SEBI (Securities and Exchange Board of India), is a statutory body constituted  on 30th January, 1992 to regulate securities market. SEBI has been given various powers under the Act to enable it to fulfil its objectives. Section 11 of SEBI Act specifies that basic duty of SEBI is to (a) protect interests of investors in securities and (b) regulate the securities market

Head Office of SEBI is at 224, Mittal Court, B wing, Nariman Point, Mumbai - 400 021. Tel : 22850451-56. Fax : 22045633. E-mail – sebi@sebi.gov.in. SEBI has regional offices at New Delhi, Chennai and Kolkata. Website of SEBI is http://www.sebi.gov.in. The website contains information about SEBI regulations, offer documents, orders of Securities Appellate Tribunal etc.

Address of investor grievance & guidance section is P.B. No. 19972, Nariman Point, Mumbai - 400 021.  Address of Office of Investor Assistance and Education is – SEBI, Exchange plaza, C-1, Block G, 4^th Floor, Bandra Kurla Complex, Bandra (E), Mumbai 400 051.

There are many intermediaries involved in stock exchange transactions. These are : Merchant bankers, Underwriters, Registrars, bankers, brokers, depositories, custodians etc.  These intermediaries have to be registered with SEBI and follow the regulations issued by SEBI. They should appoint a ‘Compliance Officer’. He should report non-compliance with SEBI Act, rules, regulations, notifications, guidelines, instructions etc. directly to SEBI. [Quite probably, he will lose the job, if he really does so].

SEBI Regulations in respect of intermediaries prescribe code of conduct to be followed by them.

Income Tax PAN will be sole identification number for all transactions in securities market – Income tax PAN will be the sole identification number for all participants in the securities market with an alpha-numeric prefix or suffix to distinguish a particular kind of account. The intermediaries, stock exchanges and depositories have been advised to put in place necessary systems to link PAN details with clients – SEBI circular No. MRD/DoP/Cir-05/2007 dated 27-4-2007.

Composition of Board - Provisions, as contained in clause 49(I) of Listing Agreement are as follows – Company should have optimum combination of executive and non-executive directors, with not less than 50% of directors comprising of non-executive directors. - - There should be at least 50% independent directors if Chairman is executive. In case of non-executive Chairman, at least one-third should be independent directors. [The non-executive Chairman may or may not be ‘independent director’].

Meaning of independent directors - 'Independent director' means a non-executive director who - (a) apart from receiving director's remuneration, does not have any other material pecuniary relationship or transactions with company, its promoters, its directors, its senior management or its holding company, subsidiaries and associates, which may affect independence of the director. Senior management means members of management one level below executive directors including functional heads (b) is not related to promoters or management at the board level or at one level below the Board (c) Has not been executive of the company in immediately preceding three financial years  (d) is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following – (i) the statutory audit firm or the internal audit firm that is associated with the company and (ii) the legal firm/s and consulting firm/s and consulting firm/s that have a material association with the entity (e) is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director and (f) is not a substantial shareholder of the company, i.e. owning two percent or more of the block of voting shares. [clause 49I(A)(iii) of Listing Agreement] [Concept of ‘materiality’ implies that minor transactions with company will not affect the independent character of director]

Nominee directors appointed by an institution which has invested in or lent to the company shall be deemed to be independent directors [Explanation (c) to clause 49-I(A) of Listing Agreement]. ‘Institution’ means PFI (Public Financial institution) or Bank. However, directors nominated by Government on Government companies will not be ‘independent directors’. ‘Associate’ means ‘associate’ as defined in AS-23.

Independent directors may have a tenure not exceeding a period of nine years on the Board. [This is not a mandatory requirement]

Disclosures by non-executive directors – Non-executive directors are required to disclose their shareholding (own or held on a beneficial basis) before being appointed as director. These details should be disclosed in the notice to general meeting called for appointment of such director.

Restrictions on Committee membership - A person shall not be member of more than 10 committees of Board. He shall not be Chairman of more than five committees across all companies in which he is director.  Every director must inform the company about committee positions he occupies in other companies annually, and notify changes as and when they take place. - - For purpose of considering the limit of committees on which a director can serve, all listed and unlisted public companies will be included, but other companies (private companies, foreign companies, section 25 companies) will be excluded. Further, only two committees i.e. Audit committee and  Shareholders’ Grievance Committee shall be considered for purpose of the limit, i.e. membership of other committees will not be considered [explanation to clause 49(IC) of Listing Agreement]

Clause 49(IB) of Listing Agreement makes following provisions in respect of remuneration to remuneration of non executive directors.

All fees/compensation paid to non-executive directors shall be fixed by the Board of Directors and shall require previous approval of shareholders in general meeting (except that sitting fees are not required to be approved in general meeting). Shareholders’ resolution shall specify the maximum number of stock options that can be granted to non-executive directors including independent directors.

Thus, in case of listed company, resolution in general meeting is required to be passed for any managerial remuneration (except payment of sitting fees). As per section 309(1), managerial remuneration can be fixed by Articles or by resolution in general meeting. Proviso to section 309(1) provides exemption to remuneration for services rendered by director in professional capacity, if in the opinion of Central Government, director possesses requisite qualifications. However, all such remuneration will have to be approved in general meeting, except sitting fees.

Stock options to non-executive directors - Limits shall be set for the maximum number of stock options that can be granted to non-executive directors including independent directors in any financial year and in aggregate.

Board meetings shall be held at least four times in a year, with maximum time gap of four months between the meetings [clause 49I(C) of Listing Agreement]. Minimum information to be made available to Board has been specified in Annexure 1A of clause 49 of Listing Agreement.

Review of compliance report – Board will review compliance reports of all laws applicable to company, prepared by company and steps taken by company to rectify instances of non-compliance [clause 49I(C)(iii) of listing agreement].

Code of Conduct for directors and senior managers - Board of a company shall lay down the code of conduct for all Board members and senior management of a company. This code of conduct shall be posted on the website of the company. All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The annual report of the company shall contain a declaration to this effect signed by the CEO.

The term "senior management" shall mean personnel of the company who are members of its core management excluding Board of Directors. Normally, this would comprise all members of management one level below the executive directors [clause 49(ID) of Listing Agreement].

Policy towards Subsidiary Companies of listed company - At least one independent director on the Board of Directors of the holding company shall be a director on the Board of Directors of the subsidiary company.  - - The Audit Committee of the holding company shall also review the financial statements, in particular the investments made by the subsidiary company.  - - The minutes of the Board meetings of the subsidiary company shall be placed for review at the Board meeting of the holding company. - - The Management should bring to notice of Board of holding company all significant transactions and arrangements entered into by unlisted subsidiary company  [clause 49(III) of Listing Agreement]

Basis of related party transactions - A statement of all transactions with related parties including their basis shall be placed before the Audit Committee. Details of material transactions which are not in normal course of business shall be placed before audit committee. If any transaction is not on an arm’s length basis, management shall provide an explanation to the Audit Committee justifying the same. [clause 49(IVA) of Listing Agreement]

Disclosure of Accounting Treatment – If accounting standards are not followed, the fact should be disclosed in financial statement, together with management’s explanation why the alternate treatment is giving better view [clause 49(IVB) of Listing Agreement]

Disclosure of risks and risk management -  Company shall lay down procedures to inform Board members about the risk assessment and minimization procedures. These procedures shall be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework. [clause 49(IVC) of Listing Agreement]

Proceeds from Initial Public Offerings (IPOs) - When money is raised through an Initial Public Offering (IPO) it shall disclose to the Audit Committee, the uses / applications of funds by major category (capital expenditure, sales and marketing, working capital, etc), on a quarterly basis as a part of their quarterly declaration of financial results. Further, on an annual basis, the company shall prepare a statement of funds utilized for purposes other than those stated in the offer document/prospectus. This statement shall be certified by the statutory auditors of the company. The audit committee shall make appropriate recommendations to the Board to take up steps in this matter. [clause 49(IV-D) of Listing Agreement] [This clause makes no provision about disclosure to members. However, as per clause 43 of Listing Agreement, information about deployment funds raised through issue of securities is required to be given to members]

Remuneration of Directors - All pecuniary relationship or transactions of the non-executive director’s vis-à-vis the company shall be disclosed in the Annual Report. Disclosure about remuneration giving prescribed details should be made in section on Corporate Governance [clause 49[IV-E)]

Management discussion and analysis report of Board - A management discussion and analysis report of Board shall form part of annual report to shareholders. The report should include following matters within the limits set by the company’s competitive position  - (a) Industry structure and development (b) Opportunities and threats (c) Segment-wise or product wise performance (d) Outlook (e) Risks and concerns (f) Internal control systems and their adequacy (g) Discussion on financial performance with respect to operational performance (h) Material developments in human resources / industrial relations [clause 49(IVF) of Listing Agreement].

Disclosure by senior management to Board of their interests in transactions - Disclosure shall be made by senior management to Board,  relating to all material financial and commercial transactions where they have personal interest that may have potential conflict with interest of company - e.g. dealing in company shares, commercial dealings with bodies which have share-holding or management of their relatives etc. [This disclosure is to be made by senior management to Board]. [clause 49(VIIF(ii)] of Listing Agreement].

Disclosure when director is to be appointed/re-appointed - In case of the appointment of a new director or re-appointment of a director the shareholders must be provided with the following information – (a) A brief resume of the director; (b) Nature of his expertise in specific functional areas (c) Names of companies in which the person also holds the directorship and the membership of Committees of the Board and (d) Shareholding of non-executive directors in the company either own or as beneficiary [clause 49(IVG)(i) of Listing Agreement]

Information about company on web - Quarterly results and presentation made by companies to analysts shall be put on company’s web-site, or shall be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own web-site [clause 49IVG(ii) of Listing Agreement].

Shareholders / investors grievance Committee - A Board committee under Chairmanship of a non-executive director should be formed to look into redressing of shareholders and investors complaints like transfer of shares, non-receipt of balance sheet / dividend etc. This Committee shall be designated as ‘Shareholders/Investors Grievance Committee’. [clause 49(IVG)(iii) of Listing Agreement].

Delegation of authority of share transfer - In order to expedite process of share transfers, Board shall delegate powers of share transfer to an officer or a committee or to registrar and transfer agents. The delegate authority shall attend to share transfer formalities at least once in fortnight. [clause 49IVG(iv) of Listing Agreement]

Report on Corporate Governance to Members - Annual Report of Company shall include a separate section on report on corporate governance.  This report shall give details as specified in Annexure 1C of clause 49 of Listing Agreement.

Transparency and disclosures – Besides clause 49, SEBI has initiated many amendments in listing agreements to bring transparency and ensure adequate disclosures to members and public. Some important measures are (a) Publication of quarterly unaudited reports with segment reporting within one month (b) Quarterly limited review by auditors (c) Disclosures about important events in the company (d) Disclosures in Directors’ Report.

CEO (either the Managing Director or Manager appointed under Companies Act) and the CFO (whole-time Finance Director or other person discharging this function) of the company shall certify to Board that, they have reviewed the financial statements and the cash flow statements and to the best of their knowledge and belief these statements are true, there were not fraudulent or illegal transactions, they accept responsibility of internal control for the purpose for financial reporting, they have indicated to auditors and audit committee significant changes and instances of fraud etc.   [clause 49(V) of Listing Agreement].

The certificate should be submitted to Board annually before or at the time when the annual accounts are presented to Board. It is advisable that the certificate is taken on record by Board and recorded in minutes of Board meeting accordingly.

All the requirements in respect of Corporate Governance discussed above are mandatory. In addition, some non-mandatory requirements have been suggested. Even if these are not mandatory, company has to state its adoptions / non-adoption in the 'Corporate Governance' section of the Annual Report, as per clause 49VII(2) of Listing Agreement]

The non-mandatory requirements, as contained in Annexure 1-D of clause 49 of Listing Agreement  are as follows -

Facilities to non-executive Chairman of Company - If the Chairman is non-executive, he should be given a Chairman's office at company's expenses and reimbursement of expenses incurred in performance of his duties.

Tenure of independent directors – Independent directors may have a tenure not exceeding a period of nine years on the Board.

Remuneration Committee - Remuneration Committee of Board of directors may be formed to decide policy on remuneration to executive directors, including pension and compensation payment. There should be at least three members of committee. All members of Committee should be non-executive directors. Chairman of remuneration Committee should be independent director. All members of Committee could be present at the meeting of remuneration committee (i.e. 100% quorum is desirable). - - Chairman of Remuneration Committee could be present at AGM to answer shareholder queries, but Chairman of meeting should decide who will answer the queries.

Half-yearly reporting to members - Shareholders should be supplied half yearly report about financial performance and significant events in last six months.

Goal towards No Audit qualifications - Company may move towards a regime of unqualified financial statements.

Training of Board Members - Company shall train its Board members in the business model of the company as well as the risk profile of the business parameters of the company, their responsibilities as directors, and the best ways to discharge them.

Mechanism for evaluating non-executive Board Members - The performance evaluation of non-executive directors should be done by a peer group comprising the entire Board of Directors, excluding the director being evaluated; and Peer Group evaluation should be the mechanism to determine whether to extend / continue the terms of appointment of non-executive directors.

Whistle Blower Policy – The company may establish a mechanism for employees to report to management concerns about unethical behaviour, actual or suspected fraud or violation of company’s code of conduct or ethics policy.

Listing agreements provide for reporting of compliance with requirements of corporate governance.

Quarterly Compliance report to stock exchange - The companies shall submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter as per the format prescribed in Annexure IB. The report shall be submitted either by the Compliance Officer or the Chief Executive Officer of the company. The details under each head shall be provided to incorporate all the information required as per the provisions of the clause 49 of Listing Agreement. In the remarks column, reasons for non-compliance may be indicated. [clause 49(VI)(ii) of Listing Agreement]

Compliance certificate from auditors/PCS - Company shall obtain a certificate from auditors of the company or Practicing Company Secretary (PCS) regarding compliance of conditions of Corporate Governance. This certificate will be annexed to directors’ report, which is sent annually to all members. Copy of the certificate shall be sent to stock exchange along with annual return which is filed with stock exchange – Clause 49(VII) of Listing Agreement.

One of the key feature of Corporate Governance is ‘Audit Committee’.  This is required under clause 49 of Listing Agreement. Provision for audit committee has also been made in section 292A of Companies Act. Needless to mention, section 292A applies to listed as well as unlisted companies, while clause 49 applies only to listed companies. An audit committee is a sub-committee of Board of Directors. It should consist of independent directors with no management responsibility for company's financial operations. The Committee should report directly to Board.

Constitution of Qualified and Independent Audit Committee - A qualified and independent audit committee shall be set up by Board. The audit committee shall have minimum three members. All the members of audit committee shall be non-executive directors. Two-thirds of them being independent. [Clause 49(IIA) of Listing Agreement]

Members of committee to be financially literate - All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.  - - The term "financially literate" means the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows. - - A member will be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting, or requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer, or other senior officer with financial oversight responsibilities. - - Thus, he need not be qualified CA/ICWA/CS, but he should have had reasonable exposure to accounting and financial management aspects at fairly senior level.

Chairman of Audit Committee - The Chairman of the Audit Committee shall be an independent director. The Chairman shall be present at Annual General Meeting to answer shareholder queries [clause 49II(A)(iii) of Listing Agreement].

Secretary of committee - The Company Secretary shall act as the secretary to the committee. - - Note that he is not a member of the audit committee [clause 49II(A)(vi) of Listing Agreement].

The audit committee shall meet at least thrice a year. One meeting shall be held before finalization of annual accounts and one every six months. The quorum shall be either two members or one-third of the members of the audit committee, whichever is higher and minimum of two independent directors. [clause 49(IIB) of Listing Agreement]

Invitation to executives/auditors at meeting - The audit committee may invite such of the executives, as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the committee, but on occasions it may also meet without the presence of any executives of the company. The finance director, head of internal audit and when required, a representative of the external auditor may be present as invitees for the meetings of the audit committee [clause 49II(A)(v) of Listing Agreement] [However, as per section 292A(5), auditor, internal auditor and director-in-charge of finance shall attend and participate at the Audit Committee meetings, though they shall not be entitled to vote. This would apply to all companies having paid up capital exceeding Rs five crores].

Powers of Audit Committee - The audit committee shall have powers which should include the following – (1) To investigate any activity within its terms of reference (2) To seek information from any employee (3) To obtain outside legal or other professional advice (4) To secure attendance of outsiders with relevant expertise, if it considers necessary [clause 49II(C) of Listing Agreement].

Overview of reporting process – Audit committee should have oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible [clause 49(IID1) of Listing Agreement].

Recommend auditors and their fees – Audit committee should recommend the appointment and removal of external auditor, fixation of audit fee and also approval for payment for any other services [clause 49(IID2) and 49(IID3) of Listing Agreement]

Reviewing annual financial statements before submission to Board – Audit Committee should review with management the annual financial statements before submission to the board, with particular reference to – (a) Matters required to be included in Directors Responsibility Statement  in terms of section 217(2AA) (b) Changes in accounting policies and practices and reasons (c) Major accounting entries involving estimates based on exercise of judgment by management (d) Significant adjustments in financial statement arising out of audit (e) Compliance with listing and legal requirements concerning financial statements (f) Disclosure of any related party transactions (g) Qualifications in the draft audit report [clause 49(IID4) of Listing Agreement].

Clause 49 gives some emphasis on ‘related party transactions’ as it is one of usual ways of siphoning out money by promoters from the company.  - - The term "related party transactions" shall have the same meaning as contained in the Accounting Standard 18, Related Party Transactions, issued by ICAI.

Reviewing quarterly Financial Statements - Audit Committee should review with management the quarterly financial statements before submission to the board [clause 49(IID5) of Listing Agreement].

Reviewing performance of auditors and internal audit system – Audit committee should review with management performance of statutory and internal auditors and adequacy of internal audit system [clause 49(IID6) of Listing Agreement].

Review Internal audit function – Audit committee should review the adequacy of internal audit systems. It should review the adequacy of internal audit function, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit.  [clause 49(IID7) of Listing Agreement].

The audit committee should have discussion with internal auditors any significant findings and follow up there on [clause 49(IID8) of Listing Agreement]. Audit committee should review the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature. Such matters should be reported to the board. [clause 49(IID9)]

Discussions with statutory auditors – Audit Committee should hold discussion with external auditors before the audit commences about nature and scope of audit as well as post-audit discussion to ascertain any area of concern [clause 49(IID10) of Listing Agreement].

Look into substantial defaults in payments – Audit Committee should look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors [clause 49(IID11) of Listing Agreement]

Whistle blower policy – If a company has whistle blower policy, audit committee should review functioning of whistle blower mechanism [clause 49(IID12) of Listing Agreement].

Review of specified information by Audit Committee - The Audit Committee shall mandatorily review the following information:  (1) Management discussion and analysis of financial condition and results of operations (2) Statement of significant related party transactions (as defined by audit committee) submitted to management (3) Management letters / letters of internal control weaknesses issued by statutory auditors  (5) Internal audit report relating to internal control weaknesses and (5) The appointment, removal and terms of remuneration of the Chief Internal Auditor shall be subject to review by the Audit Committee [clause 49II(E) of Listing Agreement]

Any other function assigned by Board  – Audit committee may carry out any other function as is mentioned in terms of reference of Audit Committee (by Board of Directors) [clause 49(IID13) of Listing Agreement].

Duties of audit Committee under Companies Act – Section 292A(6) provides that the audit committee should have discussions with the auditors periodically about the internal control systems, the scope of audit including the half-yearly and annual financial statements before submission to Board. It will also ensure compliance of internal control systems. [These are already covered under duties as specified in clause 49 of Listing Agreement].

Recommendation of dividend - As per Secretarial Standard (SS-3) of ICSI on Dividend (which is presently recommendatory in nature), audit committee should consider financial statement before submission to Board. Dividend should be recommended by Board only after approval of financial statement. Similarly, in case of interim dividend, same shall be approved only after interim financial statement is considered by Committee. It should then be submitted to Board for consideration and declaration of interim dividend.

As per section 292A of Companies Act, every public company having paid up capital of Rs five crore or more must constitute a committee of Board as ‘Audit Committee’.  - - Note that these provisions apply to listed as well as unlisted companies.

Composition of Committee – The audit committee of the Board shall consist of minimum three directors. Out of total members of committee, at least two third shall be non-executive i.e. those who are not Managing or Wholetime Directors. The committee shall select its own Chairman. It is provided that director-in-charge of finance shall attend the meeting of audit committee as invitee. By implication, it means that director-in-charge of finance cannot be member of the committee.

Terms of reference will be specified in writing by the Board. [section 292A(2)]. Composition of Audit Committee shall be disclosed in Annual Report of the company. [section 292A(4)].

Recommendations of Committee binding – Recommendations of Committee on any matter relating to financial management including the audit report, shall be binding on the Board. [section 292A(8)]. If the Board does not accept recommendations of Audit Committee, it shall record the reasons therefor and communicate such reasons to the shareholders. [section 292A(9)].

Chairman of committee to attend AGM – Chairman of Audit Committee shall attend the Annual General Meeting of company to provide any clarification on matters relating to audit. [section 292A(10)]. There is no provision permitting his absence for reasons beyond his control. However, the offence is compoundable.

Punishment for default – In case of default, company as well as every officer who is in default is punishable with imprisonment upto one year or fine upto Rs 50,000 or both. [section 292A(11)]. Since auditor is not an ‘officer’ of the company, he cannot be penalised for not attending the meeting/s of audit committee, though section 292A(5) prescribe that he shall attend the meetings of audit committee.

Every company listing its shares in stock market must enter into a ‘listing agreement’ with the stock exchange. As per section 21 of Securities Contract (Regulation) Act, 1956; a listed company is bound by the listing agreement. Violation of listing agreement is an offence. Stock exchange can suspend or withdraw dealings in securities if there is violation of listing agreement. Salient aspects of 'listing agreement' are summarised here.

Closure of transfer register - Company will close its register of transfer books at least once in a year at the time of annual general meeting. Company will close register of transfer only once in a year. Closing date will not be inconvenient to stock exchange for purpose of settlement of transactions. [Clause 15] Time gap between book closure and record date will be minimum 30 days. (reduced from earlier 90 days – SEBI circular dated 6.12.2000). [Clause 16]. All transfers received upto date of closure /record date will be recorded. [Clause 17]

Intimate stock exchange after adoption of accounts - Immediately after Board meeting, company will inform stock exchange about dividend declared, total turnover, gross profit/loss, net profits, capital profit, accumulated profit, capital profits, source of dividend, provisions for taxes and depreciation etc. by letter or telegram. Such declaration will be made only after close of market hours. It can also be made at least half an hour before market opens. [Clause 22]

Prior intimation if buy back proposed - If company intends to buy back its shares, company should give seven days prior notice about the Board meeting at which proposal to buy back of securities is to be considered. Immediately after Board meeting, decision about buy back should be intimated to stock exchanges within 15 minutes of closure of Board meeting. [Clause 19]

Decision to be intimated after closure of stock market - Decision about dividends, rights or bonus shares or buy back of securities shall be informed to stock exchange immediately after the Board meeting, but after close of market hours of stock exchange, to avoid excessive volatility of stock prices. [Clause 20]

Listing fees - Company will pay listing fees to stock exchange at the time of listing and also annual fees and will abide by rules and bye-laws of stock exchange. Listing fee is payable by 30th April of the year. Non-payment of fees is deemed to be a breach of agreement between company and stock exchange concerned. [Clause 38]. Listing fee of 3 years together with initial listing fee will be paid up front and later once in every three years. [Clause 38 and 38A]

Copies of annual accounts etc. to be sent - Six copies of annual accounts, notice of meeting, directors report, etc. will be submitted to stock exchange. [Clause 31(a)] Copies of all notices of meetings convened u/s 391 or 394, together with annexures shall be sent to stock exchange [clause 31(c)].

Prior Intimation about Board meeting in certain cases - Date of meeting of Board at which recommendation of dividend or declaration of dividend or rights or bonus issue or issue of convertible debentures or passing over of dividend is proposed will be intimated in advance. Declaration of dividend must be at least 5 days before commencement of closure of books. [Clause 19]. - -  At least seven days prior intimation about meeting where dividend declaration is to be considered should be given to stock exchange. [Clause 19]

Intimation about proposed bonus issue - If company intends to propose a bonus issue and agenda papers of Board meeting contain the papers of the proposal, simultaneously, notice should be given to stock exchange. However, if agenda papers do not contain any proposal of bonus issue, advance intimation is not required. [Clause 19]

Intimate if major change - Inform stock exchange about proposed change in general character or nature of its business, change in Board, MD, auditors etc. and any other information as may be required. [Clauses 29 and 30]

Intimate shareholding pattern - Inform shareholding pattern, i.e. distribution of each kind of securities (i.e. pattern of shareholding e.g. shares held by financial institutions, banks, promoters, foreign companies etc.) listed will be informed to stock exchange every year after AGM [Clause 35].

Major events to be informed - Major events e.g. strike, lock outs, power cuts etc. will be informed promptly to stock exchange [Clause 36]. Any other information required by stock exchange will be supplied at the request of stock exchange [Clause 36A]. - - Take-over offer or substantial acquisition of securities will be intimated to stock exchange.

Abridged balance sheet can be sent to members - Company can send abridged balance sheet to shareholders, as provided in section 219(1)(iv) of Companies Act. If shareholder makes written request, complete and full balance sheet should be sent to shareholder [Clause 32 amended w.e.f. 26-4-2007] [Of course, full balance sheet can be sent, if company wants].

Cash flow, consolidated statement and related party transaction disclosures in annual accounts - Company will give a cash flow statement along with balance sheet. The cash flow statement will be prepared as per ICAI accounting standard AS-3, under indirect method as given in AS-3. - - Consolidated financial statements shall be published in the annual report in addition to the individual financial statements. These will have to be audited by statutory auditors and filed with stock exchange - - Disclosures as per ‘Related Party Disclosures’ Accounting standard shall be made in Annual Report. - - It also has to make disclosure about loans/advances and investments in its own shares by subsidiaries, associates etc. Both parent and subsidiary company has to make the disclosure [Clause 32]

Electronic Information on SEBI website - Company will provide following information and reports on EDIFAR (Electronic Data Information Filing and Retrieval] website maintained by National Informatics Centre (NIC), in such manner and format as may be prescribed by SEBI [clause 51] - * Full version of annual report * Corporate Governance Report * Shareholding pattern statement * Statement of actions taken against company by any regulating agency * Such other statement as may be specified by SEBI from time to time.  Company will appoint a compliance officer for this purpose. [Clause 51]. Initially, 200 companies have been selected for the EDIFAR project – SEBI circular dated 20-6-2002. Further 500 companies were added each vide SEBI circular No. SMD/POLICY/CIR-23/02 dated 17-9-2002, circular No. SMD/POLICY/CIR-10/2003 dated 17-3-2003 and more 500 companies vide circular No. SMD?SR/CIR-23/2003/18/06 dated 2-6-2003.

Unaudited quarterly financial results will be furnished to stock exchange within one month from closure of quarters. In case of companies which are yet to commence commercial production, details how unutilised funds have been invested should be disclosed. In the last quarter of financial year, if company wants to give audited results, the audited accounts shall be published within 3 months. However, company will have to inform stock exchange within one month of end of quarter that it will publish audited results within 3 months.

The quarterly report shall also give number of investor complaints received, disposed of and lying unresolved at the end of the quarter [Clause 41]. Proforma of quarterly results has been prescribed by SEBI. An alternative format has also been prescribed, where manufacturing and trading/service companies have followed functional (secondary) classification.

Reporting of financial results to stock exchange – Quarterly financial results shall be submitted to stock exchange within 15 minutes of conclusion of meeting of Board or committee in which they were approved – [clause 41(I)((f)].

Limited review of quarterly report - In addition to quarterly report, company shall prepare half yearly results in same proforma. Both half yearly and quarterly report will be subjected to 'limited review' by auditors of company. Copy of review report shall be submitted within two months after close of quarter. If variation in net profits or net loss after tax between quarterly results as published and after limited review is in excess of 10% or Rs 10 lakhs, whichever is higher, reason shall be informed to stock exchange. Half yearly report should indicate non promoter shareholding in prescribed form. Form of review report has been specified in Annexures V to VIII of clause 41 of Listing Agreement.

Limited Review Report of Auditors shall be placed before Board or Committee, before submitting it to stock exchange.

If the results are amended subsequent to limited review by auditors, explanation for variations shall be submitted to stock exchange. The explanation shall be approved by Board of Directors.

Quarterly report on accrual principle with segment reporting - The quarterly results should be prepared on basis of recognition and measurement principles laid down in AS-25 (Interim Financial Reporting) issued by ICAI. Segment-wise quarterly reporting of revenue, results and capital employed should be done in prescribed form. Changes in accounting policies and extra-ordinary items shall be disclosed as per AS-5 (AS-5 net Profit or Loss for the period, prior period items and changes in accounting policies).

Any material event in quarter shall be reported.

Segment reporting will be as per AS-17 issued by ICAI. Accounting for taxes on income should be done in quarterly report.

Publishing quartery consolidated financial results on optional basis – In case of companies having subsidiaries, the Company has option to publish consolidated financial results on quarterly/half yearly basis. These may be published in addition to quarterly financial result of the parent company.

Consolidated yearly financial results - Audited consolidated financial statements on annual basis shall be submitted to stock exchange along with stand alone financial result is mandatory.

Quarterly report to be approved by Board  or committee- Unaudited quarterly financial results will be approved by Board of Directors or a committee thereof, other than audit committee. The committee of directors should be consisting of least one third directors with MD and at least one independent director. The report shall be signed by Chairman, Managing Director or Wholetime Director. However, Annual audited financial results shall be approved by Board of Directors of the company.

Date of Board meeting to be intimated and advertised in advance - Date of meeting of Board or Committee where quarterly unaudited/audited results are to be approved by Board/Committee will be informed to stock exchange at least seven days in advance, excluding date of intimation and date of meeting. Simultaneously, a public notice shall be issued in at least one English daily newspaper circulating in substantially whole of India and in one regional newspaper, where the registered office is situated.

Variation from audited results to be explained - Unaudited results should not materially differ from audited accounts of the company. If the variation in net profit or net loss after tax is in excess of 10% or Rs 10 lakhs, whichever is higher, an explanation shall be submitted to stock exchange.

Disclosure of audit qualifications – Company shall disclose the audit qualifications along with audited financial results published under clause 41, in addition to the explanatory statement as to how audit qualification in respect of the audited accounts of previous year have been addressed in the financial results. - - Stock exchange should ask companies to explain about audit objections. If companies fail to remove audit qualifications, stock exchange should report the matter to SEBI within 7 days. – SEBI circular No. SMD/POLICY/CIR-2 dated 10-1-2003.

Quarterly Compliance report about Corporate Governance to stock exchange - The company is required to submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter, in respect of corporate governance [clause 49(IX)(ii) of Listing Agreement]

As per clause 40A of Listing Agreement (as amended on 13-4-2006), all listed public companies should have 25% public shareholding.

‘Public shareholding’ means shares excluding shares held by promoters, promoter group and shares held by custodians against IDR/GDR issued overseas).

Following are the exceptions to the aforesaid requirement –

(a)     Where in the past company had offered at least 10% of its shares to public in terms of rule 19(2)(b) of Securities Contracts (Regulations) Rules, 1957, they can continue, provided public shareholding of at least 10% is maintained.

(b)     Where number of outstanding listed shares are two crores or more and market capitalisation of such company is Rs 1,000 crores or more, irrespective of percentage of shares with public at the time of initial listing. However, they must have at least 10% public shareholding. (Market capitalisation means average market capitalisation for the previous financial year).

(c)     Government companies, infrastructure companies and sick companies under BIFR. They need not have minimum 10% public shareholding.

Intimation about distribution of shareholding - Distribution of shareholding in prescribed form shall be informed to stock exchange on quarterly basis in prescribed form. The break up required is in respect of promoters shares, non-promoters shares, and shares held by custodians against which GDR/ADR has been issued. [Clause 35]. Stock exchange will provide this information on web. Company will also put up his information on its web site.

Existing companies to bring public shareholding to required minimum level – If the existing public holding is less then 10%/25% (as applicable), the company shall bring the public shareholding to the required level within 2 years from 1-5-2006. This period can be extended by one year by ‘specified stock exchange’ for genuine reasons.

Mode of increase in public shareholding – The public shareholding can be increased by any of following methods – (a) Issuance of shares to public through prospectus (b) Offer of shares held by promoters to public through prospectus (c) Sale of shares by promoters through secondary market i.e. on stock exchange or (d) Any other method which does not affect interest of minority shareholders.  If company wants to adopt method specified in (c) or (d) above, prior approval of stock exchange will be required.

Effect of non-compliance by a company – If a company fails to comply with the requirements, the shares are liable to be de-listed and the company will be liable to penal action under SCRA and SEBI Act.

Provisions of rule 19(2)(b) – As per rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957, a company can offer minimum 10% public shareholding if following conditions are satisfied – (a) minimum 20 lakh securities (excluding reservations, firm allotment and promoters’ contribution) was offered to public (b) Size of offer to public i.e. offer price multiplied by number of securities was minimum Rs 100 crores and (c) Issue was made only through book building and at least 60% of issue was allotted to QIB (Qualified Institutional Buyer).

Only these companies can have 10% public shareholding. Other companies must have at least 25% public shareholding.

SEBI has issued consolidated guidelines as SEBI (Disclosure and Investor Protection) Guidelines, 2000; in respect of issue of securities to public These have been amended from time to time.

Non-applicability of Guidelines in certain cases - SEBI guidelines are not applicable to issue of securities by private/closely held public limited and other un-listed companies, if such issue is private and is not made to public. Non-listed company can raise money without making invitation to public. However, if it wants to raise capital from the public by issuing a prospectus, it loses its non-listed character, as it is under obligation u/s 73 of Companies Act to get its securities listed on a recognised stock exchange.

Relaxation in case of Rights issue of size less than Rs 50 lakhs - As per proviso to clause 1.4(i) of SEBI (DIP) Guidelines, in case of the rights issue where the aggregate value of the securities offered is less than Rs.50 Lakhs, the company shall prepare the letter of offer in accordance with the disclosure requirements specified in these guidelines and file the same with the Board for its information and for being put on the SEBI website.

Broadly, there are following methods for issuing shares through public –

(a)     Conventional mode of obtaining applications through bankers and making allotment i.e. fixed price offer.

(b)     Book building [partly or fully] This is presently most popular method. Here price is assessed on the basis of bids obtained.

(c)     Issue through Qualified Institutional Buyers by existing listed companies under ‘Qualified Institutions Placement’.

(d)     On line system of stock exchange (e-IPO). The system is introduced w.e.f. 28.11.2000, but does not seem to have become very popular.

Present listed company can make public issue for additional shares.

In addition, following can make Initial Public Offer (IPO) - (a) Unlisted company - It can make fresh issue or make offer for sale of security (b) Partnership firm converting into company and making public issue (c) Spun off unit, i.e. company formed by division of an existing company.

The IPO may be for shares or securities convertible into shares at a later stage. Such company can also make offer for sale of their existing shares.

The companies issuing securities offered through an offer document, shall satisfy the eligibility norms at the time of filing draft offer document with SEBI and also at the time of filing the final offer document with the Registrar of Companies./ Designated Stock Exchange  [clause 2.0 of SEBI(DIP) Guidelines]. Eligibility Norm I (EN I) applies to existing profit making unlisted companies.  Eligibility Norm II (EN II) applies to new companies making issue through book building or project appraisal mode.

IPO by company having track record (EN 1) - A company having track record of profitability can make Initial Public Offer [IPO].- - An unlisted company may make an initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date, only if it meets all the following conditions [clause 2.2.1 of SEBI(DIP) Guidelines].

The company should have net tangible assets of at least Rs. 3 crore in each of the preceding 3 full years (of 12 months each), of which not more than 50% is held in monetary assets. If more than 50% of the net tangible assets are held in monetary assets, the company should have made firm commitments to deploy such excess monetary assets in its business/project.

The company should have a track record of distributable profits in terms of section 205 of the Companies Act, 1956, for at least three out of immediately preceding five years. - - Extra ordinary items shall not be considered for calculating distributable profits in terms of Section 205 of Companies Act, 1956. The company should have a net worth of at least Rs. 1 crore in each of the preceding 3 full years (of 12 months each)

If the company has changed its name within the last one year, at least 50% of the revenue for the preceding 1 full year is earned by the company from the activity suggested by the new name. [Often name of company is changed to some business which is currently in demand – e.g. ‘Information Technology’ shares were in demand few years ago. The provision is to discourage such practices]

The aggregate of the proposed issue and all previous issues made in the same financial year in terms of size (i.e. offer through offer document + firm allotment + promoters’ contribution through the offer document), should not exceed five times its pre-issue net-worth as per the audited balance sheet of the last financial year.

IPO by Companies having no track record or required net worth (EN II) - Companies which do not fulfil the requirements of net worth, profitability, issue size etc. as specified in clause 2.2.1 of SEBI guidelines (as explained above), can make IPO (of equity shares or any other security which may be converted into or exchanged with equity shares at a later date) either through book building process or project appraisal method. [clause 2.2.2(a) of SEBI(DIP) Guidelines]. The company must have post issue capital of Rs ten crores or should have arrangement of ‘market maker’ for at least two years [clause 2.2.2(b) of SEBI(DIP) Guidelines]

Book building process – If the issue is made through the book-building process, at least 50% of net offer to public must be allotted to the Qualified Institutional Buyers (QIBs). Otherwise, the full subscription monies shall be refunded. - - The intention (or hope) is that QIBs are informed and trained investors. They will take well informed and considered investment decisions, and will not be carried away by ‘sentiments’ ‘moods’, ‘rumours about premium’ etc. The minimum post-issue face value capital of the company shall be Rs. 10 crore. Alternatively, there shall be a compulsory market-making for at least 2 years from the date of listing of the shares.

Project appraisal – Instead of ‘book building, ‘project appraisal’ method can be adopted. The "project" should have at least 15% participation by Financial Institutions/ Scheduled Commercial Banks, of which at least 10% comes from the appraiser(s). In addition to this, at least 10% of the issue size shall be allotted to QIBs. If these conditions are not fulfilled, the full subscription monies shall be refunded. - -  "Project" means the object for which the monies proposed to be raised to cover the objects of the issue [clause 2.2.2B of SEBI(DIP) Guidelines]. The minimum post-issue face value capital of the company shall be Rs. 10 crore. Alternatively, there shall be a compulsory market-making for at least 2 years from the date of listing of the shares.

Exemption from entry norms – Following entities have been exempted from aforesaid entry norms – (a) Private sector and public sector banks (b) Infrastructure company whose project is appraised by PFI, IDFC, IL&FS or bank which was earlier PFI and not less than 5% project cost is financed by these institutions (c) Rights issue by existing listed company.

Compulsory IPO grading - IPO (Initial Public Officer) of equity shares or any security which may be converted later into equity shares of an unlisted company must be graded by at least one credit rating agency. All grades obtained along with rationale/description furnished by credit rating agency shall be furnished in prospectus (in case of fixed price issue) or Red herring Prospectus (in case of book built issue). Expenses of grading IPO will be borne by unlisted company obtaining the grading for IPO [clause 2.5A of SEBI (DIP) Guidelines inserted w.e.f. 30-4-2007].

Others can issue shares in OTCEI - Companies not fulfilling the aforesaid conditions can raise their funds by listing in OTCEI (Over The Counter Exchange of India). The conditions are - (a) They should fulfil listing criteria of OTCEI (b) The company should be sponsored by a member of OTCEI (c) The company must appoint two market makers - one compulsory and one additional market maker. Such company will not be permitted to de-list its shares from OTCEI at least for three years from date of admission to dealing in such securities in OTCEI.

Minimum public shareholding -  All existing listed public companies should have 25% public shareholding. The exceptions are – (a) Sectors where 10% is permitted as per rule 19 of SCR Rules (b) Government companies, infrastructure companies and sick companies under BIFR. Existing listed companies shall be given two years to bring public shareholding to this level i.e. upto 1-5-2008 (clause 40A of Listing Agreement as amended w.e.f. 1-5-2006).

Price to be market driven - There is no restriction on the price at which shares can be issued. The pricing can be decided by the issuer company and the lead managers. They can charge any price which they feel market can bear, but justification for price is required to be given in the offer document.

Company can charge different prices for firm allotment and public offer. However, price for firm allotment shall be higher than the price at which public issue is made. A composite issue i.e. simultaneous rights issue and public issue is permissible. Price for rights issue can be lower than price at which security is offered to public. In composite issue also, higher prices for firm allotment is permissible. Justification for price difference should be given in offer document.

Minimum number of prospective allottees - An unlisted public company shall not make an allotment pursuant to a public issue or offer for sale of equity shares or any security convertible into equity shares unless in addition to satisfying the conditions mentioned in Clause 2.2.1 or 2.2.2 as the case may be (discussed above), the prospective allottees are not less than one thousand in number [clause 2.2.2A of SEBI(DIP) Guidelines]. - - Since the words used are ‘shall not make’, the requirement is mandatory.

Minimum 75% Firm arrangement of finance before making issue – A company shall not make a public or rights issue of securities unless firm arrangements of finance through verifiable means towards 75% of the stated means of finance have been made. This is of course, excluding the amount to be raised through proposed Public/Rights issue [clause 2.8 of SEBI(DIP) Guidelines].

Same conditions for offer for sale – The conditions as above in case of IPO are applicable to ‘offer for sale’ also. Clause 2.2.3.1 of SEBI(DIP) Guidelines reads as under ‘An offer for sale shall not be made of equity shares of a company or any other security which may be converted into or exchanged with equity shares of the company at a later date, unless the conditions laid down in clause 2.2.1 or 2.2.2, as the case may be and in clause 2.2.2A , are satisfied’.

Who are QIBs – As per clause 2.2.2B of SEBI(DIP) Guidelines, ‘Qualified Institutional Buyer’ shall mean: (a) public financial institution as defined in section 4A of the Companies Act, 1956 (b) scheduled commercial banks (c) mutual funds (d) foreign institutional investor registered with SEBI (e) multilateral and bilateral development financial institutions (f) venture capital funds registered with SEBI (g) foreign Venture capital investors registered with SEBI (h) State Industrial Development Corporations (i) insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA) (j) provident Funds with minimum corpus of Rs. 25 crores (k) pension Funds with minimum corpus of Rs. 25 crores. - - The last three categories have been added under revised definition. However, in view of restrictions in investment of provident funds and pension funds, it is doubtful if they can participate in IPOs of shares.

An existing listed company shall be eligible to make a public issue of equity shares or any other security which may be converted into or exchanged with equity shares at a later date, subject to following conditions [clause 2.3.1 of SEBI(DIP) Guidelines] -

Aggregate of the proposed issue and all previous issues made in the same financial year in terms of size (i.e. offer through offer document + firm allotment + promoters’ contribution through the offer document), issue size should not exceed 5 times its pre-issue net-worth as per the audited balance sheet of the last financial year.

In case there is a change in the name of the issuer company within the last 1 year (reckoned from the date of filing of the offer document), the revenue accounted for by the activity suggested by the new name is not less than 50% of its total revenue in the preceding 1 full-year period

Listed company not fulfilling above criteria - Listed company not fulfilling aforesaid conditions as specified in clause 2.3.1, shall have to follow book building or project appraisal route and satisfy other requirements as specified in clause 2.2.2 [clause 2.3.2 of SEBI(DIP) Guidelines]

Explanation I to clause 6.8.3.2 of SEBI (DIP) Guidelines, 2000, defines promoter and promoter group. ‘Promoter’ includes (a) person or persons who are in overall control of the company (b) person or persons who are instrumental in formulation of plan or programme pursuant to which the securities are offered to public (c) person or persons named in the prospectus as promoters. However, if a director/officer of issuing company is acting as such merely in his professional capacity, he shall not be treated as ‘promoter’.

General guidelines for promoters’ contribution - Promoters’ contribution in respect of unlisted company should be minimum 20% of post issue capital, in case of fresh issue or offer for sale of shares. [Clause 4.1-1 of SEBI Guidelines, 2000]

In case of public issue of listed company, promoters should participate either to the extent of 20% of proposed public issue or 20% of the post-issue capital.

Following shares acquired in last three years by promoters will not be considered fro promoters’ contribution - (a) If promoters have acquired shares for consideration other than cash or (b) by bonus shares out of revaluation reserves or reserves without cash accrual (c) against shares which are otherwise ineligible for computation of promoters’ contribution - clause 4.6.1 of SEBI (DIP) Guidelines.

If promoters have acquired shares in last one year at price lower that the price at which the shares are being offered to public, these will not be treated as promoters contribution. However, if promoters bring the difference, after passing necessary resolutions, filing revised returns etc., the shares will be treated as promoter's contribution. - clause 4.6.2 of SEBI (DIP) Guidelines 

This restriction shall not apply in cases where shares were acquired by transferor promoter during preceding one year at a price equal to or higher that the price at which equity is being offered to public. Similarly, the restriction shall not apply in respect of shares acquired by transferor promoter prior to one year - second proviso to clause 4.6.2 of SEBI (DIP) Guidelines inserted w.e.f. 10-7-2007.

Sweat equity issued before making Initial Public Offer (IPO) will also be subject to above provision while computing promoters’ computation. [Para 12 of SEBI (Issue of Sweat Equity) Regulations, 2002].

Shares pledged by promoters with Banks or Financial Institutions as security shall not be eligible for computing promoters’ contribution - clause 4.6.4A of SEBI (DIP) Guidelines  However, proviso to clause 4.15.1 of SEBI (DIP) Guidelines states that locked-in securities may be pledged with financial Institutions/Banks if the loan has been granted for purposes of financing one or more objects of the issue - [What it probably means is that pledging is permitted, but if pledged, these will not be counted towards promoters’ contribution].

For computing promoters contribution, minimum contribution shall be Rs 25,000 per application from each individual and Rs 1,00,000 from firms and companies (not being business associates like dealers and distributors). Shares issued in private placement to unrelated persons will not be treated as promoters' contribution.

Promoters can bring their contribution by way of equity shares plus by FCD/ PCD (fully convertible or partly convertible debentures), so that they maintain the minimum promoters contribution as prescribed.

No promoters’ contribution in case of existing listed companies in certain cases - In case of listed companies, there will be no requirement of minimum promoters’ contribution, in following cases - (a) If company is listed on stock exchange for three years and has track record of dividend payment for 3 immediately preceding years. (b) Professionally managed company where there is no identifiable promoter or promoter group (c) In case of rights issue. However, in case of (a) and (c), existing share-holding will be disclosed in offer document. [Clause 4.10 of SEBI Guidelines, 2000]

Lock-in of promoters’ shares  - 'Lock-in' means promoters cannot sell the shares to others during the prescribed period. The basis idea is that promoters should have stake in the company. Moreover, they are not expected to make profit by selling the shares which they earlier had.

Lock-in applies to the minimum promoters' contribution required, which is 20%. Normal lock-in period for shares issued to promoters is three years from date of allotment in case of existing companies.  In case of new company, lock-in period is three years from date of allotment or three years from date of commercial production, whichever is later.

'Lock in' is also applicable inn various cases as stated in Clauses 4.11 to 4.14 of SEBI (DIP) Guidelines, 2000.

Maximum 75% of the issue can be reserved for certain categories, if reservation is on firm allotment basis.  Securities issued on firm allotment basis shall be locked in for one year from date of commencement of commercial production or the date of allotment in public issue, whichever is later. The reservation will be on competitive basis, i.e. allotment of shares will be in proportion to the shares applied for in the concerned reserved categories.

SEBI has issued detailed guidelines for issue of shares - both pre-issue obligations and post-issue obligations. Appointment of Lead Merchant Banker to manage the issue is compulsory for making a public issue. Main responsibility of following all guidelines has been placed by SEBI on Lead Merchant Banker. He should exercise 'due diligence'. He should satisfy himself about all aspects of offering, veracity and adequacy of disclosure in the offer documents.

Fees to SEBI for filing the document have been prescribed in Schedule IV of SEBI (Merchant Bankers) Regulations, 1992. The fees payable vary. The fees are generally 0.1% of issue size in case of public issue and 0.05% in case of rights issue.

Draft prospectus should be filed with SEBI at least 30 days prior to filing of prospectus with ROC. If SEBI specifies changes or issues observations on draft prospectus within 30 days, the issuer shall carry out changes in prospectus or comply with observations. It is not mandatory that SEBI must send observation letter.

If SEBI seeks some clarifications or additional information from lead managers, these should be submitted. After such submission, SEBI may specify changes or issue observations within 15 days from date of receipt of satisfactory reply.

If SEBI has made reference to any regulator or other agency (like Government Agency or regulatory authority like TRAI), SEBI may send its observations or specify changes only after receipt of comments and reply from such regulator or other agency (No time limit - It can be even months).

After waiting for 30/15 days for observation letter from SEBI, issuer can go ahead with issue. SEBI will not vet or approve the Prospectus of offer documents.

Issue to be made within 3 months from observation letter of SEBI - An issue shall open within 3 months from the date of issuance of the observation letter by the Board, if any, or within 3 months from the 22^nd day from the date of filing of the draft offer document with the Board, if no observation letter is issued [clause 8.21.1 of SEBI(DIP) Guidelines].

‘Book Building’ means accepting applications from large buyers almost on firm allotment basis, instead of asking them to apply in public offer. The advantage is that issuer can test the market and fix realistic price, as price is fixed just one or two weeks before the opening of issue. It is also fast and costs are much less compared to traditional method of inviting applications, allotment, issue etc. By book building, issuer company can assess market and build up demand before issue of prospectus. The price is investor driven and based on market forces of demand and supply.

Section 60B of Companies Act makes provision for ‘Information Memorandum’ prior to issue of red herring prospectus. Thus, in book building, initially ‘Information Memorandum’ is issued and then red herring prospectus is issued three days prior to opening of offer.

As per SEBI definition, 'book building' means a process undertaken by which a demand for securities proposed to be issued by a body corporate is elicited and built-up and the price of securities is assessed for the determination of quantum of such securities to be issued by means of a notice, circular, advertisement, document, information memoranda or offer document.

The book building process has been integrated with stock exchange procedures. Transactions will be routed through brokers. Brokers will be responsible for defaults in payment of their clients.

The book building is permitted for issue of any size. This is an alternative to the facility of reserving part of issue on firm allotment on private placement basis. Thus, issuer company can either reserve securities for firm allotment or issue securities through book building (and not both). If book building is availed of, underwriting to the extent of net public offer is mandatory.

Advantages of book building are – (a) Minimum cost (b) Fast (c) Realistic and fair price.

Book building can be either 100% route or 75% route. Presently, 100% book building method is very popular.

It is true that investment in shares is a risky investment. However, investors must get adequate information in respect of new issues, so that they know the risks involved and take correct investment decision. In view of this, various disclosure guidelines have been prescribed by SEBI in prospectus. These are in addition to requirements as specified under Companies Act. 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.

As per section 81(1A) of Companies Act, further issues of existing company must be made to existing share-holders on pro rata basis. This is called ‘rights issue’. However, if shareholders pass a special resolution in general meeting, the shares can be offered to others. Normally, this provision is used by promoters to increase their share-holding. This provision may also be used by foreign companies to increase their holding in Indian companies. The ‘preferential allotment, can also be made to Financial Institutions, Mutual Funds, Foreign Institutional Investors etc. This is called ‘private placement’.

Such increase by preferential allotment should be as per guidelines issued by Government of India, Ministry of Industry dated 10th April, 1995 and RBI guidelines dated 9th April, 95 and 16th June, 1995. SEBI guidelines were given on 19-1-2000. These are now contained in Chapter XIII of SEBI (DIP) Guidelines.

Guidelines issued by SEBI are applicable to all preferential allotments in listed companies, while guidelines issued by RBI and Central Government are applicable only to foreign investment. Broadly, these guidelines are identical.

A special resolution in general meeting of members of company is required as per section 81(1A) of Companies Act. If required, authorised capital should be increased in general meeting.

The preferential issue can be only of fully paid shares and securities and not partly paid shares and securities [clause 13.4.2 of SEBI(DIP) Guidelines. This provision does not apply to allotment of shares and convertible securities issued pursuant to Corporate Debt Restructuring framework specified by RBI.

In case of shares not listed or shares not traded though listed, in stock exchange, the price should be calculated on basis of NAV (Net Asset Value) and PECV (Profit Earning Capacity Value), as per guidelines issued long ago by (now defunct) CCI - Controller of Capital Issues.

In case of companies listed on stock exchange for a period of 6 months or more, the price should be at least higher of the two  (a) Average of high and low of closing prices last six months (b) Average of weekly high and low of closing prices in last two weeks. The period of 6 months or 2 weeks is to be calculated backward from 30 days prior to the date of meeting of shareholders for approval of preferential allotment [clause 13.1.1.1 of SEBI(DIP) Guidelines]. 

In case of companies listed on stock exchange for a period of less that 6 months, the issue price shall be at least higher of the following  - (i) The price at which IPO was made or value per share arrived at in a scheme of arrangement under sections 391 to 394 of Companies Act (ii) Average of high and low of closing prices for the period it was listed on stock exchange or (c) Average of high and low of closing prices during two weeks preceding the relevant date. The period of  share prices or 2 weeks is to be calculated backward from 30 days prior to the date of meeting of shareholders for approval of preferential allotment [clause 13.1.1.2 of SEBI(DIP) Guidelines]. However, the price will be recomputed after period of 6 months listing is over and difference, if any, will be payable by allottees - proviso to clause 13.1.1.2 of SEBI (DIP) Guidelines

Securities issued on preferential basis to promoters will have lock-in period of three years from date of allotment. The locked in shares can be transferred among promoters or new promoter, subject to compliance of Takeover regulations.

Amount of preferential issue can be only to enable promoters to increase their holdings to 26%, to thwart take-over bids. Beyond that level, promoters have to acquire the shares in market only. If promoters’ stakes are diluted through Euro Issues, promoters can increase their stake through preferential allotment.

SEBI guidelines dated 19-1-2000 (which are similar to earlier dated 13-4-94), for issue of bonus shares are as follows. It is expected that Board of Directors will consider relevant financial factors and the guidelines. However, permission from SEBI is not required to issue bonus shares. These guidelines are only for listed companies.

Bonus issue should be only out of free reserves, built out of genuine profits or share premium collected in cash only. Revaluation reserves cannot be utilised for issue of bonus shares. (It may be noted that Department of Company Affairs has issued a circular dated 6-9-1994, prohibiting allotment of bonus shares out of revaluation reserves by non-listed limited companies and private limited companies). There should be provision in articles of association of company for capitalisation of reserves (otherwise, articles should be amended in AGM). If authorised capital of the company is not adequate, the same must be increased.

Company issuing bonus shares should not have defaulted in (a) payment of interest and principal of fixed deposits and debentures (b) payment of statutory dues of employees such as provident fund, ESI contribution, gratuity, bonus etc.

Other conditions for issue of Bonus shares - (a) Declaration of bonus shares in lieu of dividend is not permitted (b) Bonus issues of partly paid shares cannot be made - these should be first fully paid. (c) A company which announces bonus issue after approval of Board of Directors must implement the proposal within 6 months and such decision should not be changed. (d) If necessary, authorised capital should be increased in general meeting, before issue of bonus shares. (e) Bonus issue cannot be made within 12 months after public or rights issue.

People connected with a company usually have access to information which is not known to outsiders. The ‘insider’ can use this information to gain undue advantage. ‘Insider trading’ is the illegal practice of buying or selling shares of corporate securities based on fiduciary information which is known to only a small group of persons (insiders) and which enables them to make profit at the expense of other investors who do not have access to the inside information.

The ‘insider’ can get some information about profits, proposed dividend, proposed bonus shares, rights issue, expansion plans, mergers, disposal of undertaking etc. before it is made public. Such information is called ‘price sensitive information’ as per regulation 2(k). The insider can take undue advantage of this ‘price sensitive information’ for his personal benefit. This is not fair in the interest of capital market in general and other investors in particular. This is particularly true in case of directors, who have a fiduciary duty towards company, similar to that of a trustee. They are not expected to make secret profit form themselves.

SEBI has, therefore, announced regulations dated 19-11-1992 termed ‘SEBI (Prohibition of Insider Trading) Regulations, 1992. These were amended in February, 2002 and November, 2002.

SEBI regulations define ‘insider’ as a person who is or was connected with a company and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information. [Regulation 2(e)].

An ‘insider’ is prohibited from dealing in the securities or subscribing to primary issue, when in possession of unpublished price sensitive information. He also shall not communicate, counsel or produce directly or indirectly any unpublished price sensitive information to any person, who while in possession of such unpublished information shall not deal in securities, except when required as per law.

SEBI can take measures to undertake inspection of any book, register or other document or record of any listed company or a public company which intends to get its securities listed in any stock exchange, if SEBI has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market. [section 11(2A) of SEBI Act].

Appeal against order of SEBI can be filed with Securities Appellate Tribunal.

Code of conduct - All listed companies, intermediaries, asset management company and trustees of mutual fund, recognised stock exchanges, Public Financial Institutions, auditors, law firms, analysts, consultants etc. shall frame a code of internal procedures and conduct as near to Model Code of Conduct.

Take-over’ means purchasing shares of a /company with a view to take-over management and control of a company (this is often called ‘Corporate Raid’ and persons taking over are called ‘Corporate Raiders’). When 'acquirer' takes over control or management of 'target company', it is termed as 'take-over'. 'Target company' is a company whose shares are listed on stock exchange/s and whose shares or voting rights are acquired / being acquired or whose control is taken over / being taken over by the acquirer.

Take-over Regulations are to provide greater transparency in substantial acquisition of shares and take-overs of companies. SEBI has been empowered to make investigations in case of violation of the regulations. SEBI had appointed a committee under chairmanship of Justice P N Bhagwati, former Chief Justice of India to review the earlier take over code. Subsequently, the take-over code has been finalised and SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997 were published on 20th February, 1997. The regulations have been amended from time to time.

Minimum public shareholding as per listing agreement - As per clause 40A (i) of Listing Agreement, company is required to maintain on continuous basis the minimum level of non-promoter holding at the level of public shareholding required at the time of listing.

Disclosure if share-holding increases to more than 5/10/114/54/74% - Acquirer has to inform within 2 days of acquisition of shares or voting rights to the company and also to stock exchange where the target company is listed, if his holding or voting rights exceeds 5%, 10%,  14%, 54% or 74%. In cases where creeping acquisition upto 5% per financial year is permitted, the disclosure should be made when the acquisition aggregates to 2% and 5% of voting rights. Pre and post acquisition and voting rights shall be disclosed.  The information is required to be given to stock exchange as well as to company. The information will be immediately displayed by stock exchange on the trading screen, notice board and also on website.

Continuous disclosures by Acquirer and existing promoters - When the acquirer holds more than 15% shares, he will have to make continuous disclosure every year before 21st April, to the company. Promoters of the company also have to make disclosure to company every year before 21st April, regarding their share-holdings. The target company shall, in turn, inform stock exchange before 30th April.

Compulsory offer to small shareholders - Under a negotiated takeover, if an acquirer acquires more than 15% shares in a company (including shares already held by him or by the person in concert with him), he should make a public announcement of his intention to acquire further shares of (a) at least another 20% shares in the target company.

In case of open market take-over, if acquirer acquires more than 15% shares (including shares already held by him or by the person in concert with him), he has to make public announcement of offer to buy additional 20% shares from public. If  The offer must be kept open for at least 30 days. Such an offer would provide option to existing shareholders to sell their shares if they do not have confidence in the likely new management. The acquirer should appoint a 'merchant banker' for this purpose.

Offer price – The offer price shall be highest of (a) negotiated price if the shares were acquired in pursuance of agreement (usually with existing promoters) (b) Highest price paid by acquirer during previous 26 weeks to any one or even in public issue or rights issue or preferential issue (c)  average of weekly high and low market price of shares in the preceding 26 weeks or average of daily high and low of prices of shares in last two weeks, in stock exchange where shares are frequently quoted, whichever is higher. The provision in respect of average of last two weeks price is not applicable in case of disinvestments of PSU undertakings. [This is to avoid manipulation of share prices].

Competitive bid - Once a person makes an open offer, another person can make a competitive bid, offering higher price. Such offer must be made within 21 days from date of public announcement of first offer.  The offer must be for shares equal to holding of first bidder including the number of shares for which the present offer by first bidder is made. If such higher offer is made, the shareholders can withdraw their offer to the first bidder and make offer to second bidder. However, once such higher bid is made, the acquirer can also increase his offer at any time upto seven days of the closing of later offer, but he cannot withdraw his offer. He cannot change any other condition of his first offer.

Public offer if holding to exceed 55% - Once the promoter and acquirer reaches limit of 55% shareholding, he will have to make public offer to acquire further shares [regulation 11(2)]. He can acquire shares in excess of 55% through market purchases or preferential allotment, subject to condition of making a public offer for purchase upto 75%/90% of share capital as applicable.  However, as per proviso to regulation 20(7), he cannot acquire shares in open market or through negotiations during the offer period.

Buy back of securities is permissible under Companies Act, w.e.f. 31st October, 1998. A listed company has to follow SEBI regulations for buy-back. These provisions are in addition to provisions made under Companies Act.

Buy back for de-listing not permitted – Some foreign companies were resorting to buy back so that the public shareholding falls below minimum required for listing. After that, they were de-listing from stock exchange. Now, as per SEBI (Delisting of Securities) Guidelines, 2003 and also as per amended Buy Back Regulations; buy back for delisting is prohibited.

Mode of buy back - A listed company can buy back its securities (a) from existing security-holders on a proportionate basis through tender offer or (b) From open market through book building, stock exchange or from odd lot holders. However, buy-back through negotiated deals, spot transactions or through private arrangement is not permissible. Insider shall not deal with securities on basis of unpublished information.

Intimation about Board resolution – Whether the buy back is with Board resolution or approval in general meeting, the proposal has to be first approved in Board meeting. As per listing agreement, company should give 7 days prior notice about the Board meeting at which proposal to buy back of securities is to be considered. Immediately after Board meeting, decision about buy back should be intimated to stock exchanges within 15 minutes of closure of Board meeting.

Buy back through stock exchange - In case of buy back through stock exchange, the Special resolution of members should prescribe maximum price at which securities can be bought. [In case of Board resolution, the same shall be specified in Board resolution]. Promoters or persons in control of company cannot sale their securities under buy back. Company should appoint a merchant banker. Public announcement should be made at least seven days prior to commencement of buy back. Copy of public announcement should be filed with SEBI along with prescribed fee within two days of such announcement. Buy back will be only through stock exchanges which are having electronic trading facility. Details about securities purchased every day should be informed to stock exchange and also published in national daily.

In case of listed company,  'sweat equity' can be issued in accordance with regulations issued by SEBI [Section 79A(1)(d) of Companies Act]. SEBI (Issue of Sweat Equity) Regulations, 2002 make provisions for issue of ‘sweat equity’ shares in case of listed company.

Sweat Equity is a reward for hard work done or using intellectual property for benefit of company. As per Black’s Law Dictionary, ‘sweat equity’ means financial equity created in property by the owner’s labour in improving property.

Unlisted company which is coming out with IPO (Initial Public Offer) and seeking listing will have to make disclosure of ‘sweat equity’ issued by it prior to listing. Similarly, provisions in respect of lock-in and computation of promoters’ contribution shall apply if company makes a public issue after it has issued equity shares.

‘Sweat Equity’ can be issued to directors or employee (and not to others -e.g. sweat equity cannot be issued to promoter, unless he is a director or an employee. The director may be wholetime or part time i.e. executive or non-executive).  The resolution should be passed as special resolution. The explanatory statement should contain details as specified in the SEBI regulations.

Sweat equity can be issued to promoters by passing ordinary resolution through postal ballot [Section 79A requires special resolution for issue of ‘sweat equity’. Hence, provision in SEBI regulation for ‘simple majority’ seems to be of very doubtful validity. Even otherwise, special resolution u/s 81(1A) will also be required as right issue is not being made. Of course, both resolutions can be passed in same general meeting].  - - Moreover, sweat equity cannot be issued to ‘promoter’ unless he is a director or employee. Section 79A of Companies Act envisages issue of sweat equity only to directors and employees, while SEBI Regulations allow issue to promoters also. Naturally, in case of conflict, provisions of Act will prevail.

Sweat equity shares should be priced on basis of weekly high and low of closing prices of related equity shares during last 6 months or average of weekly high and low of closing prices during last two weeks, whichever is higher. The 6 months/2 weeks shall be from date 30 days prior to date on which general meeting of members is held for approval of special resolution u/s 79A(1)(a).

Valuation of intellectual property right or know how provided or other value addition made by director/employee shall be carried out by Merchant Banker, in consultation with experts and valuers. A certificate should be obtained from Chartered Accountant that the valuation is done as per accounting standards. This certificate shall be placed before annual general meeting subsequent to issue of sweat equity shares. - - Section 79A specifically provides that sweat equity shares can be issued at discount. However, SEBI Regulations make no provision for issue of sweat equity at discount.

The sweat equity shares will have lock-in period of three years.  Provisions as applicable to promoters’ contribution will apply to such sweat equity also. The shares can be listed in stock exchange.

Fringe Benefit Tax on ESOP and sweat equity – Company issuing ESOP or sweat equity is liable to FBT (Fringe Benefit Tax) in respect of ESOP issued after 1-4-2007. Company (employer) will have to pay FBT at 33.99%. Fair market value on date on which option vests with the employee as reduced by amount actually paid by employee or recovered from employee shall be the value of fringe benefit [section 115WB(1)(d) of Income Tax Act]. FBT can be recovered from employee.

Some companies intend to issue equity shares to their employees. The purpose is to ensure more employee’s loyalty and participation.

As per section 2(15A) of Companies Act, ‘Employees Stock Option’ means the option given to the Wholetime directors, officers or employees of a company, which gives such directors, officers or employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price.  [same definition in SEBI Guidelines, 1999].

In case of Employee Stock Option Scheme [ESOS] [more popularly  termed as Employees Stock Option Plan (ESOP)], employees are given an option to purchase shares at a later date, at a pre-determined price (which is usually price lower than current market price). In case of Employee Stock Purchase Scheme [ESPS], shares are offered on the spot to employees at a discounted price.

SEBI guidelines in respect of Employee Stock Option Scheme [ESOS] or Employee Stock Purchase Scheme [ESPS] apply to listed companies.

Normally, share transfer form has to be accompanied by original share certificate. This was creating tremendous problems in share market as there had to be physical movement of hundreds and thousands of share certificates. A scheme of ‘Depository’ was introduced to overcome the difficulty. Depositories Act, 1996 was passed. The aim of depositories is to introduce paperless trading and smooth functioning of settlements of security transactions.

'Dematerialisation' is the process by which physical share certificates held by an investor are taken back by company/Registrar and converted into equivalent number of shares which are credited to the investor in the form of electronic holding, through the depository participant.

'Depository' is an agency with whom securities are deposited for safe-keeping and handling / dealing in them on behalf of owner of securities. The securities are deposited through DP (Depository Participants). Depository holds these securities in electronic form. There is no paper or share certificate involved. Such shares are termed as 'Demat Share