POLICY DEVELOPMENTS / COMMITTEES / WORKING GROUPS DURING MARCH 1999

 

The Securities and Exchange Board of India has made it mandatory for all the listed companies to give brief status on the Y2K preparedness level in their published quarterly results as well as annual results for the financial year ending December 31, 1998 or thereafter. The necessary disclosures required to be made by the companies, which will be made effective through the amendment in the Listing Agreement, shall include the following :-

 

  1. the risk of the company’s Year 2000 issues

  2. the cost to address the company’s Year 2000 issues

  3. the company’s contingency plans

 

The company’s disclosure should be specific to each company and quantified to the extent practicable. The disclosures should be in sufficient detail for the reader to comprehend the effect of the Y2K problem on the company's operations/processes/functions and also evaluate the remedial steps taken by the company.

 

  1. The Risk to the Company due to Year 2000 bug

The companies should list the operations, processes, functions, which could be adversely affected due to the Year 2000 problem.

 

For each of the processes/ operations/ functions the following information should be disclosed.

 

  1. Status of progress of making these Y2K compliant (indicating the percentage of the work completed)

  2. The date by which the work would be completed.

  3. The names of other intermediaries, directly dependant upon the above processes/operations/functions.

 

  1. The Cost to Address the Company’s Year 2000 issues.

    2. Companies must disclose material historical and estimated costs of remediation. This includes costs directly related to fixing Year 2000 issues. In the worst case, the replacement cost of a non-compliant IT system should be disclosed as an estimated Year 2000 cost.

     

  3. The Company’s Contingency Plans.

Companies should briefly disclose the contingency plans in the event of system breakdown/failure due to the Year 2000 problem.

 

Decisions of SEBI Board Meeting held on March 19, 1999

 

  1. Amendments to SEBI (Depositories and Participants) Regulations, 1996

    2. The Board approved amendment to SEBI (Depositories and Participants) Regulations, 1996 to include Registrars to an Issue and Share Transfer Agents as an eligible category of applicant for grant of certificate of Registration as a depository participant. However, the RTI/STA shall not act as depository participant for securities of companies for which it is acting as a Registrar to an Issue or Share Transfer Agent. This amendment will help in increasing the number of depository participants. This step will also enable the system to get advantage of experience and infrastructure of RTIs/STAs and speed up the process of dematerialisation.

     

    Board also approved amendment to the Regulations to enhance the limit for client holdings by a Depository participant who is a broker with reference to its networth. The current provision provides for a broker to have a minimum networth of Rs. 50 lacs and the aggregate value of portfolio of securities of beneficial owners held in dematerialised form in a depository through him shall not be more than 25 times his networth. The Board agreed to increase the limit to 35 times the networth for brokers with networth between Rs.50 lakh and Rs.7.5 crores, and to 50 times the networth above Rs.7.5 crores and upto Rs.50 crores. This amendment will allow the existing brokers to accept more beneficiary accounts and increase the pace of dematerialisation. It will also have an effect of encouraging brokers to step up their networth.

     

  2. Revision of entry norms for initial Public Offer

    3. i. The existing SEBI norms permit an unlisted company to come out with an IPO if it has a dividend payment track record for 3 out of immediately 5 preceding years. The Board decided to change the requirement of the actual payment of dividend, to ability to pay dividend, in terms of Section 205 of the Companies Act, 1956.

    ii. The Board also decided that it shall be necessary for companies intending to come out with an IPO, based on ability to pay dividend, to have a minimum pre-issue networth (i.e. paid up capital and free reserves minus intangible assets and revaluation reserves)of not less than Rs. 1 crore in three out of the preceding five years, with a minimum networth to be met during the immediately preceding two years.

    iii. Under the recently changed SEBI norms for the initial public issues by Infrastructure Companies, the minimum participation of the appraising agency viz. a Development Financial Institution (DFI) or Infrastructure Development Finance Corporation (IDFC) or Infrastructure Leasing and Financing Services Ltd. (IL&FS) was reduced from 10% to 5%. The agencies like IL&FS are themselves promoting such projects and can not therefore be the appraising agencies. This was affecting infrastructure projects. The Board therefore decided that the condition of minimum 5% of the project cost can be met by any of the aforesaid institutions, jointly or severally, irrespective of whether they appraise the project or not.

     

  4. Amendment to SEBI (Buy-Back) Regulations

    5. Board decided to amend the SEBI (Buy-Back) Regulations consequent to the promulgation of the Companies (ArtLendment) ordinance, 1999/introduction of Companies (Amendment) Bill, 1999 to provide for buy-back of specified securities listed on a recognised Stock Exchange in addition to buy-back of equity shares of listed Companies. The Board also approved following other changes:

     

    i. A Company which seeks to buy-back securities through tender offer, can disclose in the explanatory statement to the notice under section 173 of the Companies Act, 1956, the maximum price at which the buy-back of securities shall be made instead of disclosing the specific price. The Board of Directors may determine the specific price.

     

    ii. The company may take approval of the shareholders authorising the Board of Directors to opt for tender or book building route at their discretion at the appropriate time.

     

  5. Merchant Bankers are permitted to carry on activities of primary dealers

    6. Certain Merchant Bankers have obtained in-principle approval from Reserve Bank of India to function as Primary Dealers and are required to be registered as Non Banking Finance Companies with RBI. As per existing SEBI (Merchant Bankers) Regulations, Merchant Bankers are prohibited from doing fund based activities. The Board decided to grant an exemption from this prohibition under SEBI (Merchant Bankers) Regulations to those Merchant Bankers who are or get registered with RBI as NBFC for primary and Satellite dealership of government securities.

     

  6. Draft regulations for Credit Rating Agencies

 

The Board approved the draft regulations for regulating the Credit Rating Agencies (CRAs).

 

i. The Regulations would cover rating of securities only, since the jurisdiction of SEBI Act, 1992 extents to securities only. Consequently, the Regulations are not proposed to cover the rating of fixed deposits, foreign exchange, country ratings, real estates etc.

 

ii. CRAs can be promoted by any one of the following categories of persons :

a) public financial institutions;

b) scheduled commercial banks ;

c) foreign banks operating in India;

d) foreign credit rating agencies recognized in the country of their incorporation, having atleast five years experience in rating ;

  1. any other company or a body corporate having continuous networth of minimum Rs. 100 crores as per the audited annual accounts for the previous five years prior to filing of the application with the Board.

 

iii. The holdings of the Banks and the financial institutions (including their group companies) shall not be more than 5% in the equity of the CRA in case such CRA are rating the securities of the group companies which are their borrowers. In the existing CRA, where such holdings of the Banks and financial institutions (including their group companies) are more than 5% and where the services of such CRA are proposed to be availed of, the Banks and Financial Institutions would have to bring their holding down to 5% within a period of 3 years.

 

iv. A Credit rating agency in which a scheduled commercial bank, financial institution/ and its group holds more than 5% stake in the form of equity capital would not be allowed to rate any instrument of any of the promoter and its associates.

 

v. CRAs would be required to have a minimum networth of Rs.5 crores. Existing CRAs would be given 3 years time in case their networth is less than Rs.5 crores.

 

vi. Disclosure of unaccepted ratings to investors has been made compulsory. Further, an obligation has been cast on the issuer to disclose all the ratings it has got during the previous 3 years for any of its listed securities.

 

vii. If an associate rates a company's securities, then another rating by another CRA would have to be compulsorily obtained and disclosure of both ratings would be required.

 

viii. Credit Rating Agencies would have to carry out periodic reviews of the ratings given during the lifetime of the rated instrument.

 

ix. For ensuring that corporates provide correct/adequate information to Credit Rating Agencies:

a) A clause would be incorporated in the listing agreement of the stock exchanges requiring the companies to cooperate with the rating agencies in giving correct and adequate information.

b) Issuers coming out with a public/rights issue of debt securities would be required to incorporate an undertaking in the offer documents promising necessary co-operation with the rating agency in providing true and adequate information.

 

x. For all public and rights issues of debt securities of issue size greater than or equal to Rs. 100 crores, two credit ratings from different rating would be made mandatory.

 

  1. Participation in trading in derivative products by mutual Funds

    2. The Board approved the amendment to the SEBI (Mutual Fund) Regulations permitting the Mutual Funds to trade in derivatives for the purpose of hedging and portfolio balancing.

     

  2. Par Value of shares

The Board discussed the issue of par value of shares. Currently, the requirement to issue shares with a par value of Rs.10/- and Rs.100/- arises out of the Circular issued by the Government in 1983 following a meeting of the Presidents of all Stock exchanges. The Informal Group on Capital Market chaired by Dr. Shankar N. Acharya, Chief Economic Advisor, had recommended the abolition of par value. The Board decided that

 

  1. SEBI will withdraw the existing Government circular requiring companies to issue shares at Rs.10/- and Rs.100/- and the companies will have the freedom to issue shares at a fixed amount to be determined by them in accordance with Section 13(4) of the Companies Act, 1956. While doing so, the companies will have to ensure that shares are not issued in decimal of a rupee.

  2. The companies will be free to change the existing fixed amount indicated by them in the Memorandum and Articles of Association under Section 13(4) of the Companies Act, 1956. Only companies whose shares are dematerialised would be eligible to alter the fixed amount, indicated in the Memorandum and Articles of Association.

  3. The existing companies, which have issued shares at Rs.101- and Rs.100/-, could also avail of this by splitting/consolidating the existing shares.

  4. The current disclosure norms applicable for premium issues as per SEBI Disclosure and Investor Protection Guidelines will apply for all IPos under the new dispensation. Also, current entry norms applicable for par issues will be applicable to all issues. Thus, henceforth there will be only one set of Disclosure and entry point norms for all IPOS.

  5. While introducing the aforesaid measures, appropriate modalities will be worked out.

 

The above steps will give the freedom to companies to price their IPos below Rs.10 and would thus be an extension of free pricing. It was felt that this measure of liberalization will benefit the investors and the companies. The measures will also harmonize the existing separate disclosure and entry point norms for par and premium issues. The measures are also in accordance with international practices.

 

  1. Employee Stock Option/Employee Stock Purchase

    2. The Board had constituted a Committee under the Chairmanship of Prof. J.R. Varma, of IIM, Ahmedabad and also member of SEBI, to review the existing regulations relating to Employee Stock Option Plans (ESOP)/Employee Stock Purchase Plans (ESPPs). The Board considered the recommendations of the Committee in the meeting today. Following are the main decisions taken:

     

  2. ESOPs

  1. Issue of stock options at a discount to the market price would be regarded as another form of employee compensation and would be treated as such in the financial statements of the company regardless of the quantum of discount on the exercise price of the option.

  2. Subject to the aforesaid financial treatment, ESOPs would not be covered by the pricing provisions of SEBI's preferential allotment guidelines.

  3. The issue of ESOPs would be subject to approval by shareholders through a special resolution.

  4. There would be no restriction on the maximum number of shares to be issued to a single employee. However, in cases of employees being offered more than 1 per cent shares, a specific disclosure and approval would be necessary in the AGM.

  5. A minimum period of one year between grant of options and its vesting has been prescribed. After one year, the period during which the option can be exercised would be determined by the company.

  6. The operation of ESOP Scheme would have to be under the superintendence and direction of a Compensation Committee of the Board of Directors in which there would be a majority of independent directors.

  7. ESOP would be open to all permanent employees (whether working in India or abroad) and to the directors of the company but not to promoter and large shareholders. With specific approval of the shareholders, the scheme would be allowed to cover the employees of a subsidiary or a holding company.

  9. Certain minimum disclosures would be required in the Director's Report or in the annexure to the Director's Report regardless of whether the stock options are issued at a discount or not: the total number of shares covered by the ESOP as approved by the shareholders, the pricing formula, options granted, options vested, options exercised, options forfeited, extinguishment or modification of options, money realized by exercise of options, total number of options in force, employee wise details of options granted to senior managerial personnel and to any other employee who receives a grant in any one year of options amounting to 5% or more of options granted during that year, fully diluted Earnings Per Share (EPS) computed in accordance with international accounting standards.

  10. The SEBI stipulations prohibiting an initial public offering by companies having outstanding options should not apply to Employee Stock Options whether vested or not. If any Employee Stock Options are outstanding at the time of an initial public issue by an unlisted company, the promoters' contribution shall be calculated with reference to the enlarged capital that would arise if all vested options are exercised.

 

  1. ESPPs

    2. 1. In respect of shares issued under an ESPP scheme during any accounting period, the accounting value of the shares so issued shall be treated as another form of employee compensation in the financial statements of the company.

    2. Subject to aforesaid financial treatment, ESPPs would not be covered by the pricing provisions of the SEBI's preferential allotment guidelines.

    3. Shares issued under an ESPP shall be locked in for a period of one year. However, if the ESPP is a part of a public issue and the shares are issued to employees at the same price as in the public issue, the shares shall not be subject to any lock-in.

     

    The companies would continue to have the alternative of issuing shares to employees in full compliance with the SEBI guidelines on preferential allotment without subjecting themselves to the ESOP/ESPP guidelines.

     

  2. Corporate Governance

    3. Recognising the importance of corporate governance for efficient working of the securities market and as a measure of. investor protection, the Board decided to suggest amendment in the Listing Agreement executed by the Stock Exchanges with the companies to cover this aspect. It was accordingly decided to appoint a Committee under the Chairmanship of Shri Kumar Mangalam Birla, well known industrialist and Member of SEBI Board, to suggest such measures to be incorporated in the Listing Agreement. SEBI would separately announce the composition of the Committee shortly.

     

  3. Risk Containment Measures in Derivatives Trading

    4. While approving the Dr. L.C. Gupta Committee Report on introduction of Derivatives Trading in Stock Index Futures, it was decided by the Board to set up a Group chaired by Prof. J.R. Varma to recommend risk containment measures for derivatives trading. The recommendations of the Prof. J.R. Varma Committee have been accepted by the Board. These recommendations provide the methodology for determining initial margins and also the requirements of liquid net worth for clearing members. It is prescribed that the liquid net worth shall not be less than Rs.50 lacs at any point of time. The Committee has also

     

    recommended transparency and disclosure norms for the clearing corporation and limits on the positions of the trading members. The implementation of these risk containment measures would help ensuring safety of the market when trading in derivatives starts.

     

  4. Y2K Compliance

The SEBI Board took a detailed review of the status of the Y2K compliance in the case of stock exchanges and other SEBI regulated intermediaries. It further decided to review the progress in all future Board meetings.

 

 

TAKEOVERS

 

Acquisition of 48.47% of the voting capital of M/s. Annapurna Industrial Resources Limited

 

Mr. Iqbal Singh Anand, Mr. Prithipal Singh Anand, alongwith their associates (the acquirers) made a public announcement of a public offer under Regulation 9 and Regulation 12 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1994. In terms of the public announcement the acquirers had sought to acquire 48.47% of the then existing voting capital of M/s. Annapurna Industrial Resources Limited (the target company) from the equity shareholders.

As per the Public Announcement, the offer was to open on 25/10/96 and close on 7/12/96 and M/s Netwest Finance Limited, a Merchant Banker, had been appointed as Manager to the offer. On 22/10/96, SEBI received a draft offer document in respect of the offer from the Manager to the offer. In the due course of processing the draft offer document, the Manager to the offer informed SEBI that the offer had already opened and closed. Meanwhile, the registration of the Merchant Banker expired on 15/1/97 and the same had not been renewed.

 

SEBI, therefore, advised the acquirers to inform SEBI the steps taken for the completion of the offer formalities and the status of the offer, in response to which the acquirers informed SEBI that all steps had been taken for completion of the offer and payment had been made by bank drafts to the shareholders whose shares were accepted and that the acquired shares have been transferred in the name of the acquirers.

 

It was found that the acquirers had committed the following violations:

 

  1. The offer document was dispatched without SEBI’s approval.

  2. The minimum offer price was not fixed in accordance with the provisions of the regulations since the shares of the target company did not have a continuous market.

  3. Delay in payment of consideration to the shareholders who had accepted the offer.

 

Taking into consideration the facts, the totality of the circumstances, the interests of the shareholders who have accepted the offer, SEBI directed the acquirers, to pay the shareholders whose offers were accepted @ 15% p.a. on the consideration paid, for the delayed period, except in the cases where the interest involved is below Rs.100/- or where addresses of tenderers have changed subsequently and not traceable now, within 15 days from the date of the order. The balance amount (i.e. the difference between Rs.55,000/- and

 

paid as aforesaid), was directed to be deposited to the credit of the Investor Protection Fund of the Regional Stock Exchange where the shares of M/s Annapurna Industrial Resources Ltd. are listed.

 

Acquisition of shares of M/s. Sesa Seat Information Systems Limited

 

M/s. Sesa Seat Information Systems Limited (SSIS), engaged in the publication of Telephone Directory with Yellow Pages and Tourist Guides. The company feared that it may be forced into Creditors liquidation. In order to revive the company, the Core Group of Managers of SSIS (referred to as the "acquirer") approached SEAT s.p.a. of Italy, with an offer to buy out its 40% stake in SSIS. SEAT s.p.a. in turn has decided in principle to transfer the shares. The Acquirers made an application dated 28.10.98 for grant of exemption under Regulation 3(1)(l) of SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997, for acquisition of the said 6,00,000 Equity Shares of SSIS held by SEAT s.p.a. of Italy.

 

The application of the acquirer was forwarded by the Board to the Takeover Panel in terms of Sub regulation (4) of regulation 4. The Takeover Panel initially rejected the application as the acquirers failed to furnish independent evidence to support their contentions disclosed in the application.

 

The acquirers submitted further information for consideration. The Panel on further consideration recommended that the exemption may be granted taking into consideration that the Core Managers as well as other employees of the company want to revive the company which would be in the interests of all the employees of the company and the shareholders in the company, that is, about 5000 shareholders as also the inclination of the company’s main bankers, Messrs. Canara Bank who is considering to provide the company with a short term credit facility of Rs.100 lacs against pledge of entire 6,00,000 shares to be transferred from SEAT s.p.a. as collateral security in addition to pledging personal fixed deposits of the Managers to the extent of Rs.15 lacs.

 

SEBI took into consideration the recommendation of the Takeover Panel and also the fact that the share price of SSIS shares is quoted at Rs.0.80 (low) and is Rs.1.05 (high) in OTCEI and any direction for making public offer in the circumstances mentioned above will be detrimental to the interest of shareholders and employees of the company who are seeking to revive the company.

 

Therefore, in the light of the facts and circumstances of the case and taking into consideration recommendation of the Takeover Panel, SEBI, in exercise of the powers under Section 4(3) of SEBI Act read with regulation 4(6) of the Regulations granted exemption to the acquirers from making an open offer as provided in Chapter III of the Regulations.

 

Standardised formats of reports/records etc. in terms of specific provisions of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997

 

Under the provisions of SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997, Acquirer(s), Merchant Banker(s) and Target Companies are required to maintain certain records to furnish certain information / reports to SEBI / Stock Exchanges in accordance with the specific provisions stipulated in the regulations.

 

In order to ensure uniformity in compliance of these requirements by all concerned and to enable the concerned persons to furnish all the relevant information in the first instance itself, SEBI has standardized the formats of the following reports / records :

 

  1. Format for filing the information with SEs by acquirer as required under regulation 3(3).

  2. Format of report to be filed with SEBI as required under regulation 3(4).

  3. Format for filing the information by acquirer with Target Company as required under regulation 7(1), 8(1) & 8(2).

  4. Format of the Register to be maintained by the Target Company in terms of Regulation 8(4).

  5. Format of due diligence certificate to be furnished by Merchant Banker in terms of Regulation 24(2).

  6. Format of 45 days report required to be filed by Merchant Banker with SEBI in accordance with Regulation 24(7).

 

A copy of these formats, are available on our website at, www.sebi.gov.in. With the standardization of these formats, all the concerned persons are advised to maintain records to furnish the information / report, as applicable, strictly in accordance with these formats, w.e.f. 01/04/99.

 

In order to provide concise and authentic information on Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997 and subsequent amendment thereto, SEBI has compiled a list of most frequently asked questions and answers there to. To facilitate larger awareness of this compilation, the same has been made available on the SEBI website viz. http://www.sebi.gov.in.

 

As the contents are informative in nature, for exact details and clarifications the readers are advised to refer to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and subsequent amendment(s) which are available at SEBI website http://www.sebi.gov.in. They are also advised that these answers do not purport to explain the regulations in force, with respect to any particular case/fact pattern since answers to questions involving particular case/fact pattern since answers to questions involving particular case.fact pattern may depend upon interpretations, administrative decisions and court actions in respect of the same.