SECURITIES AND EXCHANGE BOARD OF INDIA
PRIMARY MARKET DEPARTMENT
Mittal Court, A Wing, Gr. Floor,
224, Nariman Point, Mumbai 400 021
RMB DIP Series Circular No. 3 (1999- 2000)
October 15, 1999
To :
All Registered Category I Merchant Bankers
Dear Sirs,
Sub: SEBI (Disclosure and Investor Protection) Guidelines Clarification No. XXVI
The Board had received several representations from the companies in the information technology sector for relaxation of the listing requirement of offering at least 25% of each class or kind of securities issued by such companies to the public as prescribed under Rule 19(2)(b) of the Securities Contracts (Regulation) Rules, 1957 (hereinafter referred to as ‘the SC(R)R’).
The representations received from the companies in information technology sector emphasized that they are knowledge intensive companies rather than capital intensive, as large part of the total valuation of these companies emanates from intangibles such as manpower, brand equity, portfolio of services etc. and only a small portion of valuation is due to capital and fixed assets. It was also submitted that in case of these companies, with high valuations but low capital requirements, the compliance with Rule 19(2)(b) SC(R)R would result in huge offer size. The capital so raised may be in excess of their requirements. At the same time listed status is important for these companies in order to provide an exit route to the shares /stock options issued/ granted to their employees.
The Board after duly considering the issue, with regard to the companies in the information technology sector, has decided to relax the enforcement of requirement of offering to the public at least 25% of each class or kind of securities issued by the company, as prescribed under Rule 19(2)(b) of the SC(R)R. It has further been decided that the relaxation from the enforcement of the requirement of the Rule 19(2)(b) of the said Rules, to be granted to the companies in the information technology sector, shall be subject to the conditions as specified in Part A of the Clarification no. XXVI to SEBI Guidelines for Disclosure and Investor Protection. A copy of the said Clarification is enclosed.
It had also been observed that a number of the erstwhile non-banking finance companies changed their names so as give an impression of their being engaged in the software/ information technology activities. In order to safeguard the interests of investors, the Board has decided that in case of public issue/ offer for sale of securities by any unlisted company in information technology sector, it shall have to fulfil the criteria of track record of distributable profits from the information technology business/activities. In case, a company does not fulfil this criterion, it can access the market through the alternative route of appraisal and financing by a bank or financial institution. The same criterion shall also be applicable to a listed company, which has changed its name to indicate as if it is engaged in information technology business/ activity.
In order to help the investors to assess the credit risk of debt instruments and to enable them to take informed decision, it has been decided to have additional requirements regarding credit rating of debt instruments offered by companies through public/ rights issues.
Part B of the clarification XXVI pertains to eligibility norms for public issues/ offers for sale by companies in information technology sector.
Part C of the Clarification XXVI pertains to recasting of financial statements by companies in information technology sector.
Part D of the Clarification XXVI pertains to compulsory credit rating of debt instruments.
This Clarification is being issued under sub-section (1) of the Section 11 of the Securities and Exchange Board of India Act, 1992.
This Clarification shall come into effect from October 15, 1999 and shall be applicable to offer documents pending with SEBI.
Please acknowledge receipt.
Yours faithfully,
(O. P. Gahrotra)
Sr. Executive Director
Encl : As above
PART A
RELAXATION FROM THE ENFORCEMENT OF RULE 19(2)(b) OF THE SECURITIES CONTRACTS (REGULATION) RULES, 1957, TO THE COMPANIES IN INFORMATION TECHNOLOGY SECTOR
In exercise of the powers conferred under Rule 19(7) of the Securities Contracts (Regulation)Rules, 1957, the Board has decided to relax, in respect of public issues / offers for sale of equity shares or securities convertible at a later date into equity by unlisted companies in the information technology sector, the enforcement of requirement of offering to the public at least 25% of each class or kind of securities as provided under Rule 19(2)(b) of the said Rules, subject to the following conditions;-
minimum 10% of the securities issued by such company are offered to the public;
minimum twenty lacs securities are offered to the public (excluding reservation, firm allotment and promoter’s contribution); and the size of the offer to the public i.e. the offer price multiplied by the number of securities offered to the public at point 2 above, is minimum Rs. 50 crores.
PART B
GUIDELINES FOR ELIGIBILITY OF BODY CORPORATES FOR PUBLIC ISSUES
In Part A of Clarification XXIV dated May 18, 1999, following amendments be made –
After clause (ii) and before the explanation a new Explanation – I shall be inserted as under:
“Explanation – I :
At least three (3) audited accounts shall be available comprising not less than thirty six (36) months for determining the minimum track record of three (3) years,
In case of companies in the information technology sector, the track record of distributable profits shall be considered for the purpose of eligibility requirements only if the profits are emanating from the information technology business / activities;
In case of partnership firms which have since been converted into companies, the track record of distributable profits of the firm shall be considered for the purpose of eligibility requirements if, the financial statements for the respective years pertaining to partnership business conform to or are revised in a format identical to that required for companies and also comply with the following:
adequate disclosures are made in the financial statements similar to that of companies as specified in Schedule VI of the Companies Act 1956, and the financial statements shall be duly certified by a Chartered Accountant stating unequivocally that :
the accounts as revised or otherwise and disclosures made are in line with the provision of Schedule VI of the Companies Act 1956; and
the accounting standards of the Institute of Chartered Accountants of India (ICAI) have been followed and that the financial statements present a true and fair picture of the firm’s accounts,
the lead merchant banker shall also confirm that the financial statements furnished on behalf of the Partnership firms are in accordance with accounting standards prescribed by the ICAI.
d) In case of an unlisted company formed out of a division of an existing company, the track record of distributable profits of the division spun off shall be considered for the purpose of eligibility criteria if the requirements regarding financial statements as specified for partnership firms in clause (c) above are complied with”
II. The existing Explanation shall be renumbered as “Explanation – II”.
Public issue by a listed company which has changed its name to reflect its activities in information technology sector.
A listed company which has changed its name to indicate as if they are engaged in the business/ activities in information technology sector during a period of three years prior to filing of offer document with the Board, shall be eligible to make a public issue of equity share or securities convertible at a later date into equity share, if ;
i) it has a track record of distributable profits in terms of Section 205 of Companies Act, for at least three (3) out of immediately preceding five (5) years from the information technology business / activities, and
ii) it has a pre-issue networth of not less than Rs. One Crore in three (3) out of preceding five (5) years, with the minimum networth to be met during immediately preceding two (2) years.
if the company does not satisfy the requirements specified in clause (a) above, it can make a public issue provided that it satisfies the requirements laid down in sub clauses (a) and (b) of clause 2 of Part A of Clarification XV dated April 17, 1996, as modified from time to time.
The norms in clause (i) shall be applicable in addition to the norms specified in clause 3 of Part A of Clarification XV dated April 17, 1996.
Explanation:
For the purposes of clause (a) above the ‘networth’ shall have the same meaning as assigned to it in Explanation-II to Clarification XXIV dated May 18, 1999.
PART C:
AMENDMENTS TO THE DISCLOSURE GUIDELINES
In modification of the existing requirements, the offer documents of companies in the information technology sector shall be required to recast their financial statements so as to disclose profits from the information technology business activities.
PART D:
COMPULSORY CREDIT RATING OF DEBT SECURITIES OFFERED BY BODY CORPORATES THROUGH PUBLIC/RIGHTS ISSUES.
Part C of the Clarification No. XXII dated June 5, 1998, shall be substituted by the following:
“(a). No public or rights issue of debt instruments (including convertible instruments) irrespective of their maturity/conversion period shall be made unless credit rating by at least one approved credit rating agency is obtained and disclosed in the offer document. Where credit rating is obtained from more than one approved credit rating agencies, all the credit ratings, including the unaccepted credit ratings, shall be disclosed.
Provided any public/rights issue of debt securities of issue size greater than or equal to Rs.100 Crores, shall have to be compulsorily rated by two approved credit rating agencies and all the credit ratings shall be disclosed.
All the credit ratings obtained during the three (3) years preceding the public or rights issue of debt instrument (including convertible instruments) for any listed security of the issuer company shall be disclosed in the offer document.”
(ii) Every draft offer document for the public or rights issue of debt instrument (including convertible instruments) submitted to SEBI shall contain the following undertaking by the issuer:
“Necessary co-operation would be given to the credit rating agency (ies) in providing true and adequate information till the debt obligations in respect of the securities are outstanding.”
