What is preferential What is preferential issue?issue?

Preferential issue means issuance of Preferential issue means issuance of equity shares to the promoters, promoter equity shares to the promoters, promoter group or selected group of persons or any group or selected group of persons or any investor(s) on private placement basis.investor(s) on private placement basis.

Thus if offer is made to-Thus if offer is made to-1.1. Persons ,who are not members of Persons ,who are not members of

Company Company 2.2. Selected members of Company Selected members of Company 3.3. members in disproportionate manner(not members in disproportionate manner(not

pro rata)pro rata)Such an offer shall be called Preferential Such an offer shall be called Preferential

issue.issue.

Who can be Investors?Who can be Investors?

Institutional InvestorInstitutional Investor Private equity investorsPrivate equity investors High net worth individuals or High net worth individuals or

CompaniesCompanies

Regulatory FrameworkRegulatory Framework For making a preferential issue, listed For making a preferential issue, listed

companies shall be governed by the companies shall be governed by the provisions contained in Chapter XIII and provisions contained in Chapter XIII and Chapter XIII-A of the SEBI (Discloser and Chapter XIII-A of the SEBI (Discloser and Investor Protection ) Guidelines,2000.Investor Protection ) Guidelines,2000.

certain provisions of:-certain provisions of:-

1.1. Securities Contracts(regulation) Act, 1956Securities Contracts(regulation) Act, 1956

2.2. Listing AgreementListing Agreement

3.3. Indian Stamp Act 1899Indian Stamp Act 1899

4.4. Companies Issue of Share Certificate) Rules Companies Issue of Share Certificate) Rules 19601960

5.5. SEBI(Substantial Acquisition of shares and SEBI(Substantial Acquisition of shares and Takeover) Regulations 1997Takeover) Regulations 1997

In-Principle approval from In-Principle approval from Stock ExchangeStock Exchange

Clause 24(a) of the listing agreement Clause 24(a) of the listing agreement sayssays

prior to the preferential issue of prior to the preferential issue of shares, the Company shall obtain an shares, the Company shall obtain an ‘In-Principle’ approval from BSE‘In-Principle’ approval from BSE

for grant of ‘in principal’ approval, for grant of ‘in principal’ approval, Stock Exchange insist upon Stock Exchange insist upon production of specific identity of the production of specific identity of the proposed allotteesproposed allottees

Authorization in the Authorization in the Articles & Resolution Articles & Resolution

requirementrequirement A company shall be authorized by its A company shall be authorized by its

Article to issue shares on preferential Article to issue shares on preferential basis.basis.

A Company can offer further shares to A Company can offer further shares to any person, whether they are any person, whether they are shareholder or not, if a shareholder or not, if a special special resolutionresolution to that effect has been to that effect has been passed in the general meeting.passed in the general meeting.

If company fails in getting Special If company fails in getting Special Resolution but get Ordinery resolution Resolution but get Ordinery resolution then C.G approval shall also be required.then C.G approval shall also be required.

AllotmentAllotment Allotment by the Board pursuant to any Allotment by the Board pursuant to any

resolution passed at a meeting of resolution passed at a meeting of shareholder of a Company granting shareholder of a Company granting consent for preferential issues of any consent for preferential issues of any financial instrument, shall be completed financial instrument, shall be completed within a period of within a period of fifteen daysfifteen days from the from the date of passing of the resolution.date of passing of the resolution.

Where the allotment on preferential basis Where the allotment on preferential basis is pending for want of any approval for is pending for want of any approval for such allotment by CG, the allotment shall such allotment by CG, the allotment shall be completed within 15 days from such be completed within 15 days from such approvalapproval

Restriction on number of Restriction on number of offereesofferees

Offer or invitation of preferential issue Offer or invitation of preferential issue can’t can’t bebe made made to 50 persons or more.to 50 persons or more. Section Section 67 of the Act prescribes that private 67 of the Act prescribes that private placement made by companies , other than placement made by companies , other than non- banking financial companies and non- banking financial companies and public financial institutions, to 50 persons or public financial institutions, to 50 persons or more will be deemed to the public issue.more will be deemed to the public issue.

However ,Shares issued to certain category However ,Shares issued to certain category of person under of person under Employee Stock option Employee Stock option SchemeScheme or Employee Stock Purchase or Employee Stock Purchase Scheme or Sweat Equity Shares Scheme or Sweat Equity Shares shall not shall not be reckoned for calculating this limitbe reckoned for calculating this limit..

Pricing of the issue Pricing of the issue at a price higher of the at a price higher of the

followingfollowing Avg weekly high / low closing prices Avg weekly high / low closing prices

of shares quoted in STX during 6 of shares quoted in STX during 6 months preceding the relevant date months preceding the relevant date

OROR Avg weekly high / low closing prices Avg weekly high / low closing prices

of shares quoted in STX during 2 of shares quoted in STX during 2 weeks preceding the relevant date weeks preceding the relevant date

Explanation Explanation

"relevant date" means the date 30 days "relevant date" means the date 30 days prior to the date on which the meeting prior to the date on which the meeting of general body of shareholders is held, of general body of shareholders is held, in terms of Section 81(1A) to consider in terms of Section 81(1A) to consider the proposed issue. the proposed issue.

A listed company shall not make any A listed company shall not make any preferential issue unless it has preferential issue unless it has obtained the PAN of the proposed obtained the PAN of the proposed allottees.allottees.

Example of PricingExample of Pricing

Date of meeting : 31Date of meeting : 31stst Oct2009 Oct2009 Relevant date :1Relevant date :1stst Oct 2009 Oct 2009

Average of weekly high & low of Average of weekly high & low of closing priceclosing price

During preceding During preceding 6 month of 6 month of relevant daterelevant date

During During preceding 2 preceding 2 weeks of weeks of relevant daterelevant date

Price Price (Rs.)(Rs.)

Case Case 11

1515 1919 1919

Case Case 22

2626 2424 2626

Lock-in period for Lock-in period for promoter/spromoter/s

The instruments allotted on a preferential basis to The instruments allotted on a preferential basis to the promoter / promoter group, shall be subject to the promoter / promoter group, shall be subject to lock-in of 3 years from the date of their allotment lock-in of 3 years from the date of their allotment

In any case, not more than 20% of the total capital In any case, not more than 20% of the total capital of the company, including capital brought in by of the company, including capital brought in by way of preferential issue, shall be subject to lock-in way of preferential issue, shall be subject to lock-in of three years from the date of allotment.of three years from the date of allotment.

In addition to the requirements for lock in of In addition to the requirements for lock in of instruments allotted on preferential basis to instruments allotted on preferential basis to promoters/ promoter group the instruments promoters/ promoter group the instruments allotted on preferential basis to any person allotted on preferential basis to any person including promoters/promoters group shall be including promoters/promoters group shall be locked-in for a period of locked-in for a period of 1 year1 year from the date of from the date of their allotmenttheir allotment

Auditor’s Certification Auditor’s Certification In case of every issue of shares or other In case of every issue of shares or other

financial instruments having conversion financial instruments having conversion option, the statutory auditors of the option, the statutory auditors of the issuer company shall certify that the issuer company shall certify that the issue of said instruments is being made issue of said instruments is being made in accordance with the requirements in accordance with the requirements contained in these guidelines contained in these guidelines

Copies of the auditors certificate shall Copies of the auditors certificate shall also be laid before the meeting of the also be laid before the meeting of the shareholders convened to consider the shareholders convened to consider the proposed issueproposed issue

If shares are issued for If shares are issued for consideration other than consideration other than

cashcash valuation of the assets in valuation of the assets in

consideration for which the shares consideration for which the shares are proposed to be issued shall be are proposed to be issued shall be done by an done by an independent qualified independent qualified valuervaluer and and

the valuation report shall be the valuation report shall be submitted to the BSEsubmitted to the BSE

‘‘Valuer” means C.A or merchant Valuer” means C.A or merchant banker appointed to determine the banker appointed to determine the value of intellectual property rights or value of intellectual property rights or other value addition.other value addition.

Proceed from issueProceed from issue The details of all monies utilised out of The details of all monies utilised out of

preferential issue proceeds shall be preferential issue proceeds shall be disclosed under appropriate heads in B/S disclosed under appropriate heads in B/S indicating the purpose for which such indicating the purpose for which such monies have been utilised.monies have been utilised.

The details of un utilised monies shall The details of un utilised monies shall also be disclosed under a separate head also be disclosed under a separate head in the B/S indicating the form in which in the B/S indicating the form in which such unutilised monies have been such unutilised monies have been invested.invested.

Details can be given in the notes to Details can be given in the notes to accountsaccounts

Clause 43(a)of listing Clause 43(a)of listing agreementagreement

Every Company shall furnish on a Every Company shall furnish on a quarterly basis statement to the quarterly basis statement to the Exchange indicating the variation Exchange indicating the variation between projected utilisation of fundsbetween projected utilisation of funds

and/or projected profitability statement and/or projected profitability statement made by it in its object/s stated in the made by it in its object/s stated in the explanatory statement to the notice for explanatory statement to the notice for the general meeting for considering the general meeting for considering preferential issue of shares and the preferential issue of shares and the actual utilisation of funds and/ or actual actual utilisation of funds and/ or actual profitability.profitability.

Clause 43(b) of listing Clause 43(b) of listing agreementagreement

The statement referred to above shall The statement referred to above shall be given for each of the years for which be given for each of the years for which projections are provided in its object/s projections are provided in its object/s stated in explanatory statement to the stated in explanatory statement to the notice for considering preferential issue notice for considering preferential issue of shares and shall published of shares and shall published

in newspapers with the unaudited in newspapers with the unaudited /audited financial result as required /audited financial result as required under clause 41 .under clause 41 .

Clause 43 (C ) of listing Clause 43 (C ) of listing agreementagreement

If there are material variation between If there are material variation between the projections and the actual the projections and the actual utilisation/profitability ,the Company utilisation/profitability ,the Company shall furnish an explanation therefor in shall furnish an explanation therefor in the advertisement and shall also the advertisement and shall also provide the same in the Director’s provide the same in the Director’s Report.Report.

49(IV) (D) of the listing 49(IV) (D) of the listing agreementagreement

Every company shall disclose to the Every company shall disclose to the Audit committee, the uses applications Audit committee, the uses applications of fund by major category ,quarterly of fund by major category ,quarterly

Further on annual basis ,the Company Further on annual basis ,the Company shall prepare a statement of funds shall prepare a statement of funds utilised for the purposes other than utilised for the purposes other than those stated in the notice and place it those stated in the notice and place it before audit committee shall make before audit committee shall make appropriate recommendation to the appropriate recommendation to the board to take up steps in this matter. board to take up steps in this matter. This statement shall be certified by the This statement shall be certified by the Statutory auditors of the Company.Statutory auditors of the Company.

SEBI (substantial SEBI (substantial Acquisition of shares and Acquisition of shares and

takeover regulation)takeover regulation) Any new acquirer who is allotted shares Any new acquirer who is allotted shares

having voting rights on a Preferential having voting rights on a Preferential basis shall make a Public basis shall make a Public Announcement under reg.11 in case Announcement under reg.11 in case shares allotted to him to exercise 15% shares allotted to him to exercise 15% or more but less than 55% of total or more but less than 55% of total voting right either himself or together voting right either himself or together with person acting in concert, or in with person acting in concert, or in case of beyond 55% of paid up post case of beyond 55% of paid up post preferential equitypreferential equity

If preferential issue is made If preferential issue is made to QIBsto QIBs

Equity share shall be:Equity share shall be:

1.1. Of the same class and listed on stock Of the same class and listed on stock exchange exchange

2.2. In compliance with the prescribed In compliance with the prescribed minimum public shareholding minimum public shareholding requirement of the listing agreement.requirement of the listing agreement.

Note:Note:

Shares issued under QIP are not Shares issued under QIP are not subjected to lock- in.subjected to lock- in.

QIBs meansQIBs means Public financial Institution as defined in 4A of the ActPublic financial Institution as defined in 4A of the Act Scheduled Commercial bankScheduled Commercial bank Mutual fund Mutual fund Foreign Institutional Investor registered With SEBIForeign Institutional Investor registered With SEBI Multilateral and bilateral development financial Multilateral and bilateral development financial

InstitutionInstitution Venture Capital fund with SEBIVenture Capital fund with SEBI Foreign Venture Capital registered with SEBIForeign Venture Capital registered with SEBI State industrial development corportionsState industrial development corportions Insurance companies registered with IRDAInsurance companies registered with IRDA Providend funds with minimum corpus Rs 25 croreProvidend funds with minimum corpus Rs 25 crore Pension Fund with minimum corpus of Rs. 25 crorePension Fund with minimum corpus of Rs. 25 crore

Public financial Institution Public financial Institution u/s 4Au/s 4A

ICICIICICI IFCIIFCI IDBIIDBI LICLIC UTIUTI IDFCIDFC

Placement DocumentPlacement Document is mandatory to be provide to select is mandatory to be provide to select

investors through serially numbered copies. investors through serially numbered copies. The placement document shall contain all The placement document shall contain all material information material information

It should also be posted on website of BSE It should also be posted on website of BSE and of company with disclaimer toand of company with disclaimer to

the effect that it is in connection with an the effect that it is in connection with an issue to QIBs and that no offer is being made issue to QIBs and that no offer is being made to public or to any other category of to public or to any other category of Investors. Investors.

A copy of placement document shall be filed A copy of placement document shall be filed with SEBI with in 30 days of the allotmentwith SEBI with in 30 days of the allotment

Resolution & Allotment Resolution & Allotment RequirementsRequirements

A company can make a A company can make a preferential issue to QIBs preferential issue to QIBs if a special resolution to if a special resolution to that effect has been that effect has been passed.passed.

The placement made The placement made pursuant to authority of pursuant to authority of same shareholder's same shareholder's resolution shall be resolution shall be separatedseparated

by at least six months by at least six months between each placement. between each placement.

Allotment shall be Allotment shall be completed in within completed in within 12 12 monthsmonths from the date of from the date of passing of the resolutionpassing of the resolution

Allotment to mutual Allotment to mutual FundsFunds

Mutual fund shall be Mutual fund shall be alloted a minimum of 10 alloted a minimum of 10 % of specified securities. % of specified securities. If no mutual fund is If no mutual fund is agreeable to take up the agreeable to take up the minimum portion or any minimum portion or any part then such minimum part then such minimum portion may be allotted portion may be allotted to other QIBsto other QIBs

Restriction on allotmentRestriction on allotment No allotment shall be made ,either directly or No allotment shall be made ,either directly or

indirectly, to any QIB being a promoter or any indirectly, to any QIB being a promoter or any person related to promoter/sperson related to promoter/s

QIBs who has all over or any of the following QIBs who has all over or any of the following rights shall be deemed to be relatedrights shall be deemed to be related

1.1. Rights under a shareholder’s agreement or Rights under a shareholder’s agreement or voting agreement entered in to with promotersvoting agreement entered in to with promoters

2.2. Veto rightVeto right3.3. Right to appoint any nominee director Right to appoint any nominee director NoteNote :- A QIB who does not hold any shares in the :- A QIB who does not hold any shares in the

issuer and who has acquired the aforesaid issuer and who has acquired the aforesaid rights in the capacity of a lender shall not be rights in the capacity of a lender shall not be deemed to be a person related to promoter/sdeemed to be a person related to promoter/s

Number of allotteesNumber of allottees

2 where the issue size is less than o 2 where the issue size is less than o equal to Rs.250 crore,equal to Rs.250 crore,

5, where the issue size is greater than 5, where the issue size is greater than 250 crore.250 crore.

No single allottee shall be allotted 50 % No single allottee shall be allotted 50 % of the issue size.of the issue size.

QIBs under the samegroup shall be QIBs under the samegroup shall be single allottee.single allottee.

Investors shall not allowed to withdraw Investors shall not allowed to withdraw their bids after the closure of issue.their bids after the closure of issue.

Obligations of Merchant Obligations of Merchant BankerBanker

Any issue and allotment to QIBs Any issue and allotment to QIBs shall be managed by Merchant shall be managed by Merchant Banker(s) registered with SEBI.Banker(s) registered with SEBI.

The M.B shall give due diligence The M.B shall give due diligence certificate to BSEcertificate to BSE

M.B shall also furnish any M.B shall also furnish any document ,undertaking etc required document ,undertaking etc required for the purpose of seeking In for the purpose of seeking In principal approval and final principal approval and final permission from BSEpermission from BSE

Restrictions on amount Restrictions on amount raisedraised

The aggregate of the proposed The aggregate of the proposed placement and all previous placement and all previous placement made in the same placement made in the same financial year to QIBs shall not financial year to QIBs shall not exceed five times the networth of exceed five times the networth of issuer as per audited balance sheet issuer as per audited balance sheet of previous financial year.of previous financial year.