or more shares
issued during that year;

(iii) identified employees who were issued shares

during any one year equal to or exceeding 1% of
the issued capital of the company at the time of
issuance;

(d) diluted Earning Per Share (EPS) pursuant to issuance of

shares under ESPS; and

(e) consideration received against the issuance of shares.

19.2 Every company that has passed a resolution for an ESPS under clause
17.1 of these guidelines shall comply with the accounting policies specified in
Schedule II.

20. Preferential Allotment

20.1 Nothing in these guidelines shall apply to shares issued to employees in

compliance with the Securities and Exchange Board of India Guidelines on
Preferential Allotment.
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21. Part D of Clarification XIV of DIP Guidelines

21 .1 Part D of the Clarification XIV dated March 1, 1996, of the SEBI (

Disclosure and Investor Protection ) Guidelines shall not be applicable in case
of ESOS and ESPS.

22. Listing

22.1 In case of listed companies, the shares arising pursuant to an ESOS and
shares issued under an ESPS, shall be eligible for listing in any recognised
stock exchange only if such schemes ( i.e. ESOS or ESPS ) are in
accordance with these Guidelines.

23. Commencement of the Guidelines

23.1 These guidelines came into force w.e.f. 19th June,1999.