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TABLE OF CONTENTS

1 INTRODUCTION *

2 TERMS OF REFERENCE OF THE SUB-COMMITTEE *

3 MEMBERS OF THE SUB-COMMITTEE *

4 NEED FOR SPECIAL PROVISIONS FOR DOT-COM COMPANIES *

5 RECOMMENDED ADDITIONAL DISCLOSURES IN THE OFFER DOCUMENT: *

5.1.1 Business model : *

5.1.2 Risk factors in the offer document: *

5.1.2.1 Global risks: *

5.1.2.2 Risks attached to the internet industry: *

5.1.2.3 Risks attached to the company: *

5.1.3 Project cost, means of financing and deployment of funds in the project: *

5.1.4 Key Managerial and Technical Personnel : *

5.1.5 Basis for issue price: *

5.1.6 Information given to Qualified Institutional Buyers ("QIB"): *

5.1.7 Accounting policies *

6 RECOMMENDED ADDITIONAL DISCLOSURES UNDER THE CONTINUOUS DISCLOSURE REQUIREMENTS *

6.1 Annual Reports *

6.2 Quarterly un audited results under Clause 41 of the Listing Agreement: *

7 CLASSIFICATION OF COMPANIES AS DOT COM COMPANIES : *

ANNEXURE i - xxxv

REPORT OF THE ACCOUNTING STANDARDS SUB COMMITTEE ON DOT COM COMPANIES

1. INTRODUCTION

1.1 Rapid technological advancements have led to the emergence of what is known as the ‘new economy’ where electronic media is increasingly used for communication and executing transactions. In this new economy, business takes place at the "speed of thought". The internet has become an integral part of this business process. Dot-com companies are different from the traditional ‘brick and mortar’ companies in many ways specifically in terms of their rapidly changing and unpredictable business models as well as the composition of their assets which are predominately intangible.

1.2 The investors’ need for adequate and timely information is more critical than ever before. Quality information is the lifeblood of strong, vibrant markets. Without it, investor confidence erodes, liquidity dries up, fair and efficient markets simply cease to exist. As the quantity of information increases exponentially through the Internet and other technologies, the quality of that information must be a signal priority.

1.3 The International Organization of Securities Commission ("IOSCO"), the International Accounting Standards Committee ("IASC") and the Financial Accounting Standards Board ("FASB") of the United States as well as national regulators like the United States Securities and Exchange Commission ("SEC") have discussed the significant issues relating to accounting, financial reporting and disclosure by dot-com companies for quite some time now. In the recently concluded International Organization of Securities Commission ("IOSCO") Technical Committee meeting, concerns were raised towards the need to identify market and investment risks unique to the emerging new economy and to disclose these risks to investors in a manner that they understand them. This concern for investor protection in the era of new economy was highlighted by the Securities and Exchange Board of India ("SEBI") at the IOSCO’s annual conference. At that conference, it was expressed that in the absence of any standardized set of accounting recognition, measurement and disclosure norms for dot-com companies, investors wishing to invest in these dot-com companies would not be able to assess the appropriateness and adequacy of accounting principles adopted by dot-com companies. Further, the lack of adequate guidance could lead to accounting arbitrage that renders effective inter-firm comparison difficult. The situation is also complicated because:

there appears to be a diversity in practice;
the situation is not adequately addressed in current accounting literature; and
developing practices may be inappropriate under generally accepted accounting principles.

1.4 The Accounting Standards Committee of SEBI (the "Committee") in its meetings held on July 6, 2000 and August 3, 2000 had discussed the significant accounting, financial reporting and disclosure issues pertaining to dot-com companies. The Committee was of the view that regulators need not determine whether a unit of a company’s equity is correctly priced or not, this being a matter that should be left to the individual investor to assess whether the valuation was fair or not. However, the Committee was of the view that our regulators need to address the difficulties encountered by investors in making well-informed decisions regarding their investments in dot-com companies. These problems mainly arise due to the lack of proper guidance relating to financial accounting and reporting by dot-com companies, unavailability of adequate benchmark information for comparison purposes and inadequate disclosures regarding the critical elements and peculiar nature of the business of dot-com companies.

1.5 The Committee concluded that dot-com companies are often valued, based on estimates of future revenues or cash flows that would be generated by deploying their assets. These assets are mainly intangible in nature and therefore investors would need certain additional information to enable them to make an informed judgement of the qualitative factors related to a dot-com company’s business model such as the unique business idea, technology, quality of promoters and key managerial personnel, prime-mover advantage, etc. The Committee also believes that fundamental accounting principles remain the same and are applicable to all entities, including dot-com companies. There is however a need for formulating specific accounting guidance applicable to dot-com companies to avoid any irrational application of fundamental accounting principles, to facilitate meaningful inter-firm comparison between different dot-com companies, and to provide investors with robust and reliable financial information that could be applied to a variety of business valuation models such as price multiples of revenues or net income, discounted cash flows, etc..

1.6 The Committee constituted a Sub-Committee on Dot-com Companies (the "Sub-Committee") to examine the need for additional disclosures in the offer documents, additional disclosures under continuous disclosure requirements and accounting standards for dot-com companies.

1.7 The Committee puts on record its appreciation for the invaluable contribution made by Shri Avinash Chander, Technical Director, The Institute of Chartered Accountants of India (ICAI); Shri Sumanth Cidambi, Infosys Technologies Ltd.; Shri S Ravindran, General Manager, SEBI; Shri Manoj Kumar, Assistant General Manager, SEBI; Shri Sunil Kadam, Assistant General Manager, SEBI and other staff of Secondary Market Department of SEBI, in preparation of this report.

2. TERMS OF REFERENCE OF THE SUB-COMMITTEE

The terms of reference of the Sub-Committee are set out below.

2.1 To examine and recommend additional disclosure requirements to be made in offer documents of dot-com companies with the objective of providing sufficient information, both financial and non-financial, to potential investors to enable them to understand the business model of the dot-com company and determine its fair value.

2.2 To examine and recommend initial and continuous disclosure requirements for dot-com companies including disclosures in their financial statements.

2.3 To prescribe accounting and financial reporting guidance to be adopted by dot-com companies and to identify and define critical items emerging due to the unique nature of business of dot-com companies (such as the definition of revenue, principles of revenue recognition, treatment of expenses as pre-paid or intangible assets as opposed to their recognition as period costs, etc).

3. MEMBERS OF THE SUB-COMMITTEE

The Sub-Committee consists of the following members:

1. Shri Y H Malegam – Chairman of the Sub-Committee Managing Partner S B Billimoria & Co., Chartered Accountants

2. Prof. J R Varma - Board Member, SEBI

3. Shri T V Mohandas Pai– Director (Finance and Administration) and Chief Financial Officer, Infosys Technologies Limited

4. Shri Ravi Narain - Managing Director, National Stock Exchange of India Limited

5. Ms. Bhavana Doshi - Chairperson, Research Committee of the Institute of Chartered Accountants of India

6. Shri Pratip Kar - Executive Director, SEBI (Member Secretary)

4. NEED FOR SPECIAL PROVISIONS FOR DOT-COM COMPANIES

4.1 The Sub-Committee appreciated the fact that though the valuation of all companies including internet/dot-com companies is generally performed by investors on a comparable company basis, using a discounted cash flow model (i.e. calculating the present value of expected future cash flows), forecasting future cash flows of dot-com companies is sometimes difficult when compared to traditional "brick and mortar" companies due to the following reasons:

The business models of dot-com companies are unpredictable and rapidly changing.
Currently, the earnings of many dot-com companies are negative. Valuations of these companies are often based on the assumption that these dot-com companies will generate sustainable positive earnings in future.
Absence of historical data as most of the dot-com companies are in a very early stage of their life cycle.
Absence of comparable companies - Even if the companies operate in the same type of business they may not be comparable because of differences in the products/services provided, stages in their life cycles, size and scale of operations, etc.
The "going-concern" assumption may not be valid for dot-com companies.
The continued ability of dot-com companies to survive often depends on their future fund raising capabilities, through the issue of either debt/equity to meet their future financing requirements. The ability of the dot-com company to raise funds from the public or private equity/debt markets depends on various factors including the background of the promoters, quality of senior managerial/technical personnel, the market’s perception of the viability and soundness of the business model of the dot-com company, etc.
A substantial portion of the assets of dot-com companies are of an intangible nature and consequently a high degree of uncertainty surrounds their identification of intangible assets and estimated future economic benefits that can be derived from their use.
Difficulties in estimating future growth in revenues because of business uncertainties.
Lack of availability of customer and usage statistics.
Lack of comparable and reliable financial and non-financial data – a variety of new valuation models such as price multiples of revenues or net income, discounted cash flows, etc are in use. When such valuation models are prepared with inaccurate underlying accounting and financial information, it may lead to wide distortions. Practice varies amongst dot-com companies with respect to the definition of revenue, principles of revenue recognition, treatment of expenses as pre-paid or intangible assets as opposed to their recognition as period costs, etc.

4.2 In view of the above difficulties encountered by the investors while forecasting the future cash flow of dot-com companies, the Sub-Committee felt that certain additional disclosure requirements may be mandated for the dot-com companies in the offer documents and financial statements and also necessary accounting standards applicable to the dot-com companies may be formulated.

4.3 The Sub-Committee discussed at length the issue of the extent to which it should go in laying down separate disclosure standards for dot-com companies. While recognizing that its terms of reference limit it to dot-com companies, the Sub-Committee believed that some of its recommendations could have wider applicability. Accordingly, the Sub-Committee recommends that :

Recommendations contained in para (5.1.1.2, 5.1.2.1, 5.1.2.2, 5.1.2.3, 5.1.3, 5.1.5, 5.1.7, 7) of the draft report shall be applicable to the dot com companies only and not to the other companies.
Recommendations contained in para (5.1.4, 6) of the draft report may be extended to companies in other high technological industries like bio-technology that have an uncertain business model, by the main Committee (Accounting Standards Committee) with necessary modifications depending on the unique nature of the particular high technological industry.
Recommendations contained in para (5.1.1.1, 5.1.2, 5.1.6) of the draft report may be extended to all companies by the main Committee.

4.4 The Sub Committee was of the view that the internet is a source of fundamental uncertainty for all companies – dot-com or otherwise. An example like Encyclopaedia Britannica demonstrates that even a century old industry leader can be destroyed within a short period of time by internet enabled competitors. The Sub-Committee recommends that the main Committee may consider recommending that all companies should be required to disclose their state of internet preparedness and the potential risks to their business models from e-rivals.

5 RECOMMENDED ADDITIONAL DISCLOSURES IN THE OFFER DOCUMENT:

5.1 The Sub-Committee reviewed the existing disclosure requirements prescribed under the Disclosure and Investor Protection Guidelines issued by SEBI and is of the view that certain additional disclosure requirements may be presented under the following heads:

5.1.1. Business model :

5.1.1.1 At present, the information to be furnished by the companies pertaining to the nature of products, marketing and capacity utilisation in the offer document is specified under Paragraphs 6.7.11 to 6.7.12.1 of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 (annexed).

The Sub Committee believes that with the advent of new economy based on technological advancement, the business models have changed for not only the dot com companies but also for brick and mortar companies. Therefore, the following additional disclosure may be mandated for all companies to enable potential investors to understand the business model:

i.A description of the nature of the company’s operations and its principal activities, stating the nature of product sold and/or services provided for each of the last three financial years. If the company has been in existence for less than three years, this information may be provided for such shorter period. Information may be presented on the same basis as that used to determine the company’s business segments under the same body of accounting principles used in preparing the company’s financial statements.

[Note: In case of dot com companies, the nature of the company’s operations could include internet portals, internet infrastructure, internet B2B software, internet commerce, internet consulting and application services, internet financial services, internet vertical portals, multi sector internet companies, internet direct marketing and advertising services, B2B commerce, B2C commerce etc. in which the company will operate. The company should also disclose the percentage of composition of company’s revenue and capital employed in each of the sectors.]

A description of the principal markets in which the company competes including a breakdown of total revenues by category of activity and geographic market for each of the last three financial years. If the company has been in existence for less than three years, this information may be provided for such shorter period.

iii.A description of the seasonality, if any, of the company’s main business

iv.Industry size and structure for each of the business segments in which the company will be operating. Data on industry size and structure must be supported by corroborative sources. This recommendation could be extended to all companies that provide data on industry size and structure;

v.Uniqueness of the idea- The proposed action plan (including the management systems and expertise proposed to be put in place) to fulfill the commitments made within the stipulated time, cost and qualitative targets;

vi.Interests of experts and counsel - If any of the named experts or counselors was employed on a contingent basis, owns an amount of shares in the company or its subsidiaries which is material to that person, or has a material, direct or indirect economic interest in the company or that depends on the success of the offering, provide a brief description of the nature and terms of such contingency or interest.

5.1.1.2 In case of a company classified as dot com company, the management of the company, shall identify and disclose all relevant qualitative and quantitative business information including the following for each of the last three financial years:

I Qualitative information:

Market position, competition and management’s assessment of the company’s prime-mover advantage. The basis for any statements made by the company regarding its competitive position should also be clearly disclosed;
Description of the underlying technological processes including summary information regarding the extent to which the company is dependent, if at all, on patents or licenses and/or industrial or commercial contracts or new technological processes, where such factors are material to the company’s business or profitability;
General terms of contracts and arrangements with customers and how revenue is earned on products sold and/or services provided to customers;
General terms of contracts (generic and specific) entered into with suppliers;
Alliance and Partnerships;
Description of the marketing channels used by the company including an explanation of any special sales methods employed by the company;
Description of intangible assets and how they will be used to generate future cash flows;
Multiple elements arrangements (like upgrades, maintenance, services, etc);

II Quantitative information:

(Company management should determine the parameters on which the quantitative information is to be provided in order to enable the investor to evaluate the operating profitability of a company. The list given here should be regarded as illustrative.)

Sources of revenue by business segment subcategorized as appropriate into heads including advertising income, subscription income and transaction income;

b. Amounts, if any, of barter transactions recorded as a component of gross revenues and cost of revenues/selling and marketing expenses if such amounts exceed 5% of either of total revenues or cost of revenues or selling and marketing expenses /

c.Operational statistics:

Number of portals
Average number of daily visitors to each portal
Number of pages viewed
Number of minutes spent to view the web page
Quarter–on-quarter growth in the average number of daily visitors and pages viewed
Average number of daily impressions that are delivered i.e. number of times banner ads appear and click-throughs;
Percentage of page hits that have historically translated into revenues by quarter
Average size and duration of contracts with customers.
Percentage of repeat business.
Percentage of revenue generated by the largest customers.
Percentage of average revenue generated by top five largest customers.

d. Duration of advertisements, minimum guaranteed impressions, etc.

e. Recurring and non recurring items of revenue

f. Cost of acquiring a customer and revenue per customer

g. Customer loyalty and customer churn rate (i.e. proportion of number of customers lost to the total number of customers during the past three years);

h. any other information that the company believes will be useful to an investor in assessing the performance of the company

5.1.2 Risk factors in the offer document:

The Sub-Committee was of the view that risk factors generally may be classified into three broad categories namely global risks (including general economic and political risks), risks attached to the industry and risks attached specifically to the company. Companies should be encouraged to list the risk factors in the order of their priority to the company. These risk factors include factors that will make the offering speculative or one of risk. The management of the dot-com company and the Lead Merchant Bankers may be made responsible for identifying these risk factors.

Risk factors that are required to be disclosed by dot-com companies may include the following (illustrative). However, some of these risk factors may be applicable to other companies also.

5.1.2 Global risks:

Risks due to technological changes and obsolescence
Absence of cross border entry barriers
Currency fluctuation risk
Risks related to Intellectual Property Rights transfers
Competitive industry where innovation is immediately copied and there is no entry barrier
Liability to third parties and liability for unlawful/fraudulent activities by users under the laws of foreign countries.
Dependence on global market.

5.1.2.2 Risks attached to the internet industry:

Changes in government regulation relating to internet service companies
Industry associated timing risk
High bandwidth costs of accessing the internet in India and other technical obstacles
Limited installed personal computer base in India
Limited internet connections in India
Uncertainty regarding the growth and acceptance of online advertising and e-commerce in India
High percentage of failures is common in internet market
No comparable companies in the same segment with reasonable operating history for the purpose of bench marking
Legal risks including liabilities if any, to third parties for information retrieved from web sites, liabilities for unlawful fraudulent activities by web site users, liability to third parties for the products sold through electronic means.
e-security risk.
Computer viruses
Lack of protection of the intellectual property rights due to inadequate legal provisions in the statutes.

5.1.2.3 Risks attached to the company:

Risks related to the financial condition and existing business model of the company. The future prospects of the company will depend on the following factors:

Awareness of the company’s unique selling proposition;

Pricing models of competitor companies

Expansion of content and services on the portal

Ability of the company to attract and retain customers

Ability of the company to attract a larger number of advertisers from a variety of industries

Ability of the company to attract, maintain and motivate qualified staff

Ability of the company to maintain strategic relationships with business partners

Ability of the company to respond effectively to competitive pressures

Ability of the company to continue to develop and upgrade the technology

Ability of the company to promptly address the challenges faced by early stage and rapidly growing businesses, which do not have an experience or performance base to draw on.

Risks related to competition
Availability of bandwidth and cost associated with it including the risk of existing contracts and commitments in the face of falling prices of bandwidth.
Risks related to unproven business models
Risks related to the following reasons:

Timing of the expansion plans of the company

Changes in pricing policies or product and service offerings

Increases in personnel, marketing and other operating expenses to support the anticipated growth

Seasonality in revenues due to certain factors such as festivals, etc

Failure of marketing campaign to establish brand recognition and loyalty for the brand

Failure to manage the growth effectively

Failure of telecommunication and computer systems

Failure to retain the existing key personnel and hire additional skilled employees including risks related to competitive labor markets

Risks related to (sunk) investments in network infrastructure

Termination of agreements with third parties to provide products and services to the customers and termination of strategic alliances.

Strain on managerial, operational and financial resources due to future acquisitions, investments, strategic partnerships or other ventures

Failure to meet merchandising, inventory management and order fulfillment obligations for e-commerce business could disrupt the operations

The number of shares offered to public will represent only __ percentage of the company’s paid up equity capital and therefore the share price of the company will be volatile in view of the low floating stock.
Risks associated with impairment of intangible assets.
Risks in forecasting future cash flows due to :

Difficulty in forecasting sales

Difficulty in forecasting size of the market

Difficulty in forecasting share of the market size

Difficulty in forecasting costs

Difficulty in forecasting re-investment needs

Low floating cost and consequent volatility in the share price.

5.1.3 Project cost, means of financing and deployment of funds in the project:

At present, all the companies are required to furnish information regarding project cost, means of financing and deployment of funds in the project in the offer document as specified under Paragraphs 6.6.2, 6.6.3 and 6.6.5 of SEBI (Disclosure and Investor Protection) Guidelines, 2000 (annexed).

The Sub-Committee recommends that the following additional disclosure requirements may be prescribed for the dot-com companies with regard to the estimated project cost and use of proceeds:

The Company shall disclose the annual break up of expenditure to be incurred under the following heads, for the next three financial years:

1. Technological infrastructure.

Expenditure on hardware
Expenditure on software

2. Other tangible assets.

3. Brand building and marketing

4. Financing present and future losses (The amount provided under this head must be adequate to ensure that the company has adequate funds for the purpose and in any case for a period of not less than 24 months. If the company proposes to finance this expenditure out of any further issues of capital the amount and the expected date of such issue shall be indicated).

5. Working capital

6. Any other item which is greater than the 5% of the total cost of the project.

The dot com companies are required to provide additional information in respect of technology, process, patent, software and other intangible assets and a brief description of any restriction on the use or marketability of such assets.

Prof. J R Varma, is of the opinion that if dot-com companies are required to disclose the future losses for the next 24 months, the companies can use it as a tool to give projections regarding the future financial performance of the companies indirectly which is otherwise not permissible under the present guidelines. However, the other members of the Sub-Committee are of the view that it will amount to giving projections regarding future financial performance of the company only when companies are permitted to provide complete set of figures such as revenue, profit etc.

Prof. Varma was also of the view that it may actually be in the interest of investors that a company raise only a small amount of money initially and thereby subject itself to the ongoing discipline of the capital markets. The company would have to demonstrate continued performance to receive additional rounds of financing. Prof. Varma believes that this would ensure that if the business model turned out to be unviable, only a smaller amount of investor money is lost.

5.1.4 Key Managerial and Technical Personnel :

At present, all the companies are required to furnish the information in the offer documents regarding the promoters and their background and key managerial personnel as specified under paragraphs 6.7.3 and 6.7.4 of SEBI (Disclosures and Investor Protection) Guidelines, 2000 (annexed).

The Sub Committee felt that the ability of dot-com companies to survive and raise capital depends not only on the background of the promoter and key managerial personnel but also on the quality of its key technical personnel and therefore dot-com companies may be required to identify all key personnel (both managerial and technical) whose continuance may be vital for the existence and growth of the company.

The Sub Committee recommends that dot-com companies may be required to comment on its key managerial and technical manpower, their equity holding in the company, the measures taken by the company to ensure their retention, the risks associated with their parting of the company and how it propose to address these risks.

The purpose of this section is to provide information concerning the company's directors and managers as well as key technical personnel that will allow investors to assess such individuals' experience, qualifications and levels of compensation, as well as their relationship with and dependency by the company.

A. Directors and senior management: The following information shall be disclosed with respect to the company's directors and senior management, and any employees such as engineers, scientists or designers (i.e. key technical personnel) upon whose work the company is critically dependent:

1. Name, business experience, functions and areas of experience in the company. In the case of key technical personnel, a clear description of their functional responsibilities and why they are considered critical to the company’s functioning, on an individual basis

2. Principal business activities performed outside the issuing company (including, in the case of directors, other principal directorships).

3. Date of birth and age

4. The nature of any family relationship between any of the persons named above.

5. Any arrangement or understanding with major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management.

6. Plans formulated by the company to retain key technical personnel and description of contingency measures that will be adopted by the company should such personnel leave the employment of the company or their employment is terminated.

B. Compensation: Provide the following information for the last full financial year for the company's directors and members of its administrative, supervisory or management bodies. :

1. The amount of compensation paid, and benefits in kind granted, to such persons by the company for services in all capacities to the company by any person. Disclosure of compensation is required on an individual basis. This also includes contingent or deferred compensation accrued for the year, even if the compensation is payable at a later date. If any portion of the compensation was paid (a) pursuant to a bonus or profit-sharing plan, provide a brief description of the plan and the basis upon which such persons participate in the plan; or (b) in the form of stock options, provide the title and amount of securities covered by the options, the exercise price, the purchase price (if any), the expiration date of the options, and the number of options that have vested and were exercised, vested and unexercised options and unvested options as of the most recent practicable date.

2. The total amounts set aside or accrued by the company to provide pension, retirement or similar benefits to these personnel.

C. Share ownership:

1. With respect to the persons listed in subsection B, above, provide information as to their share ownership in the company as of the most recent practicable date (including disclosure on an individual basis of the number of shares and percent of shares outstanding of that class, and whether they have different voting rights) held by the persons listed and options granted to them on the company's shares. Information regarding options shall include: the title and amount of securities called for by the options; the exercise price; the purchase price, if any; and the expiration date of the options.

2. Describe any arrangements for involving the employees in the capital of the company, including any arrangement that involves the issue or grant of options or shares or securities of the company.

Note to Item.C: If (a) any of the persons listed in subsection A beneficially owns less than one percent of the class of shares and (b) that person's individual share ownership previously has not been disclosed to shareholders or otherwise made public, indicate, by an asterisk and explanatory footnote or similar means, that the person beneficially owns less than one percent of the class, instead of providing that person's individual share ownership.

5.1.5 Basis for issue price:

At present, all the companies are required to furnish the information in the offer documents regarding basis for issue price as specified under the Paragraph 6.13 of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 (annexed)

The Sub-Committee felt that because of peculiar nature of the revenue and income models of dot-com companies and their present negative earnings, the traditional valuation models such as price-earnings ratio are found to be inadequate for valuing dot-com companies and a variety of new surrogate valuation models such as price multiples of revenues or net income are being increasing used by investors.

The Sub-Committee recommends that dot-com companies may be required to disclose additional information to enable the investors to use the following valuation models and ratios together with comparative data of comparable firms in India and abroad for last three years:

a. Market capitalization as a multiple of revenues

b. Market capitalization as a multiple of net profit

c. Market capitalization/number of users or page views for ad views revenue per customer/user/subscriber.

d. Hit ratios/click through ratios

e. Any other industry pricing models that are commonly used

Market capitalization is the issue price multiplied by the number of shares at the relevant point of time.

The Sub Committee was of the view that in some cases comparative data of comparable firms in India and abroad for the last three years may not be available. The Sub Committee recommends that where comparative data of comparable firms is not disclosed then the dot com companies shall be required to make a statement to the effect that comparative data of comparable firms in India and abroad for last three years is not available.

Information given to Qualified Institutional Buyers ("QIB"):

"the Sub Committee recommends that companies may be required to disclose all the information provided to the QIBs, analyst etc., in connection with the contemplated public offering at any point of time prior to the public offering as an annexure to the offer document."

5.1.7 Accounting policies

The Sub-Committee reiterated that though the fundamental accounting principles remain the same and are applicable to all entities including dot-com companies, there is a need to formulate accounting standards applicable to dot-com companies in order to avoid irrational application of fundamental accounting principles and to ensure uniformity in accounting by all dot-com companies for facilitating comparison between them. The Sub Committee noted that a study group had been constituted by Research Committee of ICAI to examine the issues related to the identification, definition and accounting treatment of critical items emerging due to unique nature of business of dot com companies . The Sub Committee considered the draft monograph on Accounting by Dot Com Companies prepared by the Research Committee of ICAI and made detailed suggestions which have been incorporated in the Monograph. The Sub Committee also recommended the ICAI to issue a Guidance Note instead of the Monograph and the ICAI has already issued a Guidance Note on Accounting by Dot Com Companies which deals with Accounting by Dot Com Companies in respect of issues relating to revenue and expense recognition.

The Sub-Committee recommends that dot-com companies shall disclose their significant accounting policies including the following, as applicable:

1. Revenue recognition

a. Membership and subscription

b. Merchandising activities

c. Advertising services

d. Other services like web hosting, content selling etc.

2. Recognition and measurement of associated costs

a. Accounting for web site development costs

b. Rebate, discounts and other sales incentives

c. Point and loyalty programs

d. Assets acquired or services received against equity based consideration.

The Sub Committee recommends that dot com companies may be required to give declaration in the offer document confirming their complete compliance with the recommendations contained in the Guidance Note on Accounting by Dot Com Companies issued by ICAI.

The Annexure containing the above additional disclosures in the offer document exactly in the format as they appear under the existing clauses of the SEBI (Disclosure and Investor Protection) Guidelines, 2000, is enclosed.

6. RECOMMENDED ADDITIONAL DISCLOSURES UNDER THE CONTINUOUS DISCLOSURE REQUIREMENTS

The Sub-Committee recommends that the following additional disclosure requirements may be prescribed for dot-com companies:

6.1 Annual Reports

Quantitative Information:

(Company management should determine the parameters on which the quantitative information is to be provided in order to enable the investors to evaluate the operating profitability of the company)

Sources of revenue by business segment sub categorized as appropriate into heads including advertising income, subscription income and transaction income;
Amounts, if any, of barter transactions recorded as a component of gross revenues and cost of revenue/selling and marketing expenses if such amounts exceed 5% of either of total revenues or cost of revenues or selling and marketing expenses.
Operational statistics:

Number of portals

Average number of daily visitors to each portal

Number of pages viewed

Number of minutes spent to view the web page

Quarter–on-quarter growth in the average number of daily visitors and pages viewed

Average number of daily impressions that are delivered i.e. number of times banner ads appear and click-throughs;

Percentage of page hits that have historically translated into revenues by quarter

Customer loyalty and customer churn rate (i.e proportion of number of customers lost to the total number of customers during the past three years);
Changes in key managerial personnal.
In case of B2B portals, the number of members showing separately ~~and~~ the number of corporate members.

6.2 Quarterly un audited results under Clause 41 of the Listing Agreement:

Changes in key managerial personnel during the quarter.

Prof. Varma was of the view that a company which does business at the speed of thought must not shy away from disclosure at the same speed. Prof. Varma strongly believes that key quantitative particulars relating to customer and usage data as well as sales and billings must be disclosed on a daily basis for dotcom companies. In addition, Prof. Varma was of the view that revenue and gross profit data must be disclosed on a monthly basis. It would be sufficient to provide this daily and monthly disclosure on the company’s web site.

Prof. Varma was further of the view that given the preponderance of intangible assets in dot-com companies, the "going concern" assumption on which accounting statements are conventionally prepared is inappropriate and fails to reveal the true and fair view of the state of the company. Prof. Varma was therefore of the view that it should be made mandatory for dot-com companies to provide supplemental financial statements prepared on a failing concern basis disclosing clearly the estimated realizable value of the intangible assets.

7. CLASSIFICATION OF COMPANIES AS DOT COM COMPANIES :

The Sub-Committee also discussed the issue of definition of dot-com company that may be required to make additional disclosures in the offer documents and under the continuous disclosure requirements. The Sub-Committee was of the view that manufacturing companies which sell their products through internet may not be classified as dot-com company.

The Sub-Committee recommends that the disclosure requirements applicable to dot-com companies will also be applicable to the companies having a business segment in which internet is the principle distribution channel for delivery of products/services and the concept of materiality shall be applied to classify a company or a business segment as dot-com or not.

Prof. Varma was of the view that in many cases, a company may choose not to conform to disclosures prescribed for dot-com businesses on the grounds that its dot-com business segment is not a material part of its business using the traditional yardstick of 10% of revenues, profits or assets. However, examples like Pirelli, etc demonstrate that a business segment which accounts for less than 1% of revenues, assets and profits could account for more than one half of the market capitalization of a company in an arms length transaction.

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Annexure

EXTRACT OF SECURITIES AND EXCHANGE BOARD OF INDIA (DISCLOSURE AND INVESTOR PROTECTION) GUIDELINES FOR CAPITAL ISSUES 2000

(Recommendations of Sub Committee are given in the box)

CHAPTER VI : CONTENTS OF OFFER DOCUMENT

6.0 The Offer document shall contain the following:

SECTION I - CONTENTS OF THE PROSPECTUS

6.1 The offer document shall contain all material information which shall be true and adequate so as to enable the investors to make informed decision on the investments in the issue.

6.1.1 The offer document shall also contain the information and statements specified in this chapter.

Cover Pages

6.2.1 Front Outer Cover Page

6.2.1.1a) The front cover page of the prospectus shall be whiteand no patterns or pictures shall be printed on this page.

b)The cover page paper shall be of adequate thickness (preferably minimum 100 gcm. quality).

6.2.1.2 The front outer cover page of the prospectus shall containthe following details only:

i.The word "Prospectus"

ii.The name of the issuer company and address of the registered office of the company along with telephone fax number and E.mail address.

iii.The nature, number, price and amount of the instruments

offered.

iv) a) The ‘Risks in relation to the first issue’ (wherever applicable)shall be incorporated in a box format in case of a initial public issue:

"This being the first issue of the company, there has been no formal market for the securities of the company. The issue price (has been determined and justified by the Lead Merchant Banker and the issuer company as stated under Justification of Premium paragraph - in case of premium issue) should not be taken to be indicative of the market price of the equity shares after the shares are listed. No assurance can be given regarding an active or sustained trading in the shares of the company nor regarding the price at which the equity shares will

be traded after listing."

b) In case of issue proposed to be listed on the Over the Counter Exchange of India and / or where market maker has been appointed, the concluding sentence of the above risk factor shall read as under:

"No assurance can be given regarding the price at which the equity shares of the company will be traded after listing."

6.2.1.2 (v) The following general risk shall be incorporated:

"Investment in equity and equity related securities involve a degree of risk and investors should not invest any funds in this offer unless they can afford to take the risk of losing their investment. Investors are advised to read the risk factors carefully before taking an investment decision in this offering. For taking an investment decision, investors must rely on their own examiniation of the issuer and the offer including the risks involved. The securities have not been recommended or approved by Securities and Exchange Board of India(SEBI) nor does SEBI guarantee the accuracy or adequacy of this document."

Specific attention of investors shall be invited to the summarized and detailed statement of Risk Factors by indicating their page number(s) in the "General Risks".

Proposed Additional Disclosure Requirements for Dot Com Companies:

Risk factors in the offer document:

Rrisk factors pertaining to dot-com companies generally may be classified into three broad categories namely global risks (including general economic and political risks), risks attached to the industry and risks attached specifically `to the company. Companies may list the risk factors in the order of their priority to the company. The management of the dot-com company and the Lead Merchant Bankers are responsible for identifying these risk factors.

Risk factors that are required to be disclosed by dot-com companies may include the following: (illustrative). However, some of these risk factors may be applicable to other companies also.

Global risks:

Risks due to technological changes and obsolescence

Absence of cross border entry barriers

Currency fluctuation risk

Risks related to Intellectual Property Rights transfers

Competitive industry where innovation is immediately copied and there is entry barrier

Liability to third parties and liability for unlawful/fraudulent activities by users under the laws of foreign countries.

Dependence on global market.

Risks attached to the internet industry:

Changes in government regulation relating to internet service companies

Industry associated timing risk

High bandwidth costs of accessing the internet in India and other technical obstacles

Limited installed personal computer base in India

Limited internet connections in India

Uncertainty regarding the growth and acceptance of online advertising and e-commerce in India

High percentage of failures is common in internet market

No comparable companies in the same segment with reasonable operating history for the purpose of bench marking

Legal risks including liabilities if any, to third parties for information retrieved from web sites, liabilities for unlawful fraduelent activities by web site users, liability to third parties for the products sold through electronic means.

e-security risk.

Computer viruses

Lack of protection of the intellectual property rights due to inadequate legal provisions in the statutes.

Risks attached to the company:

Risks related to the financial condition and existing business model of the company. The future prospects of the company will depend on the following factors:

Awareness of the company’s unique selling proposition;

Pricing models of competitor companies

Expansion of content and services on the portal

Ability of the company to attract and retain customers

Ability of the company to attract a larger number of advertisers from a variety of industries

Ability of the company to attract, maintain and motivate qualified staff

Ability of the company to maintain strategic relationships with business partners

Ability of the company to respond effectively to competitive pressures

Ability of the company to continue to develop and upgrade the technology

Ability of the company to promptly address the challenges faced by early stage and rapidly growing businesses, which do not have an experience or performance base to draw on.

Risks related to competition

Availability of bandwidth and the cost associated with it including the risk of existing contracts and commitments in the face of falling prices of bandwidth.

Risks related to unproven business models

Risks related to the following reasons:

Timing of the expansion plans of the company

Changes in pricing policies or product and service offerings

Increases in personnel, marketing and other operating expenses to support the anticipated growth

Seasonality in revenues due to certain factors such as festivals, etc

Failure of marketing campaign to establish brand recognition and loyalty for the brand

Failure to manage the growth effectively

Failure of telecommunication and computer systems

Failure to retain the existing key personnel and hire additional skilled employees including risks related to competitive labor markets

Risks related to (sunk) investments in network infrastructure

Termination of agreements with third parties to provide products and services to the customers and termination of strategic alliances.

Strain on managerial, operational and financial resources due to future acquisitions, investments, strategic partnerships or other ventures

Failure to meet merchandising, inventory management and order fulfillment obligations for e-commerce business could disrupt the operations

The number of shares offered to public will represent only __ percentage of the company’s paid up equity capital and therefore the share price of the company will be volatile in view of the low floating stock.

Risks associated with impairment of intangible assets.

Risks in forecasting future cash flows due to :

Difficulty in forecasting sales

Difficulty in forecasting size of the market

Difficulty in forecasting share of the market size

Difficulty in forecasting costs

Difficulty in forecasting re-investment needs

Low floating cost and consequent violatility in the share price.

vi) ‘Issuer’s Absolute Responsibility’ clause shall be incorporated as

under :

"The issuer, having made all reasonable inquiries, accepts responsibility for and confirms that this offer document contains all information with regard to the issuer and the issue, which is material in the context of the issue, that the information contained in the offer document is true and correct in all material aspects and is not misleading in any material respect, that the opinions and intentions expressed herein are honestly held and that there are no other facts, the omission of which make this document as a whole or any of such information or the expression of any such opinions or intentions misleading in any material respect."

vii.a) The name and address of only of the Lead Merchant Banker who files the offer document with Board along with its telephone, fax number and E.mail address shall appear on the front outer cover page.

b) The names of the other Lead Merchant Bankers,Co-Managers, etc. may be mentioned on the back cover page.

vii.The name and address of the Registrar to the issue along with the telephone number and fax number.

viii.Issue Opening Date

ix.Credit Rating, if applicable

x.Name/s of stock exchanges where listing of the securities is proposed.

6.2.2 Front Inside Cover Page

6.2.2.1 Index shall appear on the Front Inside Cover Page.

6.2.3 Inner Cover Pages

6.2.3.1The other risk factors shall be printed in clear readable font (preferably of minimum point 10 size) starting on the first inner cover page to be numbered page i (and, if need be, shall continue on subsequent pages ii, iii, etc. as distinct from the page number of the offer document proper which would run as 1, 2, 3, etc.) in addition to appearing in the Part I of the Prospectus.

6.2.3.2 The risk factors shall be classified as those which are specific to the project and internal to the issuer company and those which are external and beyond the control of the issuer company. Management perception of the internal and external risk factors shall be given

immediately after each of the risk factors and not as a separate heading under management perception.

6.2.4 Back Cover Pages

1.Back Inside Cover Page and Back Outside Cover Page shall

be in white.

6.2.4.2 Any ‘notes’ required to be given prominence shall appear immediately after the Risk Factors wherever they appear.

PART I

6.3 General Information

6.3.1 Name and address of registered office of the issuer company.

6.3.2 Letter of intent / industrial license and declaration of the Central Govt./RBI about non-responsibility for financial soundness or correctness of statements.

6.3.3 Disclaimer Clause

6.3.3.1 A prospectus shall contain the following disclaimer clause in bold capital letters:

"It is to be distinctly understood that submission of offer document to SEBI should not in any way be deemed or construed that the same has been cleared or approved by SEBI. SEBI does not take any responsibility either for the financial soundness of any scheme or the project for which the issue is proposed to be made or for the correctness of the statements made or opinions expressed in the offer document. Lead Merchant Banker, ______________ has certified that the disclosures made in the offer document are generally adequate and are in conformity with SEBI (Disclosures and Investor Protection) Guidelines in force for the time being. This requirement is to facilitate investors to take an informed decision for making investment in the proposed issue.

It should also be clearly understood that while the Issuer Company is primarily responsible for the correctness, adequacy and disclosure of all relevant information in the offer document, the Lead Merchant Banker is expected to exercise Due Diligence to ensure that the Company discharges its responsibility adequately in this behalf and towards this purpose, the Lead Merchant Banker _______________________ has furnished to SEBI a Due Diligence Certificate dated ________________ in accordance with SEBI (Merchant Bankers) Regulations 1992 which reads as follows :

i.We have examined various documents including those relating to litigation like commercial disputes, patent disputes, disputes with collaborators etc. and other materials in connection with the finalisation of the offer document pertaining to the said issue;

ii.On the basis of such examination and the discussions with the Company, its Directors and other officers, other agencies, independent verification of the statements concerning the objects of the issue, projected profitability, price justification and the contents of the documents mentioned in the Annexure and other papers furnished by the company.

WE CONFIRM that :

(a) the offer document forwarded to SEBI is in conformity with the documents, materials and paper relevant to the issue;

(b) all the legal requirements connected with the said issue, as also the guidelines, instructions, etc. issued by SEBI, the Government and any other competent authority in this behalf have been duly complied with; and

(c) the disclosures made in the offer document are true, fair and adequate to enable the investors to make a well informed decision as to the investment in the proposed issue.

iii. We confirm that beside ourselves, all the intermediaries named in the prospectus are registered with SEBI and till date such registration is valid.

iv. We have satisfied ourselves about the worth of the underwriters to fulfill their underwriting commitments. The filing of offer document does not, however, absolve the company from any liabilities under section 63 or 68 of the Companies Act, 1956 or from the requirement of obtaining such statutory or other clearances as may be required for the purpose of the proposed issue.SEBI, further reserves the right to take up, at any point of time, with the lead merchant banker(s) any irregularities or lapses in offer document."

6.3.4 Disclaimer Statement from the Issuer

6.3.4.1 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 anyone placing reliance on any other source of information would be doing so at his own risk should be incorporated .

6.3.5 Filing of offer document with the Board and RoC

Under this head, the office of the Board where the offer document has been filed shall be mentioned.

b.The RoC where copy of the offer document, having attached thereto the Material Contracts and Documents referred to elsewhere in the offer document, has been filed shall also be

mentioned.

6.Names of regional stock exchange and other stock exchanges where application made for listing of present issue, shall be mentioned.

6.3.7 Provisions of sub-section (1) of section 68A of the Companies Act, relating to punishment for fictitious applications, shall be mentioned.

6.3.8 Minimum Subscription Clause

Following statements shall appear:

6.3.8.1 For Non-underwritten Public Issues

" If the company does not receive the minimum subscription of 90% of the issued amount on the date of closure of the issue, or if the subscription level falls below 90% after the closure of issue on account of cheques having being returned unpaid or withdrawal of applications, the company shall forthwith refund the entire subscription amount received. If there is a delay beyond 8 days after the company becomes liable to pay the amount, the company shall pay interest as per Section 73 of the Companies Act 1956."

6.3.8.2 For Underwritten Public Issues

"If the company does not receive the minimum subscription of 90% of the net offer to public including devolvement of Underwriters within 60 days from the date of closure of the issue, the company shall forthwith refund the entire subscription amount received. If there is a delay beyond 8 days after the company becomes liable to pay the amount, the company shall pay interest prescribed under Section 73 of the Companies Act 1956."

6.3.8.3 For Composite Issues

1.The Lead Merchant Banker shall ensure that the requirement of "minimum subscription" is satisfied both jointly and severally, i.e., independently for both rights and public issues.

2.If the company does not receive the minimum subscription in either of the issues the company shall refund the entire subscription received.

6.3.8.4 Offer for sale

6.3.8.4.1The requirement of minimum subscription shall not be applicable to offer for sale.

5.Public issues by infrastructure companies

1.The requirement of minimum subscription shall not be applicable to an eligible infrastructure

company, provided disclosures regarding the alternate source of funding is made in the offer

documents.

6.3.9 Declaration about the issue of allotment letters or refunds within a period of 10 weeks and interest in case of any delay in refund at the prescribed rate under section 73(2) / 73(2A) of the Companies Act, shall be mentioned.

6.3.10 Issue Schedule

a.Date of opening of the issue

b.Date of closing of the issue

c.Date of earliest closing of the issue

6.3.11 Intermediaries and auditors

a.Name and address of auditors and lead managers.

b.Name and address of registrars to the issue.

c.Name and address of trustee under debenture trust deed (in case of debenture issue)

6.3.12 Credit Rating

a.The credit rating obtained from a credit rating agency for the proposed issue of debt security including convertible instruments.

b.If the rating has been obtained from more than one credit rating agencies, disclosures shall be made of all ratings including unaccepted rating.

c.All the credit ratings obtained during the previous three years before filing of the offer document for any of its listed debt-securities at the time of accessing the market through a rated debt-security shall be disclosed.

6.3.13 Underwriting of the issue

a.Names and addresses of the underwriters and the amount underwritten by them

b.Declaration by board of directors of the issuer company that the underwriters have sufficient resources to discharge their respective obligations.

6.3.14 Compliance Officer

a.The name, address telephone number, fax and E.mail number and address of Compliance Officer.

b.The investor’s attention shall also be invited to contact the compliance officer in case of any pre-issue / post-issue related problems such as non-receipt of letters of allotment / share certificates / refund orders / cancelled stockinvests, etc.

6.4 Capital Structure of the company

6.4.1 The lead merchant banker shall present the capital structure in the following manner:

a.Authorised issued subscribed and paid up capital (Number of instruments, description, aggregate nominal value)

b.Size of present issue giving separately promoters contribution,firm allotment / reservation for specified categories and net offer to public. (Number of instruments, description, aggregate nominal value and issue amount shall be given in that order, Name(s) of group companies to be given, in case, reservation has been made for shareholders of the group companies)

c.Paid-up Capital

i.after the issue

ii.after conversion of securities (if-applicable)

d) Share Premium Account (before and after the issue)

6.4.2 Notes to Capital Structure

1.After the details of capital structure, the following notes shall be ncorporated:-

a.Note relating to promoters' contribution and lock-in period stating date of allotment, date when made fully paid up, Nature of allotment (rights, bonus, etc.), number of securities, face value of securities, issue price of securities, percentage of promoters contribution to total issued capital and the date up to which the securities are locked-in.

b) An illustrative format of promoters contribution and lock-in is specified in Schedule VIII.

(i) percentage of contribution by the promoters whose name figured in the prospectus as promoters in the paragraph on "Promoters and their background" and the date up to which the securities are locked-in.

(ii) An illustrative format of promoters contribution whose name figures in prospectus is specified in Schedule IX.

c) statement that promoters contribution has been brought in not less than the specified minimum lot and from persons defined as promoters under the Guidelines.

d) Statement that the promoters undertake to accept full conversion, if the promoters contribution is in terms of the same optionally convertible security as is being offered to the public.

e) Details of all "buy-back" and `stand by’ and similar arrangements for purchase of securities by promoters, directors and lead merchant bankers shall be disclosed.

f.An over-subscription to the extent of 10% of the net offer to public can be retained for the purpose of rounding off to the nearer multiple of 100 while finalising the allotment.

g.A disclosure to the effect that the securities offered through this public/ rights issue shall be made fully paid up or may be forfeited within 12 months from the date of allotment of

securities in the manner specified in clause 8.6.2.

h.A note stating that;-

a.unsubscribed portion in any reserved category may be added to any other reserved category.

b.The unsubscribed portion, if any, after such inter se adjustments amongst the reserved categories shall be added back to the net offer to the public.

f.In case of under-subscription in the net offer to the public portion spillover to the extent of undersubscription shall be permitted from the reserved category to the net public offer

portion.

j) Following details regarding major shareholders:-

i.names of the ten largest shareholders as on the date of filing of the prospectus with the registrar of Companies;

ii.number of shares held by shareholders at (i) above including number of shares which they would be entitled to upon exercise of warrant, option, rights to convert a debenture, loan or other instrument;

iii.particulars as in (i) and (ii) above as on a date two years prior to the date of filing the prospectus with the Registrar of Company, -

iv.Particulars as in (i) and (ii) above as on a date 10 days prior to the date of filing of the prospectus with the Registrar of the Company;

v.if the issuer company has made an initial public offering within the immediately preceding two years, the above information shall be given separately indicating the names of persons who acquired shares by subscriptions to the public issue and those who acquired the shares by allotment on a firm basis or by private placement.

k) The details of:-

i.the aggregate shareholding of the Promoters group and of the directors of the Promoters, where the promoter is a company;

ii.aggregate number of securities purchased or sold by the Promoters Group and the directors of the promoter during a period of six months preceding the date on which the draft prospectus is filed with Board and to be updated by incorporating the information in this regard till the time of filing the prospectus with the Registrar of the Company;

iii.the maximum and minimum price at which purchases and sales referred to in (ii) above were made along with the relevant dates.

l) In the event of it not being possible to obtain information regarding sales and purchase of securities by any relative of the promoters, a statement to that effect shall be made in the prospectus on the basis of the transfers recorded in the books of the company.

Explanation I

For the purpose of sub-clauses (i) to (iii) of clause k above, the term 'promoter' shall include -

the person or persons who are in over-all control of the company.

the person or persons who are instrumental in the formulation of a plan or programme pursuant to which the securities are offered to the public;

c) the persons or persons named in the prospectus as promoters(s) :

Provided that a director / officer of the issuer company or person, if

they are acting as such merely in their professional capacity shall not

be included in the Explanation.

Explanation II

'Promoter Group' shall include-

a) the promoter,

b) an immediate relative of the promoter (i.e. any spouse of that

person, or any parent, brother, sister or child of the person or of the

spouse);and

a.in case promoter is a company-

i.a subsidiary or holding company of that company;

ii.any company in which the promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the Promoter;

iii.any company in which a group of individuals or companies or combinations thereof who holds 20% or more of the equity capital in that company also holds 20% or more of the equity capital of the issuer company; and

d) in case the promoter is an individual,-

i) any company in which 10% or more of the share capital is held by the promoter or an immediate relative of the promoter' or a firm or HUF in which the 'Promoter' or any one or more of his immediate relative is a member;

ii) any company in which a company specified in (i) above, holds 10% or more, of the share capital;

iii) any HUF or firm in which the aggregate share of the promoter and his immediate relatives is equal to or more than 10% of the total, and

e) all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus "shareholding of the promoter group".

Explanation III - The Financial Institution, Scheduled Banks, Foreign Institutional Investors (FIIs) and Mutual Funds shall not be deemed to be a promoter or promoter group merely by virtue of the fact that 10% or more of the equity of the issuer company is held by such institution.

Provided that the Financial Institutions, Scheduled banks, Foreign Institutional Investors, shall be treated as promoters or promoter group for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them.

6.5 Terms of the present issue

6.5.1 Terms of payments

6.5.1.1 The caption "Interest in Case of Delay in Despatch of Allotment Letters/ Refund Orders in Case of Public Issues" shall appear and shall contain the following statement:

"The company agrees that as far as possible allotment of securities offered to the public shall be made within 30 days of the closure of public issue. The company further agrees that it shall pay interest @15% per annum if the allotment letters / refund orders have not been despatched to the applicants within 30 days from the date of the closure of the issue. However applications received after the closure of issue in fulfillment of underwriting obligations to meet the minimum subscription requirement, shall not be entitled for the said interest."

6.5.2 Arrangements for Disposal of Odd Lots

1.a) Any arrangements made by the issuer company for providing liquidity for and consolidation of the shares held in odd lots, particularly when such odd lots arise on account of issues by way of rights, bonus, conversion of debentures/warrants etc., shall be intimated to the Shareholders/investors.

b) The company is free to make arrangements for providing liquidity in respect of odd lot shares through any investment or finance company, broking firms or through any other agency and the

particulars of such arrangement, if any, may be disclosed in the offer documents related to the concerned issue of capital.

6.5.2.2 Lead Merchant Banker shall ascertain whether the companies coming for fresh issue of capital propose to set up trusts in order to provide service to the investors in the matter of disposal of odd lot shares of the company held by them and if so, disclosures relating to setting up and operation of the trust shall be contained in the offer document.

6.5.2.3 Whenever any issue results in issue of shares in odd lots, the issuer company, shall as far as possible issue certificates in the denomination of 1-2-5-10-20-50 shares.

6.5.3 Rights of the instrument holders

6.5.4 How to apply - availability of forms, prospectus and mode of payment

6.5.4.1Applications by mutual funds

a.Lead Merchant Bankers shall clearly incorporate necessary disclosures under the heads "Procedure for applications by mutual funds" and "Multiple Applications"to indicate that a separate application can be made in respect of each scheme of an Indian mutual fund registered with the Board and that such applications shall not be treated as multiple applications.

b.The applications made by the AMCs or custodians of a Mutual Fund shall clearly indicate the name of the concerned scheme for which application is being made.

6.5.4.2 Applications by NRIs

6.5.4.2.1 The Lead merchant banker shall ensure the following disclosures:

a.the name and address of at least one place in India from where individual NRI applicants can obtain the application forms.

b."NRI applicants may please note that only such applications as are accompanied by payment in free foreign exchange shall be considered for allotment under the reserved category. The NRIs who intend to make payment through Non-Resident Ordinary (NRO) accounts shall use the form meant for Resident Indians and shall not use the forms meant for reserved category."

6.5.4.3 Disclosures about Stock invests

a.The disclosures regarding manner of obtaining and mode of drawing stockinvests, non-utilisation of stockinvests by third party, time period for utilisation of stockinvests by thepurchasers and disposal of applications accompanied by stock invest as specified by RBI shall be incorporated at the appropriate places in the offer document.

b.Name of the bank through which the stockinvests shall be realised, shall be given in

the prospectus.

c.The following paragraph shall be incorporated at theappropriate places in the prospectus.

"Registrars to the Issue have been authorised by the company (through resolution of the Board passed on ______) to sign on behalf of the company to realise the proceeds of the Stockinvest from the issuing bank or to affix non allotment advice on the instrument or cancel the Stockinvest of the non allottees or partially successful allotees who have enclosed more than one stockinvest. Such cancelled stockinvest shall be sent back by the Registrars directly to the investors."

6.5.5 Despatch of Refund Orders

6.5.5.1 The following clause shall be incorporated in the prospectus:

"The company shall ensure despatch of refund orders of value over Rs.1500/- and share/debenture certificates by Registered Post only and adequate funds for the purpose shall be made available to the Registrars by the issuer company ".

6.5.6 Undertaking by the Issuer Company.

6.5.6.1 The following undertaking by the issuer company shall be incorporated in the offer document :

a.that the complaints received in respect of the Issue shall be attended to by the issuer company expeditiously and satisfactorily;

b.that the issuer company shall take necessary steps for the purpose of getting the securities listed in the concerned stock exchange within the specified time;

c.that the issuer company shall apply in advance for the listing of equities on the conversion of Debentures / Bonds;

d.that the funds required for despatch of refund orders/allotment letters/ certificates by registered post shall be made available to the Registrar to the Issue by the issuer company;

e.that the promoters’ contribution in full, wherever required, shall be brought in advance before the Issue opens for public subscription and the balance, if any, shall be brought in pro rata basis before the calls are made on public;

f.that the certificates of the securities/refund orders to the non-resident Indians shall be despatched within specified time.

g.that no further issue of securities shall be made till the securities offered through this offer document are listed or till the application moneys are refunded on account of non-listing, undersubscription, etc.

h.that necessary cooperation with the credit rating agency(ies) shall be extended in providing true and adequate information till the debt obligations in respect of the instrument are outstanding.

6.5.7 Utilisation of Issue Proceeds

6.5.7.1 A statement by the Board of Directors of issuer company to the effect that–

a.all monies received out of issue of shares or debentures to public shall be transferred to separate bank account other than the bank account referred to in sub-section (3) of section 73;

b.details of all monies utilised out of the issue referred to in sub-item(i) shall be disclosed under an appropriate separate ead in the balance-sheet of the company indicating the purpose for which such monies had been utilised; and

c.details of all unutilised monies out of the issue of shares or debentures, if any, referred to in sub-item(i) shall be disclosed under an appropriate separate head in the balance-sheet of the company indicating the form in which such unutilised monies have been invested.

6.5.8 Any special tax benefits for company and its shareholders.

6.6 Particulars of the issue

6.6.1 Objects

6.6.2 Project Cost

a.Where the company proposes to undertake more than one activity i.e diversification, modernisation, expansion etc. the total project cost shall be given activity- wise.

b.Where the company is implementing the project in a phased manner, the cost of each phase including the phase, if any, which has already been implemented shall be separately given.

c.The total project cost shall reflect the cost involved in each of the projects mentioned under the section on " Objects of the issue".

6.6.3 Means of financing.

6.6.4 Appraisal

6.6.4.1 (a) The scope and purpose of the appraisal along with the date of appraisal shall be disclosed in the offer document.

(b) The offer document shall contain the cost of the project and means of finance as per the appraisal report.

(c) The weaknesses and threats, if any, given in the appraisal report,shall be disclosed in the offer document by way of risk factors.

6.6.5 Deployment of funds in the project

a.Actual expenditure incurred on the project (in cases of companies raising capital for a project) upto a date not earlier than 2 months from the date of filing the prospectus with Registrar of Companies.

b.Means and source of financing including details of "bridge loan" or other financial arrangement, which may be repaid from the proceeds of the issue.

c.Year wise break up of the expenditure proposed to be incurred on the said project.

d.Investment avenues in which the management proposes to deploy issue proceeds pending its utilisation in the proposed project.

6.6.2 Project Cost

Where the company proposes to undertake more than one activity i.e diversification, modernisation, expansion etc. the total project cost shall be given activity- wise.

Where the company is implementing the project in a phased manner, the cost of each phase including the phase, if any, which has already been implemented shall be separately given.

The total project cost shall reflect the cost involved in each of the projects mentioned under the section on " Objects of the issue".

6.6.3 Means of financing.

6.6.4 Appraisal

6.6.4.1 (a) The scope and purpose of the appraisal along with the date of appraisal shall be disclosed in the offer document.

(b) The offer document shall contain the cost of the project and means of finance as per the appraisal report.

(c) The weaknesses and threats, if any, given in the appraisal report, shall be disclosed in the offer document by way of risk factors.

6.6.5 Deployment of funds in the project

Actual expenditure incurred on the project (in cases of companies raising capital for a project) upto a date not earlier than 2 months from the date of filing the prospectus with Registrar of Companies.

Means and source of financing including details of "bridge loan" or other financial arrangement, which may be repaid from the proceeds of the issue.

Year wise break up of the expenditure proposed to be incurred on the said project.

Proposed Additional Disclosure Requirements for Dot Com Companies:

The Company shall disclose the annual break up of expenditure to be incurred under the following heads, for the next three financial years:

Technological infrastructure.

Expenditure on hardware

Expenditure on software

2. Other tangible assets.

3. Brand building and marketing

Working capital

Any other item which is greater than the 5% of the total cost of the project.

Investment avenues in which the management proposes to deploy issue proceeds pending its utilisation in the proposed project.

6.6.6 Name of monitoring agency, if applicable, to be disclosed.

6.7 Company, Management and Project

6.7.1 History and main objects and present business of the company

6.7.2 Subsidiary(ies) of the company, if any

6.7.3 Promoters and their Background

A complete profile of the promoters including their age, educational qualifications, experience in the business or employment and in the proposed line of business, their business and financial activities shall be furnished.

In case, the promoters are companies, history of the companies and the promoters of the companies shall be furnished.

Details in change of management of the companies if any, including details of the persons who are holding the controlling interest together with the applicability and compliance of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

6.7.4 Key Managerial Personnel

A paragraph on the key managerial personnel shall be incorporated giving full details of the personnel recruited as on the date of filing of the offer document with the Board indicating name, date of joining, qualification, details of previous employment etc.

Proposed Additional Disclosure Requirements for dot com companies and other high technological industries like Bio-Technology and Industries that have uncertain business model:

A. Directors and senior management: The following information shall be disclosed with respect to the company's directors and senior management, and any employees such as engineers, scientists or designers (i.e. key technical personnel) upon whose work the company is critically dependent:

2. Principal business activities performed outside the issuing company (including, in the case of directors, other principal directorships).

3. Date of birth and age

4. The nature of any family relationship between any of the persons named above.

5. Any arrangement or understanding with major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management.

B. Compensation: Provide the following information for the last full financial year for the company's directors and members of its administrative, supervisory or management bodies. :

2. The total amounts set aside or accrued by the company to provide pension, retirement or similar benefits to these personnel.

C. Share ownership:

2. Describe any arrangements for involving the employees in the capital of the company, including any arrangement that involves the issue or grant of options or shares or securities of the company.

Note to Item.C: If (a) any of the persons listed in subsection A beneficially owns less than one percent of the class of shares and (b) that person's individual share ownership previously has not been disclosed to shareholders or otherwise made public, indicate, by an asterisk and explanatory footnote or similar means, that the person beneficially owns less than one percent of the class, instead of providing that person's individual share ownership.

The Lead Merchant Banker shall verify and ensure that the persons whose name appear in this para are in the employment of the company as permanent employees."

Any change otherwise than by way of retirement in the normal course in the key senior managerial personnel particularly in charge of production, planning, finance and marketing within one year prior to the date of filing the offer document with the Board shall be disclosed.

6.7.5 Names, address and occupation of manager, managing director, and other directors (including nominee- directors, whole-time directors (giving their directorships in other companies)

6.7.6 Location of the Project

6.7.7 Plant and machinery , technology, process, etc.

Details in a tabular form to be given shall include the machines required to be bought by the company, cost of the machines, name of the suppliers, the date of placement of order and the date / expected date of supply.

In case of machines yet to be delivered, the date of quotations relied upon for the cost estimates given, shall also be mentioned.

Percentage and value terms the plant and machinery for which orders are yet to be placed shall be stated and also be given by way of a risk factor.

Details of second hand machinery bought / proposed to be bought, if any, including the age of the machines, balance estimated life, etc. shall also be given.

6.7.8 Collaboration, any performance guarantee or assistance in marketing by the collaborators

6.7.8.1 Following information regarding persons/entities with whom technical and financial agreements have been entered into to be given:

place of registration and year of incorporation;

paid up share capital;

turnover of the last financial year of operation;

general information regarding such persons relevant to the issuer.

Infrastructure facilities for raw materials and utilities like water, electricity,

etc.

6.7.10 Schedule of implementation of the project and progress made so far, giving details of land acquisition, civil works, installation of plant and machinery, trial production, date of commercial production, etc.

6.7.11 The products

Proposed Additional Disclosure Requirements for all the companies:

Business model :

The following additional disclosure may be mandated for all companies to enable potential investors to understand the business model:

A description of the nature of the company’s operations and its principal activities, stating the nature of product sold and/or services provided for each of the last three financial years. If the company has been in existence for less than three years, this information may be provided for such shorter period. Information may be presented on the same basis as that used to determine the company’s business segments under the same body of accounting principles used in preparing the company’s financial statements.

[Note: In case of dot com companies the nature of the company’s operations could include internet portals, internet infrastructure, internet B2B software, internet commerce, internet consulting and application services, internet financial services, internet vertical portals, multi sector internet companies, internet direct marketing and advertising services, B2B commerce, B2C commerce etc. in which the company will operate. The company should also disclose the percentage of composition of company’s revenue and capital employed in each of the sectors.]

ii.A description of the principal markets in which the company competes including a breakdown of total revenues by category of activity and geographic market for each of the last three financial years. If the company has been in existence for less than three years, this information may be provided for such shorter period.

iii.A description of the seasonality, if any, of the company’s main business

Proposed Additional Disclosure Requirements for Dot Com Companies:

In case of a company classified as dot com company, the management of the company, shall identify and disclose all relevant qualitative and quantitative business information including the following for each of the last three financial years:

Qualitative information:

Market position, competition and management’s assessment of the company’s prime-mover advantage. The basis for any statements made by the company regarding its competitive position should also be clearly disclosed;

Description of the underlying technological processes including summary information regarding the extent to which the company is dependent, if at all, on patents or licenses and/or industrial or commercial contracts or new technological processes, where such factors are material to the company’s business or profitability;

General terms of contracts and arrangements with customers and how revenue is earned on products sold and/or services provided to customers;

General terms of contracts (generic and specific) entered into with suppliers;

Alliance and Partnerships;

A description of the marketing channels used by the company including an explanation of any special sales methods employed by the company;

Description of intangible assets and how they will be used to generate future cash flows;

Multiple elements arrangements (like upgrades, maintenance, services, etc);

II Quantitative information:

a. Sources of revenue by business segment subcategorized as appropriate into heads including advertising income, subscription income and transaction income;

c. Operational statistics:

Number of portals

Average number of daily visitors to each portal

Number of pages viewed

Number of minutes spent to view the web page

Quarter–on-quarter growth in the average number of daily visitors and pages viewed

Average number of daily impressions that are delivered i.e. number of times banner ads appear and click-throughs;

Percentage of page hits that have historically translated into revenues by quarter

Average size and duration of contracts with customers.

Percentage of repeat business.

Percentage of revenue generated by the largest customers.

Percentage of average revenue generated by top five largest customers.

d. Duration of advertisements, minimum guaranteed impressions, etc.

e.Recurring and non recurring items of revenue

f.Cost of acquiring a customer and revenue per customer

g.Customer loyalty and customer churn rate (i.e. proportion of number of customers lost to the total number of customers during the past three years);

h.any other information that the company believes will be useful to an investor in assessing the performance of the company

6.7.11.1 Nature of the product/ s - consumer / industrial and end users

(a) Market including details of the competition, past production figures for the industry, existing installed capacity, past trends and future prospects regarding exports (if, applicable), demand and supply forecasts (if given, should be essentially with assumptions unless sourced from a market research agency of repute), etc. to be given.

(b)Source of data used shall be mentioned.

6.7.11.3 Approach to marketing and proposed marketing set up.

6.7.11.4 Export possibilities and export obligations, if any (in case of a company providing any "service" particulars, as applicable, be furnished)

6.7.12 Future prospects

6.7.12.1 Capacity & Capacity Utilisation

A table shall be incorporated giving the existing installed capacities for each product, capacity utilisation for these products in the previous 3 years, proposed capacities for existing as well as proposed products and the assumptions for future capacity utilisation for the next three years (from the date of commencement of commercial production) in respect of existing as well as proposed products.

If the projected capacity utilisation is higher than the actual average capacity utilisation by more than 25% during the previous 3 years, how the company proposes to achieve the projected levels of capacity utilisation in view of its failure to achieve levels of similar capacity utilisation in the past, shall be stated.

6.7.13 Stock Market Data

6.7.13.1 Particulars of:- a.high, low and average market prices of the share 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 Board which shall be updated till the time of filing the prospectus with the Registrar of Company / Stock Exchange concerned; c.number of shares traded on the days when the high and low prices were recorded in the relevant stock exchange during 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 recognises the change in the capital structure (e.g. when the shares have become ex-rights or ex-bonus); 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 prospectus is filed with ROC; and g.to volume of business transacted along with high, low and average prices of shares of the company shall also be stated for respective periods.

6.8 Management Discussion and Analysis of the Financial Condition and Results of the Operations as Reflected in the Financial Statements.

1.A summary of past financial results after adjustments as given in the auditors report for the past three years containing significant items of income and expenditure shall be given.

2.An analysis of reasons for the changes in significant items of income and expenditure shall also be given, inter alia, containing the following:

a.unusual or infrequent events or transaction;

b.significant economic changes that materially affected or (are likely to effect income from continuing operations;

c.known trends or uncertainties that have had or are expected to have a material adverse impact on sales, revenue or income from continuing operations;

d.future changes in relationship between costs and revenues, in case of events such as future increase in labour or material costs or prices that will cause a material change are known;

e.the extent to which material increases in net sales or revenue are due to increased sales volume, introduction of new products or services or increased sales prices;

f.total turnover of each major industry segment in which the Company operated

g.status of any publicly announced new products or business segment;

h.the extent to which business is seasonal;

i.any significant dependence on a single or few suppliers or customers;

j.competitive conditions.

6.8.3 A statement by the directors whether in their opinion there have arisen any circumstances since the date of the last financial statements as disclosed in the prospectus any which 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.

6.9 Financial of Group Companies

6.9.1 The following information for the last 3 years based on the audited statements in respect of all the companies, firms, ventures, etc. promoted by the promoters irrespective of whether these are covered under section 370 (1)(B) of the Companies Act, 1956 shall be given, wherever applicable:

a.Date of Incorporation;

b.Nature of activities;

c.Equity Capital;

d.Reserves (excluding revaluation reserve);

e.Sales;

f.Profit after tax (PAT);

g.Earnings per share (EPS); and

h.Net Asset Value (NAV);

i.The highest and lowest market price of shares during the preceding six months with suitable disclosures for changes in capital structure during the period and the market value on the date of filing the prospectus with the Registrar of Companies;

j.If any of the companies has made public or rights issue in the preceding three years, the issue price of the security, the current market price and particulars of changes in the capital structure, if any, since the date of issue and a statement regarding the cost and progress of implementation of the project in comparison with the cost and implementation schedule given in the offer document;

k.Information regarding adverse factors related to the company and in particular regarding; i.whether the company has become a sick company within the meaning of the Sick Industrial Companies (Special Provisions)Act, 1995 or is under winding up; ii.whether the company has made a loss in the immediately preceding year and if so, the profit or loss figures for the immediately preceding three years.

2.(a) In case, the issuer company has more than five listed group companies, the financial information may be restricted to the five largest listed companies to be determined on the basis of market capitalisation one month before the date of filing draft prospectus with the Board.

(b) The information regarding company(ies) which has become BIFR company or is under winding up or has a negative net worth shall be provided.

3.If the promoters have disassociated themselves from any of the companies/firms during preceeding three years, the reasons therefor and the circumstances leading to the disassociation shall be furnished together with the terms of such disassociation.

4. (a) In case there are common pursuits among these companies, the reasons and justification for the same shall be spelt out and the conflict of interest situations shall be stated.

b.The related business transactions within the group shall also be mentioned.

a.The significance of these transactions on the financial performance of the company/companies shall be stated.

6.9.5 Sales or purchase between companies in the promoter group when such sales or purchases exceed in value in the aggregate 10% of the total sales or purchases of the issuer and also disclose material items of income or expenditure arising out of transactions in the promoter group.

6.10 Following particulars in regard to the company and other listed companies under the same management within the meaning section 370 (1)(B) of the Companies Act, 1956 which made any capital issue during the last three years shall be given

a.Name of the company

b.Year of Issue

c.Type of Issue (Public/ Rights/Composite)

d.Amount of issue

e date of closure of issue

f.Date of completion of delivery of share/debenture certificates

g.Date of completion of the project, where object of the issue was financing the project

h.Rate of dividend paid

6.11 Promise vis-à-vis Performance

6.11.1 Issuer Company

a.A separate para entitled "Promise Vs Performance – Last three issues" shall be given indicating whether all the objects mentioned in the respective offer Documents relating to the earlier issues by the company were met and whether all projections made in the said offer documents were achieved.

b.If not, non-achievement of objects/projections shall be broughtout distinctly shortfall and delays shall be quantified.

6.11.2 Listed Ventures of Promoters

a.A separate para on issues of group/associate companies entitled "Promise Vs Performance - Last one Issue of group/associate companies" shall be given indicating whether all the objects mentioned in the respective offer Documents relating to group/ associate companies were met and whether all projections made in the offer documents were achieved.

b.If not, non-achievement of objects/ projections shall be brought out distinctly. Shortfall and delays shall be quantified.

6.12 Projections

6.12.1 No projections of profits shall be made except

a.by a company which has not completed twelve months of commercial operations and its audited operative results are not available; or

b.by a company which is undertaking a new project or is proposing to substantially expand its activities beyond 100% of the existing capacity.

Provided that the projections by (a) and (b) above may be made only if:

i) the projections are based solely on an appraisal by a public financial institution or a scheduled commercial bank;

ii) such appraising agency has financed the project or part thereof or is committed to finance the project or part thereof;

iii) the projections are not for a period exceeding two years from the date of expected commencement of commercial production or three years from the date of closure of the issue, whichever is later;

iv) the major assumptions on which projections are base are specified.

Explanation

For the purpose of eligibility of banks or FIs to appraise the projects and give projections in the offer documents, it is clarified that:

a) The subsidiaries of banks/FIs are not eligible for the purpose of giving projections in the offer documents.

If a project is appraised by a subsidiary of a bank or FI and the project is financed/committed to be financed by the parent bank/FI, the projections made by the subsidiaries cannot be given in the offer documents.

b.If a bank/FI has appraised a project and has extended assistance by way of lease finance/hire purchase which is part of means of finance of the project as given in the offer document, the projections made by such banks/FIs can be given in the offer document.

a.If the appraisal is done by a bank/FI which is holding the equity of the company before the issue or is participating in the firm allotment category, the projection made by such bank/FI can be given in the offer document and a disclosure of the extent of their participating in the equity of the company should be given.

b.Provided that participation of banks/FI in the reserved category on competitive basis shall not eligible for giving projections as allotment to them is not certain.

c.In case of rights issues, if the banks/FIs are the shareholders and give an undertaking that they would subscribe to their entitlement fully or partially, and if projects are appraised by them, projections can be given and a disclosure of the extent of their taking up the right