CHAPTER: 5 SOURCES OF DOMESTIC EQUITY FUND, VARIOUS ROUTES OF CAPITAL ISSUES FOR INDIAN COMPANIES AND CHANGE IN THEIR REGULATIONS

CHAPTER: 5 SOURCES OF DOMESTIC EQUITY FUND, VARIOUS ROUTES OF CAPITAL ISSUES FOR INDIAN COMPANIES AND CHANGE IN THEIR REGULATIONS 5,1 SOURCES OF DOMESTIC EQUITY CAPITAL 5.1.1 Equity shares 5.1.1.1 Equity Shares with voting rights 5.1.1.2 Equity Shares with differential voting rights 5.1.1.3 Non- Voting Equity Shares 5.1.2 Preference shares 5.1.2.1 Cumulative Preference Shares 5.1.2.2 Non-cumulative Preference Shares 5.1.2.3 Convertible Preference Shares 5.1.2.4 Redeemable Preference Shares 5.1.2.5 Irredeemable Preference Shares 5.1.2.6 Participating Preference Shares 5.1.2.7 Non-Participating Preference Shares 5.1.2.8 Cumulative Convertible Preference Shares (CCP) 5.1.2.9 Variable rate Preference Shares 5.1.3 Retained earnings 5.1.3.1 Profit and loss account (Credit balance) 5.1.3.2 Revenue reserves 5.1.3.3 Capital reserve 5.2 DIFFERENT ROUTES OF ISSUE OF DOMESTIC EQUITY CAPITAL 5.2.1 Route of initial public offering (IPO) and follow on public offering (FPO)

5.2.2 Route of rights issues 5.2.3 Employees stock option plan (ESOP) 5.2.4 Private placement 5.2.4.1 Preferential allotment 5.2.4.2 Qualified Institutional Placement(QIP) 5.2.5 Bonus issues 5.3 REGULATIONS REGARDING DIFFERENT ROUTES OF ISSUE OF DOMESTIC EQUITY CAPITAL 5.3.1 Regulations regarding IPO and FPO of equity shares and preference shares 5.3.2 Regulations regarding cumulative convertible preference shares 5.3.3 Regulations regarding rights issue of shares 5.3.4 Regulations regarding issue of shares under ESOP 5.3.5 Regulations regarding issue of shares under preferential allotment on private placement basis 5.3.6 Regulations regarding issue of shares under qualified institutional placement (QIP) on private placement basis 5.3.7 Regulations regarding issue of bonus hares

CHAPTER: 5 SOURCES OF DOMESTIC EQUITY FUND, VARIOUS ROUTES OF CAPITAL ISSUES FOR INDIAN COMPANIES AND CHANGE IN THEIR REGULATIONS The main activities of a company can be classified into operating activities, investing activities and financing activities. The operating activity deals with day-to-day business, which generates revenue profit for the company. The investing activity deals with the acquisition of assets for the business operations. Financing activity takes decision and raises required funds for business operations and for acquisition of business assets. Hence, the financing activity relates with raising funds for short term as well as longterm requirement of business. Generally, short-term sources of funds are used to fulfill short-term requirement and long-term sources of funds are used to finance long-term projects and acquiring fixed assets. Long-term sources of funds are also used to finance a part of working capital, which is permanent in nature. Different new sources of domestic and international equity and debt funds and their different routes of capital issues have emerged due to the liberalization process took place in India over the time. With the introduction of new sources of funds regulations are also changed regarding the introduction of new fund and statutory requirements for the issue procedure. In this chapter, different sources of domestic equity capital available for Indian companies to raise funds and regulations regarding different routes of issue of domestic equity are discussed. 5.1 SOURCES OF DOMESTIC EQUITY CAPITAL The equity refers to equity share capital, preference share capital and retained earnings. The equiiy is also called as Net Worth, Shareholders funds, or Owners capital. Domestic equity is the capital raised in the domestic currency of the native country where the company is registered. Domestic equity is raised by accessing domestic capital market. The domestic equity includes: EQUITY SHARES PREFERENCE SHARES RETAINED EARNINGS

116 5.1.1 Equity Shares Equity shares are also called as Ordinary Shares. The holders of these securities are the real owners of the company. They can vote at shareholder meetings to form the Board of directors. Board of directors manages the business of the company on behalf of equity shareholders. Equity shareholders can also approve or disapprove major strategic and policy issues such as the type of activities to be carried out by the firm, expansion and development plan, merger and acquisition, raising additional funds etc by exercising their voting rights on the resolution placed in the general meeting of shareholders. As per Section 85(2) of Indian Companies Act, 1956, Equity Shares, with reference to any company limited by shares, are those which are not preference shares (Taxmann, 2005). The important characteristics of equity shares are as follows: (i) (ii) (iii) (iv) Equity shares carry voting rights at the general meetings of the company and have the right to control file management o f the company. Equity shares carry the right to share in the profits in the company in the form of distribution of dividend and bonus shares. In the event of winding up of the company, equity share capital is repayable only after repayment of the claims of all the creditors and preference share capital. Equity shareholders enjoy various rights as members, which are as follows: (a) (b) (c) Right to subscribe the fresh issue of capital Right to receive a copy of the statutory report Right to apply to Central Government to call an annual general meeting when the company fails to call such a meeting (d) Right to apply to Company law Board (CLB) for calling an extraordinary general meeting of the company (e) Right to receive copies of annual accounts along with auditors report.

117 Types of Equity Shares Section 86 of the Companies Act, 1956 permits public limited companies to issue three kinds of equity shares as follows (Shekhar, 1994): EQUITY SHARES WITH VOTING RIGHTS EQUITY SHARES WITH DIFFERENTIAL VOTING RIGHTS NON VOTING EQUITY SHARES 5.1.1.1 Equity Shares with voting rights Equity Shares with voting right have right to vote on every resolution placed in the meeting of board of directors or general meeting of share holders in proportion to their holding of capital to total paid-up capital. 5.1.1.2 Equity Shares with differential voting rights Equity Shares having differential voting right was permitted by the Companies (Amendment) Act, 2000. Equity shares having differential voting rights do not have proportional voting right to the paid-up capital. The voting right is decided at the time of issue of shares and can not be changed in future. Such equity shares have all other rights equally except voting right as per the other class o f shares having voting rights. 5.1.1.3 Non-Voting Equity Shares Equity shares issued without any voting right are called as non-voting equity shares. Non-Voting equity shares were recommended by Pherwani committee as a new financial instrument. Non-Voting shares got statutory recognition by the Companies (Amendment) Bill, 1996. As per the recommendation of the committee, the non-voting equity shares have all rights as other class of equity shares except voting right and therefore holder of such shares will not have any right to vote on the resolution placed in the meeting of shareholders or directors. 5.1.2 Preference Shares A preference share is a hybrid security because it has features of both equity shares and debt. Preference shares carry fixed rate of dividend and they are redeemable like debt. Preference shareholders have preferential right over equity share in terms of payment of dividend as well capital on the event of winding-up of the company.

118 As per section 85 of Indian Companies Act, 1956, Preference Share Capital means, with reference to any company limited by shares, that part of share capital of the company which fulfills both the following requirements: (i) (ii) preferential right for payment of dividend at fixed rate; Preferential right for repayment of capital in the event of winding-up of the Company; (iii) Preference shares may be issued with disproportional rights (Taxmann, 2005). Types of Preference Shares The Indian Companies act permits the issue of Preference shares having disproportional rights in terms of dividend, redemption and voting. The government also issued guidelines for introducing the issue of cumulative convertible preference shares in 1985.The underlying statutory provisions allow the companies to issue different types of preference shares having different conditions regarding voting rights, payment of dividend and mode of redemption. Thus, the different types of preference shares came into existence over the period. Following are the different kinds of preference shares (Shekhar, 1994): CUMULATIVE PREFERENCE SHARES NON-CUMULATTVE PREFERENCE SHARES CONVERTIBLE PREFERENCE SHARES REDEEMABLE PREFERENCE SHARES. IRREDEEMABLE PREFERENCE SHARES PARTICIPATING PREFERENCE SHARES NON-PARTICIPATING PREFERENCE SHARES CUMULATIVE CONVERTIBLE PREFERENCE SHARES VARIABLE RATE PREFERENCE The different types o f preference shares are explained as under:

119 5.1.2.1 Cumulative Preference Shares As per companies act, the liability of a company to pay preference dividend arises only if it has sufficient distributable profits. In case of cumulative preference shares, the unpaid dividend due to non-availability of profits accumulates until it is paid off in the year in which the profit is sufficient. The arrears of preference dividend is carried forward to be paid out cf the profits of subsequent years. If a company goes into liquidation, no arrears of dividends are payable unless the articles of association of the issuing company contain a provision otherwise. 5.1.2.2 Non-cumulative Preference Shares In case of non-cumulative preference shares, the dividend does not accumulate. If there is no profit or there is inadequate profit in any year, these shares are not entitled to any dividend for that year even out of future profit. Even they do not have right to claim the unpaid dividend at the time of winding up of the company unless there is a special provision otherwise in the articles of association o f the company. 5.1.2.3 Convertible Preference Shares These preference shares are convertible into equity shares at the end of a specified period as per the terms of issue. They are quasi-equity shares. 5.1.2.4 Redeemable Preference Shares Such preference shares are redeemed on the expiry of the specified period and the capital is paid back by the company in cash as per the terms of issue. Such shares are considered as debt if the redemption period is more than 7 years for calculating debt-equity ratio. The redemption of such shares should be made as per the conditions laid down in Section 80 of Indian Companies Act, 1956. As per the amendment of companies act, 1988 all preference must be redeemable over a maximum period of twenty years (Taxmann, 2005). 5.1.2.5 Irredeemable Preference Shares When the preference shares are not redeemable except on the happening of certain specified events like winding-up, are known as irredeemable preference shares. Issue of irredeemable preference shares was permitted until the amendment of the Companies Act, 1956 made in 1986 by the introduction of section 80A (Clause 104 of 1993 Bill)

120 with effect from 15th June, 1988. With the introduction of section 80A, no company can issue irredeemable preference shares. 5.1.2.6 Participating Preference Shares The preference shares having voting right as per the terms of issue are called as participating preference shares. The holders of such preference shares can participate in the management of the company by exercising their voting right on resolution placed in the meeting. 5.1.2.7 Non-Participating Preference Shares Such preference shares do not carry any voting right and therefore they can not attend the meeting c f shareholders and can not participate in the management of the company. 5.1.2.8 Cumulative Convertible Preference Shares (CCP) Pherwani Committee recommended Cumulative Convertible Preference shares (CCPs). It is a hybrid security. The CCPS have the positive features of debentures, equity and preference shares. The object of CCPS is to assure a fixed return to the shareholders during the gestation period of the project and a share in the profits of the company after commissioning of the project. CCPs are similar to equity shares except for voting rights and preference over equity in winding up until conversion into equity. 5.1.2.9 Variable rate Preference Shares These Preference shares are having different rates of dividend for different periods. Generally, the rate of dividend is low in the gestation period and after the commencement of commercial activities, the rate of dividend is increased as per the terms of issue. 5.1.3 Retained Earnings Company form of business organization is having separate legal entity apart from its owners to facilitate the large scale participation of owners with limited liability and limited capital. Such distinct feature makes possible the perpetual succession of the company and therefore company form has become widely acceptable all over the glob. The company form has become so popular that it has become the growth engine of many nations. Consequently, many countries have made the regulations and established

121 regulatory authorities to safeguard the interest of all stakeholders and develop the sound framework for the development of industrialization through the company form of business. In order to sustain for longer period and to expand and grow as well as reward the investors, it became quite essential to keep aside a portion of profit every year and build-up profits for future. In India, it is also obligatory by statutory requirement to transfer some profit to reserve before declaring dividend and it is obligatory to create reserves for some specific purpose. The profit kept a side by a company for the purpose of survival, expansion, growth, sound financial position and compliance with regulations is called as retained earning. Thus, depending on the purpose of creating reserves and source of reserves, retained earnings include different types o f reserves. Types of reserves Different types of reserves constituting an important element of Capital Structure of any company are as follows: PROFIT AND LOSS ACCOUNT (CREDIT BALANCE) REVENUE RESERVE CAPITAL RESERVE 5.1.3.1 Profit and loss account (Credit balance) Credit balance of profit and loss account is the balance of accumulated profit which is not transferred to any specific reserve. This balance is available for the purpose of expansion, contingency requirement, dividend, bonus shares etc. 5.1.3.2 Revenue reserves Reserves created out of profit earned from the business activities are called as revenue reserve. The revenue reserve can be further classified as under: (a) General reserve: General reserve created out of the profit without any specific purpose and which can be used for manifold purposes like expansion and growth of the business, payment of dividend and bonus shares to shareholders and write off losses of the business. (b) Specific reserve: The reserves created out of profit of the company for some specific purpose are called as specific reserves Dividend Equalization reserve, Debenture redemption reserve, Investment fluctuation reserve, Workmen accident compensation

122 reserve, Contingency reserve, Sinking fund and Capital redemption reserve are some examples o f specific reserve. 5.1.3.3 Capital reserve Capital reserve is the reserve which is not created out of revenue profit of company but it is the outcome of abnormal profit arising out of some non-recurring activities. This reserve cannot be used for distributing the dividend to shareholders of company. The main sources of these reserves are Profit earned prior to getting certificate of incorporation, Premium on the issue of shares and debentures, Profit on reissue of forfeited shares, Profit set aside for the purpose of redemption of preference shares, Profit on sale of assets or entire undertaking or part of it and Surplus on revaluation of assets and liabilities. 5.2 DIFFERENT ROUTES OF ISSUE OF DOMESTIC EQUITY CAPITAL Routes of capital issues refer to different ways of raising funds by issuing securities. Funds through equity capital in domestic capital market can be raised through various routes like Initial public Offer (IPO) and Follow-on Public Offer (FPO), rights issues, shares issued under Employees Stock Option Plan (ESOP), private placement and issue of bonus shares. In this section different routes of equity issues in domestic capital market is discussed. 5.2.1 Route of Initial Public Offering (IPO) and Follow on Public Offering (FPO) When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an Initial Public Offering (IPO) and when an already listed company makes either a fresh issue of securities or an offer for sale to the public, it is called as Follow on Public Offering (FPO). Under CCI regime permission was necessary to issue shares at premium and the amount of premium was decided by CCI. But under SEBI regime free pricing of shares is allowed and therefore new routes of IPO and FPO were invented. Shares can be offered to investors by book building offer or fixed price offer. Fixed price offer is out dated under the norms of free pricing to discover the fair price of IPO and FPO. For last few yearn shares are issued through book building offer in the form of French auction or Dutch auction method. Under book building offer bids are invited from potential buyers

123 in which offer price of buy is quoted and the final issue price is decided on the basis of price quoted in the bid at higher end. 5.2.2 Route of Rights issues Rights offering means, issuing rights to a company's existing security holders to buy a proportional number of additional securities based on their holdings in cash at a given price (usually at a discount) within a fixed period. As per Indian Companies Act, 1956 the equity shareholders have right to purchase additional shares in the company whenever the company proposes to raise funds. Thus when additional shares are offered to existing shareholders, it is called as right shares. Rights offer enables the security holders to exercise their right to subscribe to new securities during the exercise period by paying the pre decided exercise price per share. The company allots the subscribers the securities as per terms of the issue. By exercising these rights, existing shareholders can maintain their existing percentage of holding in the company. The shareholders are generally given option to renounce the right. As per this option, if any security holder does not want to exercise the rights offered to him, he can transfer his right in favor of any other existing security holder or any other person who is not the existing security holder of the company. The shareholder, who renounces the right in favor of other person, is required to file a special form with the company to enable the company to accept the subscription from the person in whose favor the rights are renounced. Rights that are not exercised will lapse. 5.2.3 Employees Stock Option Plan (ESOP) In 21st century the knowledge has become the key factor for the development of industry and hence human being is considered as a valuable asset for a business unit. Particularly in the high technology, oriented industry employees are the key players whose contribution largely determines the performance of the company. To obtain and retain the highly talented employees companies felt a need to reward the employees for their performance by making them participants in the management of the company. To fulfill this purpose, employees are given an opportunity to acquire the shares of the employer company under a special scheme for employees called Employees Stock Option

124 Scheme (ESOS). This later on came to be known more popularly as ESOP (Employees Stock Option Plan). Not only from the view point of employees but also for the companies, ESOP is the easy and cheaper route of raising capital compared to other routes of capital issues. Several guidelines have been issued from time to time in India regarding ESOP to facilitate companies to issue shares under this plan. Shares exercised by employees under ESOP also affect the Capital Structure of companies. 5.2.4 Private placement Private placement is another route of equity issue apart from public issue and rights issue. When a company issues shares to a person or a group of persons or an institution or a fund without inviting public to subscribe the security is called private placement. It is neither a rights issue nor a public issue. As per Section 81 Companies act, 1956 A private placement is an issue of shares or of convertible securities by company to a select group of persons Private placement can be made by a company by two ways: Preferential allotment Qualified Institutional Placement 5.2.4.1 Preferential allotment When a listed company issues equity shares or any convertible security to an identified person or group of persons on private placement basis is called as preferential allotment. Under this allotment the person or the group of persons to whom the security is issued, are not required to be registered with SEBI. As per SEBI (DIP) guidelines 2000, The preferential issue of equity shares/ Fully Convertible Debentures (FCDs)/ Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into or exchanged with equity shares at a later date, by listed companies whose equity share capital is listed on any stock exchange, to any select group of persons under Section 81(1A) of the Companies Act 1956 on private placement basis 5.2.4.2 Qualified Institutional Placement (QIP) QIP is the recent innovated route of private placement. QIP was introduced in India by SEBI in 2006. Under QIP, a listed company issues equity shares, or any other convertible security to a Qualified Institutional Buyer (QIB). The issue is managed by a SEBI

125 registered merchant banker. There is no requirement of pre-issue filing of the placement document with SEBI. As per SEBI DIP guidelines 2000, QIB include following a) a public financial institution as defined in section 4A of the Companies Act, 1956; b) a scheduled commercial bank; c) a mutual fund registered with the Board; d) a foreign institutional investor and sub-account registered with SEBI, other than a sub-account which is a foreign corporate or foreign individual; e) a multilateral and bilateral development financial institution; f) a venture capital fond registered with SEBI; g) a foreign venture capital investor registered with SEBI; h) a state industrial development corporation; i) an insurance company registered with the Insurance Regulatory and Development Authority (ERDA); j) a provident fund with minimum corpus of Rs. 25 crore; k) a pension fund with minimum corpus of Rs. 25 crore; l) National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated November 23,2005 published in the Gazette of Government of India. Prior to the innovation of the qualified institutional placement in 2006, Indian companies were heavily accessing international capital market via euro issues to avoid legal procedural requirement in domestic capital market and avail the benefits of Euro issues. The Securities and Exchange Board of India (SEBI) introduced the QIP process in May 8, 2006 to encourage Indian companies to raise funds in domestic market and to prevent listed companies in India from excessive dependence on foreign capital and restrict the undesirable export o f domestic equity market. 5.2.5 Bonus issues Bonus shares are the shares issued by the company to its existing shareholders proportionately on their holdings out of free reserves without taking any consideration from them. Bonus issue reduces reserves and increases paid up capital of the company. Therefore, bonus is also called as capitalization of reserves. In fact, company does not receive any additional cash against the bonus issue but the company can utilize the accumulated profits for implementing its capital plan. In other words, bonus issue

126 empowers the company to plough back profit in the business by converting the accumulated profits into capital. 5.3 REGULATIONS REGARDING DIFFERENT ROUTES OF ISSUE OF DOMESTIC EQUITY CAPITAL Separate regulations are framed and revised form time to time by prevailing regulatory authorities for each route of capital issue. Specific guidelines for certain conditions of cumulative convertible preference shares are also issued separately by Indian regulatory authorities. In this section, year wise changes in regulations regarding different routes of domestic capital issues are presented. 5.3.1 Regulations regarding IPO and FPO of equity shares and preference shares Year wise change in regulations regarding IPO and FPO of equity shares and preference shares and issuing authority is mentioned in Table 5.1. Table 5.1 Change in regulations regarding IPO and FPO of equity shares and preference shares Year / Date Regulatory authority M ain Guidelines 1947 CCI under the (i)all companies were required to obtain the Capital Issues approval of the CCI for issue o f fresh shares. (Control) Act, (ii) Promoters contribution required in IPO 1947 decided. (iii) Equity-Debt ratio decided at 1:2 (iv) Equity-Preference ratio decided at 3:1 (v) No premium was allowed on IPO (vi) NO shares were allowed to be allotted without prior permission of RBI or GIO (vii) Underwriting arrangements were made compulsory. 1956 GIO under A track record of dividend for 3 years required for Companies 3 years out o f 5 years for making IPO.

127 Act, 195 6 1957 GOI under At least 60% of the issued capital should be Securities offered to the public for subscription for being Contracts eligible to list the securities on a recognized stock (Regulation) exchange. Rules,1957. 1966 CCI under the Capitol Issues (Application for Consent) Rules, Companies were required to submit prescribed forms of application to the CCI for obtaining the consent for issue of securities. 1966 05-021969 Capital Issues Certain companies were exempted from the (Exemption) provisions relating to the approval of CCI. Order, 1969 01-10-1971 CCI Certain issue of securities exempted from certain provisions of the capital Issues (Exemption) order, 1969. 3-09-1974 CCI Some private companies, government companies and banking companies were exempted from getting sanction of CCI for raising capital. 14-05-1975 (i) All companies whose issue of share capital is not specifically excluded by the Capitol Issues (Exemption) order, 1969, are required to obtain the approval of the CCI by making application with required fees, project cost and copy of necessary license. (ii) If the fresh issue shares involves large amount, a public issue should be made and the shares must be listed in one or more stock exchanges. (iii) Where the issue of equity capital involves an offer for subscription by the public for the first time, the value of equity capital subscribed privately by the promoters, directors and their

128 friends shall not be less than 15% of the total issued equity capital, if it does not exceed one crore of rupees, 12.5%, if it does not exceed two crores of rupees and 10%, if it is in excess of two crores of rupees. (iv) To finance the capital cost of the project, the capital structure should be such that an equity debt ratio of 1:2 is considered fair and reasonable. In case of capital intensive industries, a higher equity debt ratio can be considered on merits of each case. (v) An equity preference ratio of 3:1 was permitted. (vi) The rate of dividend on preference shares should be within the ceiling as notified by the CCI from time to time. (vii) No premium was allowed in respect of a new company making its first issue o f shares. (viii) No company was allowed to make an allotment of shares to non- residents expect with the prior approval in writing of the Government of India or of the Reserve Bank of India. (ix) The MRTP companies required to furnish approvals. (x) There should be sufficient underwriting arrangements. The maximum rate of underwriting commission also decided. (xi) Firm allotment intended to be made to public financial institutions should be indicated with the application. (xii) Any commitments regarding capital expenditure affecting cost of capital should be mentioned with application.

129 24-03-1982 CCI Upward revision made regarding the rate of maximum underwriting commission. 23-01-1985 CCI The limit of issue size raised to one crore for securities issued during a period of 365 days. 22-02-1985 CCI Exempted companies were required to report CCI if the total issue of shares exceeds rupees one crore in a year. 18-3-1985 CCI On the request of the companies raising equity share capital, the retention of oversubscription was raised to 25% of the basic amount allowed to be raised, limited to total capital raised including the oversubscription Rs. 1 crore without permission of CCI. CCI approval was required if the total capital including the amount of over subscription exceeds Rs. 1 crore. 30-12-1985 CCI Sanction of CCI required for issuing shares at premium. 04-02-1986 CCI Requirement of reservation of 60% of shares for public in IPO relaxed. 20-03-1986 CCI No consent of CCI required to retain 25%of issue size in a public issue not exceeding one crore rupees. 08-04-1988 CCI The retention in an issue of capital restricted to 15% of the issue size with prior approval of CCI. 01-08-1989 CCI Guidelines issued for bought out deals by mutual funds, financial institutions, banks and other subsidiaries. 03-01-1990 CCI Conditions imposed for large issue of capital of Rs.50 crores and above for collection and monitoring of funds. 24-01-1990 CCI Fresh public issue of shares allowed only after 12 months of closure of previous issue.

130 06-04-1990 CCI Guidelines issued for minimum subscription of 90% of the shares offered. 06-08-1990 CCI Minimum gap of 12 months for issuing fresh shares will not be applicable for private placement. 25-10-1991 CCI (i) Guidelines revised for deployment of issue proceeds in proposed activities. (ii) For issue above Rs.500 crore the amount to be called, on application (25%), allotment (25%) and on calls (50%), 1992 SEBI Minimum subscription in public issue reduced to Rs. 2,000. 13-04-1992 SEBI Free pricing of shares adopted. 11-06-1992 SEBI Disclosures required in free pricing process announced. 29-06-1992 Ministry of industry Procedure for raising foreign equity announced 17 June SEBI 16 July 13 August 21 September More clarifications made on free pricing 4 November 23Decemberl 992 01-01-1993 SEBI Directions given to companies to justify the premium on free pricing process. 16-07-1993 SEBI Disclosure requirements announced 10-08-1993 SEBI Requirement of promoters contribution in public issue announced 11 August 8,9,1 l,octobe SEBI More clarifications made on free pricing.

131 ' r 1993 31-03-2994 SEBI Companies were allowed to mention price band of 20% in the offer document submitted to SEBI. 03-06-1994 Ministry of Industry Approval for raising foreign equity in existing companies. 08-07-1994 RBI Guidelines issued for raising foreign equity through preferential allotment. 22,27 May SEBI 29 September 12 October More clarifications made on free pricing 1995 30-01-1996 SEBI Lock-in period for shares issued under promoters contribution 01-03-1996 SEBI 10% reservation announced for employees in Public Issue. 17-07-1996 SEBI Free pricing criteria for public sector banks announced. 09-12-1996 SEBI More clarifications made on free pricing 1998-99 SEBI Fils were allowed to subscribe IPOs in India. 1999-2000 SEBI Promoter s contribution required in IPO at 50%. 1998 SEBI Book-building process for pricing IPO was introduced. 2003-04 SEBI (i) Companies were allowed to reserve additional Shares than the public issue under Green-shoe option. (ii) The entire pre-issue share capital, other than that Iocked-in as promoters contribution, shall be locked-in for a period of one year from the date of commencement of commercial production or the date of allotment in the public issue, whichever is later. 2004-05 SEBI Public issue was allowed in any denomination.

132 2005-06 SEBI (i) shares held by promoters) are lent to the SA under clause 8A.7, they shall be exempted from the lock in requirements specified above, for the period starting from the date of such lending to the date when they are returned to the same promoter^) (ii) on 20-01-06, ECS was introduced 2006-07 SEBI (i) IPO grading was made compulsory (ii) QIP was introduced. 2007-08 SEBI (i) Composite issue with different price was allowed. (ii) Shares could be issued to retail investors at discount in IPO. (iii) Promoter s contribution in IPO required at 20% or 20% in post issue capital. (iv) In case of public issue by unlisted companies, securities which have been acquired by the promoters during the preceding one year, at a price lower than the price at which equity is being offered to public shall not be eligible for computation of promoters contribution. (v) Pledged securities held by promoters not to be eligible for computation of promoters contribution 2008-09 SEBI ASBA was introduced for payment of application money. 5.3.2 Regulations regarding cumulative convertible preference shares Specific guidelines issued for cumulative convertible preference shares in addition to guidelines for IPO and FPO are mentioned in Table 5.2.

133 Table 5.2 Change in regulations regarding cumulative convertible preference shares Year / Date Regulatory authority Main Guidelines Capital Issues (Control) Act 1947 CCI (i) Capital can be raised at any time in the form of equity or preference shares or debentures. (ii) The rate of dividend on preference shares within the limit specified by CCI. (iii) Maximum rate of dividend was 14% subject to TDS. (iv) The objects of the issue of CCP decided. (v) The amount of CCP should not exceed the equity public offering in future. (vi) CCP issue considered as equity for calculating debt-equity ratio. (v) The CCP would be convertible into equity shares between the end of 3 years and 5 years as may be decided by the company and approved by the CCI. (vi) The rate of dividend payable on CCP would be 10%. (vii) The face value decided at Rs.100 per share. (viii) The ratio of 1:3 between preference shares and equity shares will not be applicable on CCP. (ix) The CCP would have voting rights as applicable to preference shares under the companies Act, 1955. 01-02-1969 CCI The maximum dividend on preference shares decided at 10%. 14-05-1975 CCI Guidelines issued for issue of fresh share capital. 13-03-1976 CCI Additional guidelines issued for examination of issue of fresh share capital by companies.

134 16.05.19B4 CCI Rate of dividend on preference shares increased to 15 per cent per annum (free of Companies Tax but subject of deduction of taxes at prescribed rates). 15.09.1984 CCI The maximum rate of dividend on preference shares has been raised from 13.5% to 15% per annum 04-02-1986 CCI Guidelines issued for pre and post issue share holding pattern. 16.04.1987. CCI The central Government reduced the maximum rate of dividend from 15% to 14%. 5.3.3 Regulations regarding rights issue of shares Year wise change in regulations regarding rights issue of equity shares and preference shares and issuing authority is mentioned in Table 5.3. Table 5.3 Change in regulations regarding rights issue of shares Year / Date Regulatory authority Main Guidelines 1947 CCI under (i) Consent of CCI required for issuing right shares Capital Issues at premium or at discount. (Control) Act, (ii) If right shares are to be issued at premium or 1947 discount, the data of highs and lows of market quotation for 2 frill calendar years and for each month for the current year were required to be informed to CCI for getting the consent to issue right shares at a price other than face value. (iii) The debt-equity ratio should not increase 2:1 after the issue of such right shares. For this purpose the Equity means all equity shares including right

135 shares, preference shares and all free reserves. (iv) The price of the right issue should be based on what the market can bear so that profit from the sale of right must be limited to a reasonable amount Other factors for issuing right shares at premium were considered by CCI were break-up value of the shares, profit earning capacity of the company, future growth prospectus, the dividend record, resources position of the company and extent of foreign participation in the company s capital. (v) Company s intention regarding retention of the oversubscription, if any should be informed to the shareholders. No permission of CCI was required to retain oversubscription the extent of 15% of the basic amount allowed to be raised; if the total capital including over subscription does not exceed Rs. 1 crore. If the total amount including the oversubscription amount exceeds Rs. 1 crore, the approval of CCI was required. 1956 Indian Companies Act 14-05-1975 CCI, Government of India, Ministry of Finance (Department of Economic affairs, Investment Division), Provisions for rights of share holders in additional capital Approval of CCI was made compulsory for all companies except specifically excluded by the Capital issues (Exemption) Order, 1969. 13-08-1976 CCI Before applying to CCI for right issue, the company must inform the shareholders regarding the

136 proposed utilization of capital to be raised by right issue and further earning on investment of such capital, so that shareholders can decide in advance whether they should subscribe to the right issue or not. 18-3-1985 CCI On the request of the companies raising equity share capital, the retention of oversubscription was raised to 25% of the basic amount allowed to be raised, limited to total capital raised including the oversubscription Rs. 1 crore without permission of CCI. CCI approval was required if the total capital including the amount of over subscription exceeds Rs. 1 crore. 04-02-1986 CCI The companies were required to indicate the present as well as the proposed pattern of share holding. 22-03-1986 CCI On the request of companies, the approval of CCI not required for retaining the oversubscription up to 25% of the basic amount of capital to be raised even if the total capital including the amount of oversubscription retained exceeds Rs. 1 crore. 08-04-1988 CCI The retention of oversubscription was reduced to 15% of the basic amount of capital allowed to raise with prior permission of CCI. 10-01-1990 CCI CCI issued guidelines regarding fulfillment of all conditions of the previous issue regarding the refund orders, issue of certificates and listing of the shares issued before the rights issue. 22-01-1990 CCI Restriction imposed on fresh issues, rights or public for any company within 12 months from the close of the previous issue or within six months of the listing

137 of the shares/debentures from the previous issue, whichever is later. 1992 SEBI Section C of SEBI s original guidelines prescribed the different modes of rights issue, like rights issue as per section 81 of Indian Companies Act, 1956 or rights issue to only a set of shareholders or rights issue combined with public issue or rights issue through private placement. 06-04-1992 SEBI Companies entering the capital market through public or right issue should deposit with the Stock Exchange l%percentage of the offer which would be refunded to the company without interest within 15 days from the expiry of the prescribed period and the deposit would be forfeited if the company failed to comply with the listing requirements and other obligations. 16-07-1992 SEBI The right to get right shares extended to equity shares convertible from PCD and FCD within 12 months of making rights issue by reserving the shares to issued on conversion at the same condition. 04-11-1992 SEBI If the company desires to make any reservation, the company can make reservation up to 5% of the issue size for the permanent employees of the issuer company.

138 5.3.4 Regulations regarding issue of shares under ESOP Year wise change in regulations regarding issue of shares under ESOP and issuing authority is mentioned in Table 5.4. Table 5.4 Change in regulations regarding issue of shares under ESOP Year / Date Regulatory authority Main Guidelines 1956 Companies Act, 1956 Indirect reference in Section 77(2)(b) regarding issue of shares to employees enabling the companies to fund a trust for the benefit of the employees of the company to acquire shares of the company or shares could be allotted directly to eligible employees. 1-8-1985 CCI Employees Savings linked stock option Scheme for five years introduced under which Employees Convertible Debentures (ECD) could be issued which were convertible into shares after five years at 80% of the average market price of company s equity shares or fair value of shares determined by CCI, whichever is less but not less than the face value of shares. A maximum limit of savings per employee was fixed at Rs. 10,000 over five years. Average market price was defined as the average of the highest and lowest stock market quotation for each of the six months preceding the launching of the ECD scheme. The shares so converted were subject to lock-in period of three years. 11-5-1990 CCI Companies were required to reserve 5% of the public issue and right issue subject to maximum

139 200 shares per employee. This limit could be increased to the extent of unsubscribed portion which could be offered to other employees. These shares were subject to lock-in period of three years. 29-5-1991 CCI The limit per employee was raised to maximum 500 shares per employee in a public issue. Unsubscribed portion was to be added beck to the public allotment. 10-8-1992 SEBI Reservation for employees in a public issue increased to 10% of the issue size Maximum allotment per employee reduced to 200 shares. Lock-in period removed. 4-11-1992 SEBI Reservation for employees in right issue made up to a maximum o f200 shares per employee. 11-10-1993 SEBI Ceiling of maximum shares per employee removed. 10-10-1994 SEBI The shares to be issued under ESOP should not exceed 5% of the paid up capital of the company in any year. 27-4-1995 CBDT The difference between the offer price and the market price of shares offered under ESOP was to be taxed as perquisite. 1-3-1996 SEBI Pricing of shares issued under ESOP was clarified. The market price of such shares means the average price of the weekly high and low of the closing price of the shares quoted on the stock exchange during the six months preceding the relevant date (the date 30 days prior to the date of approval of ESOP) OR the average price

140 of two weeks preceding the relevant date whichever was higher. 7-8-98 RBI Guidelines issued regarding the issue of ADR/GDR linked ESOP to non resident & resident permanent employees of foreign companies in India. The ESo could be offered at a maximum discount of 10%. 19-6-59 SEBI Detailed guidelines issued regarding the valuation & accounting of ESOP. The companies could value the ESOP at fair value OR intrinsic value. The impact of expensing ESOP on net profit and EPS was to be mentioned in the director s report. The definition of market price was revised as the average of the two weeks high and low price of the shares preceding the date of granting the option. 30-6-2003 SEBI Provision of mandatory disclosures of employee compensation cost using fair value of ESOS/ ESPS calculated on the basis of option pricing model and also the impact of the same on profits and EPS of the company, The pricing formula was made in accordance with the US-GAAP to remove the anomalies between the US-GAAP and Indian-GAAP in terms of market price. Market price" of a share on a given date means the closing price of the shares on that date on the stock exchange on which the shares of the company are listed. 30-6-2003 SEBI Stock exchanges were instructed to consider the shares issued under ESOP to list the shares at

141 paripasu without separate request for listing of the each issue of shares under ESOP. 3-5-2004 RBI Limit of 10% discount removed for ESOP shares to be exercised by Resident employees of an Indian office or a branch of a foreign company. 22-7-2004 SEBI It was clarified that market price means the latest available closing price, prior to the date of the meeting of the Board of Directors in which options are granted/ shares are issued, on the stock exchange on which the shares of the company are listed 4-8-2008 SEBI SEBI (ESOS & ESPS) Guidelines amended to bring the accounting treatment prescribed by SEBI, for options granted under graded vesting, in line with the accounting treatment provided by ICAI in this regard 5.3.5 Regulations regarding issue of shares under preferential allotment on private placement basis Year wise change in regulations regarding issue of shares under preferential allotment and issuing authority is mentioned in Table 5.5.

142 Table 5.5 Change in regulations regarding issue of shares under preferential allotment Year/ Regulatory Date authority Main Guidelines Companies Act, 1956 A private placement is an issue of shares or of convertible securities by company to a select group of persons 1956 CCI The company wants to issue shares on preferential was required to make an open offer as per the price decided by CCI 30-06-1992 Ministry of industry Guidelines issued for raising foreign equity on preferential basis. 11-01-1994 SEBI (i) The preferential issue of equity shares/ Fully Convertible Debentures (FCDs)/ Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into or exchanged with equity shares at a later date, by listed companies whose equity share capital islisted on any stock exchange, to any select group of persons under Section 81(1A) of the Companies Act 1956 on private placement basis shall be governed by these guidelines. (ii) Such preferential issues by listed companies by way of equity shares/ Fully Convertible Debentures (FCDs)/ Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into /exchanged with equity shares at a later date, shall be made in accordance with the pricing provisions (iii) Pricing of the issue of shares and warrants The issue of shares on a preferential basis can be made at a price not less than the higher of the following: The average of the weekly high and low of the closing

143 prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; OR The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date. (i) Allotment of all securities were subject to lock period of 5 years 13-05-94 SEBI Guidelines issued for preferential allotment to FIIS. 2000 SEBI (i) The preferential issue of equity shares/ Fully Convertible Debentures (FCDs)/ Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into or exchanged with equity shares at a later date, by listed companies whose equity share capital islisted on any stock exchange, to any select group of persons under Section 81(1A) of the Companies Act 1956 on private placement basis shall be governed by these guidelines. (ii) Such preferential issues by listed companies by way of equity shares/ Fully Convertible Debentures (FCDs)/ Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into /exchanged with equity shares at a later date, shall be made in accordance with the pricing provisions (iii) Pricing of the issue of shares and warrants The issue of shares on a preferential basis can be made at a price not less than the higher of the following: The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date; OR

144 The average of the weekly high and low of the-closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date. 04-08-2000 SEBI (i) Disclosure required to be made in general meeting for the sanction of preferential allotment announced. (ii) The instruments allotted on preferential basis to any person including promoters/ promoters group shall be locked-in for a period of one year from the date of their allotment (iii) Preferential allotments, if any to be made in case of Foreign Institutional Investors, shall also be governed by the guidelines issued by the Government of India/ Board/ Reserve Bank of India on the subject. 14-08-2003 SEBI A listed company shall not make any preferential issue of instrument if the same is not in compliance with the conditions for continuous listing. 30-09-2003 SEBI The trading in privately placed debts shall only take place between Qualified Institutional Investors (QIBs) and High Networth Individuals (HNIs), in standard denomination of Rs.10 lakhs. 08-04-2004 SEBI The lock-in period of one year decided in respect of the shares issued on preferential basis pursuant to a scheme approved under Corporate Debt Restructuring framework of Reserve Bank of India. 16-10-2006 SEBI Lock-in period of 3 years decided from the date of their allotment for the instruments allotted on a preferential basis to the promoter /promoter group. 30-04- 2007 SEBI (i) Where the equity shares of a company have been listed on a stock exchange for a period of less than six months as on the relevant date, the issue of shares on preferential basis can be made at a price not less than the higher of the following:

145 The price at which shares were issued by the company in its IPO or the value per share arrived at in a scheme of arrangement under sections391 to 394 of the Companies Act, 1956, pursuant to which the shares of the company were listed, as the case may be; OR The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the period shares have been listed preceding the relevant date; OR The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date. 29-11-2007 SEBI Requirement of permanent Account Number for allottees 08-04-2008 SEBI The explanatory statement to the notice for the general meeting in terms of Section 173 of the Companies Act, 1956 shall contain: i. the object/s of the issue through preferential offer, ii. intention of promoters/ directors/ key management persons to subscribe to the offer, iii. shareholding pattern before and after the offer, iv. proposed time within which the allotment shall be complete v. the identity of the proposed allottees and the percentage of postpreferential issue capital that may be held by them. August 28, 2008 SEBI Pricing formula revised