Securities and Exchange Board of India (SEBI)
SR. EXECUTIVE DIRECTOR
August 5 1994
TO,
ALL PRESIDENTS/ED OF BOMBAY/
MADRAS/DELHI/CALCUTTA/AHMEDABAD/
BANGALORE/BHUBANESHWAR/COCHIN/
COIMBATORE/GAUHATI/HYDERABAD/
JAIPUR/LUDHIANA/MADHYA PRADESH/
MAGADH/MANGALORE/PUNE/SAURASHTRA
KUTCH/ UTTARPRADESH/ VADODARA/OTCEI/ &NSE.
Dear Sir,
Guidelines for preferential allotments
Of late it was observed that the promoters of persons for the time being in charge of the management of companies were making preferential allotment of shares etc to a select group of persons , including themselves , at prices unrelated to the prevailing market prices of such instruments. This was not considered in the interest of the general investors. It was felt necessary to protect the interest of the investors. SEBI has therefore issued guidelines on August 04 1994 covering the issue of shares etc on preferential basis to a select group of persons. The guidelines come into force with immediate effect . A copy of the press release dated August 04 1994 issued by SEBI on the above subject, the contents of which are self explanatory is enclosed for your information and necessary action.
You are accordingly advised to ensure that the Shares/ Warrants/ Fully Convertible Debentures/ Partly Convertible Debentures or other financial instruments issued by the companies on a preferential basis are allowed to be listed at the Stock Exchange only if they are in accordance with the guidelines issued by SEBI.
Please acknowledge receipt of the circular.
Yours faithfully,
sd/-
C. B. BHAVE
Encl : as above.
SECURITIES AND EXCHANGE BOARD OF INDIA
SECONDARY MARKET DEPARTMENT
PRESS RELEASE
Sub : GUIDELINES FOR DISCLOSURE AND INVESTOR PROTECTION- PREFERENTIAL ISSUES.
Issued By : Primary Market Department
TEXT
1. Of late, the practice of making preferential allotments of shares etc. at a price unrelated to the prevailing market price of such instruments seem to be on the increase. This development is particularly undesirable as the allotments are made to select persons for the time being in charge of the affairs of management of the company. Besides, companies have also been issuing warrants to select persons who are considered to be the promoters, or persons with a right to obtain shares in future at a price, not bearing a fair relation to the market. Therefore, there appears to be a need for protecting the interest of the investors, who do not receive such preferential treatment by ensuring that the pricing of the preferential allotments is market related.
2. SEBI therefore issues the following guidelines governing the issue of shares or warrants/Fully Convertible Debentures (FCDs)/Partly Convertible Debentures (PCDs) or other financial instruments made on a preferential basis to a select group of persons under Section 81(1A) of the Companies Act, 1956. These guidelines are being issued in terms of Section 11(1) read with Section 24 of the Securities and Exchange Board of India Act, 1992, for orderly development of the securities market and to protect the interest of the investors at large.
3. All issues of capital by listed companies by way of shares /FCDs/PCDs /warrants/any other financial instruments on a preferential basis to any select group of persons, shall hence forth be subject to fulfilment of the requirements mentioned in the following paragraphs :-
4. Pricing of the issue
The issue of shares on a preferential basis can be made at a price not less than the higher of the following :
The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date
OR
the average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date.
Explanation –
a. “relevant date” for this purpose means the date thirty days prior to the date on which the meeting of General Body of shareholders is convened, in terms of Section 81(1A) of the Companies Act to consider the proposed issue.
b. “stock exchange” shall means any of the stock exchanges in which the shares are listed and in which the highest trading volume in respect of the shares of the company has been recorded during the preceding six months prior to the relevant date.
5. Pricing of shares arising out of warrants etc.:
Where warrants are issued on a preferential basis with an option to apply for and get allotted shares, the issuer company shall determine the price of the resultant shares in accordance with para 4 above.
However, the relevant date for this purpose may, at the option of the issuer be either the one referred in explanation a) to para 4 above or a date 30 days prior to the date on which the holder of the warrants becomes entitled to apply for the said shares.
6. Upfront payment on warrants :
An amount equivalent to atleast ten percent of the price fixed in terms of para (4 ) above would become payable for the warrants on the date of their allotment. This amount would be adjusted against the price payable subsequently for acquiring the shares by exercising an option for the purpose. This amount would stand forfeited if the option to acquire shares is not exercised.
7. Pricing of shares on conversion :
Where PCDs/FCDs/other instruments are issued on a preferential basis providing for the issuer to allot shares at a future date, the issuer shall determine the price at which the shares could be allotted either by conversion or otherwise in the same manner as provided for pricing of shares allotted in lieu of warrants as indicated in para 5 above.
8. Currency of financial instruments :
In case of warrants/PCDs/FCDs/or any other financial instruments with a provision for the allotment of equity shares at a future date, either through conversion or otherwise, the currency of the instruments should not exceed beyond 18 months from the date of issue of the relevant instrument.
9. Non transferability of financial instruments :
Warrants/FCDs/PCDs or any other financial instruments issued on a preferential basis will not be transferable. The shares allotted on a preferential basis will not be transferable in any manner for a period of 5 years from their date of allotment. Similarly, the shares acquired, by conversion or otherwise, would also remain locked in for a period of five years from their date of allotment. Similarly, the shares acquired by conversion or otherwise, would also remain locked in for a period of five years from the date of their allotment.
10. Currency of shareholders resolutions :
Action on any resolution passed at a meeting of shareholders of a company granting consent for preferential issues of any financial instrument shall be completed within a period of three months from the date of passing of the resolution. If such a resolution is not acted upon within the said period, a fresh consent of the shareholders will have to be obtained and the relevant date referred to in explanation (a) in para 4 above will relate to the new resolution.
11. Certificate from Auditors :
In case of every issue of shares/warrants/FCDs/PCDs /or other financial instruments, the statutory auditors of the issuer company must certify that the issue of said instruments is being made in accordance with the requirements contained in these guidelines. Copies of the certificate shall also be laid before the meeting of the shareholders convened to consider the proposed issue.
12. Preferential allotments to FIIs :
Preferential allotments, if any to be made in favour of Foreign Institutional Investors shall also be governed by the guidelines issued by the Government of India / SEBI/Reserve Bank of India on the subject.
13. Applicability :
These guidelines will come into force with immediate effect. Cases of preferential issues approved by the General Body of share holders at meetings held between 5th May 1994 and 4th August 1994 can be acted upon within a period of three months from the date of issue of these guidelines. However, all cases of preferential issues approved by resolutions of the general body of shareholders held prior to 5th May 1994 would be governed by these guidelines, if they have not been acted upon by 4th August 1994.
The stock exchanges are being advised separately that the shares/warrants/FCDs /PCDs or other financial instruments issued on a preferential basis would be eligible for listing only if such instruments were issued in accordance with these guidelines.
