Prohibition of Insider Trading Regulation

March 27 2017 : Markets regulator Sebi imposed a penalty of Rs 1 crore on Falcon Tyres and four senior officials,Mr Ruia, who was the Chairman and Promoter Director of the firm during the investigation period from June to September 2009, Executive Director Sunil Bhansali, Non-Executive Director S Ravi and Company Secretary cum Compliance Officer M C Bhansali.

These senior officials, who were holding these positions during the investigation period, were required to frame a clear code of conduct under PIT regulations to prevent insider trading and misuse of the price sensitive information.

However, Sebi found that Falcon Tyres has been continuing with an ambiguous code since 2008, which undermined this very spirit that the model code intended to serve.

In fact, Sebi said that code of conduct approved by the board of Falcon Tyres in December, 2008 "left ample scope for misuse of price sensitive information", was detrimental to the interest of the shareholders of the company and general public and "ambiguous".

PIT Regulations - Duty to frame code of conduct

Once again SEBI have penalised Company, *Compliance Officer and Directors of the listed company with an total amount of Rs. 1.19 crore on Company, *Rs. 5 Lakhs on Compliance Officer cum Director*, 22 Lakhs on other 11 Directors for *not framing Code of Conduct as per SEBI (Prohibition of Insider Trading) Regulations* and for violation of listing agreement.SEBI order dated January 28, 2019

Disclosure in case of violation

Loan conditions agreed by promoters which impact Listed Entity :covered under PFUTP
NDTV promoter group entity RRPR Holdings had entered into a loan agreement with ICICI in October 2008. It had entered into two loan agreements with VCPL in 2009 and 2010 for borrowing Rs. 350 crores and Rs. 50 crores respectively.
SEBI was investigating the above transactions and in the final ruling it held that the ICICI loan agreement and two VCPL loan agreements contained clauses and conditions which substantially affected the functioning of NDTV.
Additionally it noted that the VPCL loan agreements also warranted transfer of shares of NDTV by the promoters which was carried out off market by way of various inter se bulk transactions.
"Consequently, information about the said agreements and off-market transactions were essentially material, price sensitive information which would have influenced decision of investors about trading in shares of NDTV," SEBI concluded.
Non-availability of such information unjustly deprived shareholders of informed participation while dealing with shares of NDTV, it added.
Roys had vehemently argued that NDTV was not a party to the loan agreements and hence there was no requirement to make disclosure of the agreements to the stock exchange.
SEBI while agreeing that NDTV was not a party to the agreements noted that the agreements contained certain crucial, onerous and hostile stipulations pertaining to NDTV including its capital restructuring. The promoter were able to push them through since they were majority shareholders and enjoyed dominant position as Chairman and Managing Director.
"The loan agreements were structured in such a manner that clauses pertaining to NDTV, which were material and price sensitive information, were concealed from minority shareholders, thereby inducing investors to trade in shares of NDTV oblivious about such shift in de facto control over NDTV," the order said.
Besides the above, Roys had also contended that at the time of execution of the loan agreements, there was no statutory or regulatory duty cast upon promoters of listed companies to disclose loan agreements either to the concerned listed entity or to the stock exchange.
This argument was also turned down by SEBI citing clause 49 (I)(D) of the Listing Agreement introduced in 2004 as well as the Code of Conduct of NDTV itself.
"As per the provisions of the Code of Conduct framed by NDTV itself, Board members and senior management of NDTV were required to make full disclosure of all facts and circumstance before making any investment, accepting any position or benefits, participating in any transaction or business arrangement or acting in a manner that creates or appears to create any conflict of interest," SEBI said.
SEBI imposed a total penalty of Rs. 27 crore on the three NDTV promoters, Prannoy Roy, Radhika Roy and RRPR Holding Limited for failing to disclose price sensitive information to the shareholders of NDTV.
While Rs. 25 crores have been imposed jointly and severally on all three promoters, Rs. 1 crore each has to be paid separately by Prannoy and Radhika Roy.
The order passed by Adjudicating Officer Amit Pradhan ruled that the Roys acted in violation of Section 12A of the SEBI Act and the relevant rules of SEBI (Prohibition of Fraudulent Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations) by failing to disclose information relating to three loan agreements entered into by them with Vishvapradhan Commercial Private Limited (VCPL) and ICICI bank.

SAST : Takeover Code
Take Over Bid
How about buying an distressed /undervalued firm than starting from scratch.Undervaluation is possible in listed companies.But the moment take over bids cropup the managments become defensive. Case in point in IVRCL take over bid by Zee Subhash which was defended.

SEBI SAST Regulations 2011

Modes Of Acquisition

— Direct Acquisition of Shares.

— Indirect Acquisition of Shares

— Direct Acquisition of Control.

— Indirect Acquisition of Control.

Direct Acquisition of Shares and Control

— Initial Trigger limits have been raised from 15% to 25%

— Creeping acquisition limit has been retained at 5%

— Creeping acquisition can be done at the rate of 5% every year till the holdings reach 75%

— Open offer has been made mandatory when there is change in control.

— Exemption by passing a special resolution has been done away

Following Explanations have been added:-

Gross acquisitions alone shall be taken into account regardless of any intermittent fall in shareholding or voting rights whether owing to disposal of shares held or dilution of voting rights owing to fresh issue of shares by the target company.

Example

Mr. A holds 20% and his wife holds 10 % of Equity Share capital of ABC Ltd as on 31^st March 2010. Mr. A acquires additional 2 % on 1^st September, 2010 and another 3 % on 31^st December, 2010. He sold 4 % of his shares on 31^st January, 2011 in open market. He wants to acquire another 2% on 1^st March, 2011. Can he do the same?

Yes, But he will have to make an open offer.

In the case of acquisition of shares by way of issue of new shares by the target company or where the target company has made an issue of new shares in any given financial year, the difference between the pre-allotment and the post-allotment percentage voting rights shall be regarded as the quantum of additional acquisition .

Case 1

XYZ Ltd has 1,00,000 shares outstanding in the market. Mr. A holds 30,000 shares. The company makes a further issue of 10,000 shares. Mr. A is allotted 5000 Shares and remaining 5000 are allotted to a FII. Calculate the % of additional acquisition by Mr. A.

Pre Allotment Holding -30%

Post Allotment Holding - 31.81% {(35,000/110,000)*100}

Additional Acquisition - 1.81%

Case 2

Suppose in Case 2 above Mr. A acquires 3000 shares prior to above allotment. Calculate the % of additional acquisition by Mr. A.

Pre Allotment Holding - 33%

Post Allotment Holding - 34.54% {(38,000/110,000)*100}

Additional Acquisition - 1.54%

So total additional Acquisition during the year is 3% {(3,000/100,000)*100} +1.54% = 4.54%

It has been further stated in Regulation 3(3) that:-

For the purposes of sub-regulation (1) and sub-regulation (2), acquisition of shares by any person, such that the individual shareholding of such person acquiring shares exceeds the stipulated thresholds, shall also be attracting the obligation to make an open offer for acquiring shares of the target company irrespective of whether there is a change in the aggregate shareholding with persons acting in concert.

Case 1

Mrs. A holds 10% and Mr. A holds 22% of Equity Share capital of ABC Ltd as on 31^st March 2010. He acquires additional 4 % from Mrs. A. Whether he will have to make an open offer?

Mr. A will have to make a PA as his individual holding increases beyond 25%.

Case 2

Suppose Mr. A has 18 % Shares of ABC Ltd instead of 22%. He acquires additional 5.1 % from Mrs. A. Whether he will have to make an open offer?

Mr. A will have to make a PA as his individual holding increases beyond 5% creeping acquisition limit during the year.

INDIRECT ACQUISITION OF SHARES OR CONTROL

5. (1) For the purposes of regulation 3 and regulation 4, acquisition of shares or voting rights in, or control over, any company or other entity, that would enable any person and persons acting in concert with him to exercise or direct the exercise of such percentage of voting rights in, or control over, a target company, the acquisition of which would otherwise attract the obligation to make a public announcement of an open offer for acquiring shares under these regulations, shall be considered as an indirect acquisition of shares or voting rights in, or control over the target company

Case 1

H Ltd owns 60% of Equity Shares of T ltd. Mr. A owns 5% and Mrs. A holds 10% equity shares in T ltd. Mr. A acquires 20% stake in H Ltd. Whether he will have to make an open offer?

No, he will not have to make an open offer. As 20% stake is a minority stake which does not enable the holder to influence the decisions of H Ltd. It does not enable him to exercise voting rights over T Ltd.

Case 2

Mr. A owns 5% and Mrs. A holds 10% equity shares in T ltd. Mr. A acquires 60% of Shareholding in Z Ltd which owns 12% in T Ltd. Will he be required to make an open offer?

Yes, he will have to make an open offer. As 60% stake is a majority stake which enables the holder to influence the decisions of Z Ltd. It enables him to exercise voting rights of 27% over T Ltd.

5 (2) Notwithstanding anything contained in these regulations, in the case of an indirect acquisition attracting the provisions of sub-regulation (1) where,—

— the proportionate net asset value of the target company as a percentage of the consolidated net asset value of the entity or business being acquired;

— the proportionate sales turnover of the target company as a percentage of the consolidated sales turnover of the entity or business being acquired; or

— the proportionate market capitalisation of the target company as a percentage of the enterprise value for the entity or business being acquired; is in excess of eighty per cent, on the basis of the most recent audited annual financial statements, such indirect acquisition shall be regarded as a direct acquisition of the target company for all purposes of these regulations including without limitation, the obligations relating to timing, pricing and other compliance requirements for the open offer.

XYZ is an unlisted company. Its owns 51% in A Ltd a Listed Company(Target). The Consolidated Turnover of XYZ Ltd is Rs. 3000 Crores and the Consolidated NAV is Rs. 1000 Crores. The Standalone Sales turnover of A Ltd is 2500 and its standalone NAV is 850 Crores.

Proportionate NAV of A Ltd as a percentage of the consolidated NAV of XYZ Ltd is 85.00%(850/1000 x 100).

Proportionate Sales of A Ltd as a percentage of the consolidated sales of XYZ Ltd is 83.33% (2500/3000 x 100).

Hence this acquisition shall be Deemed as direct acquisition of A Ltd and hence all the requirement for direct acquisition shall be applicable.

Voluntary Offer

— The acquirer together with PAC must hold 25% or more equity shares or voting rights.

— The acquirer or PAC should not have acquired any shares by creeping acquisition or by any mode which is exempted during the 52 weeks preceding the PA. However he can acquire shares by way of Bonus or Stock Split or an open offer.

— The open offer shall be for minimum of 10% of outstanding shares.

— Compliances to be made if a voluntary open offer is made:-

1. The acquirer shall not acquire any shares during the open offer otherwise than under the open offer.

2. The acquirer cannot acquire any shares for a period of six months after completion of open offer. However he can make another Voluntary offer or make a competing offer during the said period.

— Disclosure Requirements

Regulation 28 -

The disclosures under this Chapter shall be of the aggregated shareholding and voting rights of the acquirer or promoter of the target company or every person acting in concert with him.
For the purposes of this Chapter, the acquisition and holding of any convertible security shall also be regarded as shares, and disclosures of such acquisitions and holdings shall be made accordingly.
For the purposes of this Chapter, the term “encumbrance” shall include a pledge, lien or any such transaction, by whatever name called.
Upon receipt of the disclosures required under this Chapter, the stock exchange shall forthwith disseminate the information so received.

— Event Based Disclosures

— Initial disclosure shall be made when aggregate shareholding of acquirer along with PACs reaches 5%.

— Once the holding crosses 5% every purchase and sale of aggregating to 2% shall have to be disclosed.

— Disclosure is to be made within 2 working days to the stock exchange and the target company.

— Creation of pledge or any other encumbrance shall be treated as acquisition and release of such pledge or encumbrance shall be treated as disposal and disclosures shall have to be made accordingly.

— However Scheduled Commercial Banks and PFIs are exempt form disclosure requirements if they act as as pledgee in connection with a pledge of shares for securing indebtedness in the ordinary course of business.

Case 1: Mr. A acquires 2% shares or voting rights of T Limited on 01/11/2011 which taken together with 4% shares or voting rights already held by him OR in association with Mr. P, aggregates to more than 5% shares of T Limited.

Then Mr. A and Mr. P needs to disclose their aggregate shareholding and voting rights to T Limited and BSE (where it is listed) on or before 03/11/2011 in the format Annexure A given by SEBI in Circular no. SEBI/CFD/DCR/SAST/ 2/2011/10/20 dated 20/10/2011.

Case 2: Mr. A along with Mr. P holds 6% (5% or more) shares or voting rights of T Limited. On 01/11/2011 Mr. A acquires 2% shares or voting rights of T Limited.

Then Mr. A shall disclose such acquisition of 2 % shares to T Limited and BSE (where it is listed) on or before 03/11/2011 in the format Annexure B given by SEBI in Circular no. SEBI/CFD/DCR/SAST/ 2/2011/10/20 dated 20/10/2011.

Case 3: On 01/11/2011 Mr. X holding 10% shares in T Limited pledges 3% of his shares (shares taken by way of encumbrance shall be treated as an acquisition) to Mr. A already holding 6% shares in T Limited.

Then Mr. A shall disclose such acquisition and Mr. X such disposal (by way of encumbrance) of 3 % shares to T Limited and BSE (where it is listed) on or before 03/11/2011 in the format Annexure B given by SEBI in Circular no. SEBI/CFD/DCR/SAST/ 2/2011/10/20 dated 20/10/2011.

— Continual Disclosures

— These disclosures to be made by every person which together with PACs hold more than 25% of shares or voting rights in the target company and also the promoters of target company.

— They have to disclose their aggregate shareholding and voting rights as of the thirty-first day of March, in the Target Company.

— Disclosure to be made within 7 working days from the end of Financial Year to every stock Exchange where the shares of the Company are listed and to the Company.

Case 1:

As on 31/03/2011 Mr. A together with Mr. P holds shares of T Limited which entitles them to exercise more than 25% voting right in T Limited.

They shall disclose their aggregate shareholding and voting rights within seven working days from 31/03/2011 to BSE and T Limited.

Case 2:

Mr. XYZ, is a Promoter of T Ltd.

He and members of promoter Group and PACs, shall disclose their aggregate shareholding and voting rights as on 31/03/2011 to BSE and T Limited within seven working days from 31/03/2011.

— Disclosure of shares encumbered by Promoters

— Every encumbrance of shares of target company by Promoters and PACs shall have to be disclosed.

— Disclosure shall be made at the time of creation, invocation or release of encumbrance.

— Disclosure to be made within 7 working days from creation, invocation or release of encumbrance to every stock Exchange where the shares of the Company are listed and to the Company.

— Role of Company Secretary of a Listed Company

— Identify and Categorise:-

o Promoter

o Promoter group

o Person in control

o Persons acting in concert

o Associates

o Immediate Relatives

— Ensure that timely disclosures are made by your promoters, members of Promoter Group and PACs.

— Monitor the holdings of promoters, members of Promoter Group and PACs and take necessary action as required.

— Ensure that timely intimation is sent to stock exchanges in respects of transfers exempt under regulation 10.

— Ensure that timely reports are filed in respect of transfers exempt under Regulation 10 with Stock Exchanges and SEBI, if applicable.

— Role of Company Secretary of an Acquirer

— Conduct due diligence on the target company.

— Check if provisions of Competition Act would apply and if applicable take action accordingly.

— Consider all modes of acquisition permissible and advise the management accordingly on the best way to execute the transaction.

— Thoroughly examine the takeover regulations and make a checklist and timeline for compliances.

— Assist the management in appointment of competent Merchant Bankers and other intermediaries.

— Ensure that requisite approvals under Sec 372 and 293 and other applicable provisions of the Companies Act, 1956 are in place.

— Ensure that the pricing guidelines are complied with.

— Ensure that the requisite funds are kept ready and back up funding options are also in place.

— Ensure that the obligations of the acquirer as specified in the regulations are complied with.

— Since a lot of information such as pricing etc will become available at the last moment, its is likely to be a very high pressure exercise. Hence it is very important for the CS to maintain his cool and ensure that none of the requirements are missed.

— Role of Company Secretary of a Target

— Ensure that the obligations of the target as specified in the regulations are complied with.

— To advise the directors not to sell, transfer, encumber, or otherwise dispose off substantial assets of the company or its subsidiaries or issue or allot shares during the offer period unless a special resolution by postal ballot is passed.

— Place the copy of PA and Letter of offer before the board.

— To furnish the list of shareholders to the acquirer

— Help the Board in sending the recommendation on open offer

— Help the acquirer in verification of shares tendered in acceptance of open offer.

— Offer Size

— The offer size under regulation 3 and regulation 4 shall be for at least twenty six per cent of total shares of the target company, as of tenth working day from the closure of the tendering period.

— Obligation has been placed on the acquire to take into account all potential increases in the number of outstanding shares during the offer period contemplated as of the date of the public announcement.

— If there is an increase in total number of shares, after the public announcement, which is not contemplated on the date of the public announcement then the offer size shall be proportionately increased.

Example:-

Mr. A wants to acquire 25% of equity share capital of T Ltd. He has made a public announcement on 1^st October, 2011. The tendering period is from 1^st November to 16^th November, 2011. T ltd has 100,000 equity shares outstanding as on 1^st October, 2011. The Company also has 10,000 Compulsorily Convertible Debentures outstanding against which 5,000 equity shares will have to be issued. They are due for conversion on 17^th November, 2011 and shares will have to be issued immediately.

Mr. A will have to make an open offer. The minimum size of the open offer shall be 26% total shares of the target company. The 26% shall be calculated on the enhanced no of shares i.e 1,05,000. Hence he will have to make an open offer for 27300 shares.

— The Size of the voluntary shall be minimum 10% and shall not exceed such amount as would result in the post-acquisition holding of the acquirer and PACs exceeding the maximum permissible nonpublic shareholding.

— If an competing offer is made against the Voluntary offer then the size of Voluntary offer can be increased to such amount as the first acquirer deems fit.

— This increase in the size of offer has to be made within 15 working days from the PA of competing offer, failing to which he cannot increase the size.

— Once the size of voluntary offer is increased it will cease to be a voluntary offer and be considered a open offer under regulation 3(2).

— the acquirer, PACs and the parties to any underlying agreement including deemed PACs of such parties cannot tender their shares in any open offer.

— Minimum Price for Direct Acquisition

8(1) The Minimum offer price shall be the highest of following:-

— the highest negotiated price per share of the target company for any acquisition under the agreement attracting the obligation to make a public announcement of an open offer;

— the volume-weighted average price paid or payable for acquisitions, whether by the acquirer or by any person acting in concert with him, during the fifty-two weeks immediately preceding the date of the public announcement;

— the highest price paid or payable for any acquisition, whether by the acquirer or by any person acting in concert with him, during the twenty six weeks immediately preceding the date of the public announcement;

— the volume-weighted average market price of such shares for a period of sixty trading days immediately preceding the date of the public announcement as traded on the stock exchange where the maximum volume of trading in the shares of the target company are recorded during such period, provided such shares are frequently traded;

— where the shares are not frequently traded, the price determined by the acquirer and the manager to the open offer taking into account valuation parameters including, book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies; and

— the per share value computed under sub-regulation (5), if applicable.

Example

Mr A wants to take over CBB Ltd a Listed Company. CBB Ltd has 10,00,00,000 shares outstanding. He purchased shares of CBB Ltd on as per details presented in the table given below. Some purchases were made on stock exchange and some of them were made on privately form other shareholders

He enters in to an agreement with Mr. H who holds 16% shares of CBB Ltd on 15^th March, 2011 to purchase his entire shareholding at the rate of 850 per share. The shares of CBB ltd are frequently traded. The public announcement was made on 1^st April, 2011. Calculate the minimum price payable in the open offer.

The Minimum open offer price shall be the Highest of following:-

— Rs.850 agreed to be paid to Mr. H.

— Rs. 900 being the highest price paid for any acquisition during the twenty six weeks immediately preceding the date of the public announcement. (Since 01/10/2010)

— Rs. 750 being the volume-weighted average market price of such shares for a period of sixty trading days immediately preceding the date of the public announcement.

— Rs.764 being the Volume - weighted average price paid for acquisitions during 52 weeks preceding the date of Public Announcement.

VWAP = 18,82,00,00,000/2,45,00,000 = 764

So the minimum price will be Rs. 900 per share.

The Conditions for minimum price in case of Indirect Acquisitions are also same. However one additional criteria has been prescribed which is as follows:-

— the highest price paid or payable for any acquisition, whether by the acquirer or by any person acting in concert with him, between the earlier of, the date on which the primary acquisition is contracted, and the date on which the intention or the decision to make the primary acquisition is announced in the public domain, and the date of the public announcement of the open offer for shares of the target company made under these regulations.

— Also the cut off date is date of contract or the date on which the intention or the decision to make the primary acquisition is announced in the public domain instead of date of PA.

8(5) In the case of an indirect acquisition and open offers under sub-regulation (2) of regulation 5 where,—

— the proportionate net asset value of the target company as a percentage of the consolidated net asset value of the entity or business being acquired;

— the proportionate sales turnover of the target company as a percentage of the consolidated sales turnover of the entity or business being acquired; or

— the proportionate market capitalization of the target company as a percentage of the enterprise value for the entity or business being acquired; is in excess of fifteen per cent, on the basis of the most recent audited annual financial statements, the acquirer shall, notwithstanding anything contained in sub-regulation (2) or sub-regulation (3), be required to compute and disclose, in the letter of offer, the per share value of the target company taken into account for the acquisition, along with a detailed description of the methodology adopted for such computation.

Example.

Astra Inc is a company incorporated in USA, It has a Subsidiary in India by the name of Astra India Limited which is listed on BSE and NSE. Vertigo Inc. acquires 51% in Astra Inc for $6,000. The Consolidate NAV of Astra Inc is $4,000 Crores, Consolidated Sales is $8000 croresand Market Capitalization is $10,000 Crores. NAV of Astra India is $1,000 Crores, Sales are $ 3000 Crores and Market Capitalization is $3,000 Crores.

Since there is an indirect acquisition of Astra India, Vertigo will have to make a open offer in India. Since the Proportionate NAV, sales and Market Cap of Astra India as a percentage of the consolidated NAV, sales and Market Cap of Astra INC is 25%, 37.5% and 30% respectively the provisions of this sub regulation are attracted. Hence Vertigo Inc is required to compute and disclose, in the letter of offer, the per share value ascribed to Astra India when determining the price for acquisition of Astra Inc, along with a detailed description of the methodology adopted for such computation.

— Additional Pricing Provisions

8(6) If the acquirer or any PAC has any outstanding convertible instruments convertible into shares of the target company at a specific price, the price at which such instruments are to be converted into shares, shall also be considered.

8(7) The price paid for shares of the target company shall include control premium or as non-compete fees or any other fee.

8(8) Where the acquirer has acquired or agreed to acquire whether by himself or through or with PACs any shares or voting rights in the target company during the offer period, whether by subscription or purchase, at a price higher than the offer price, the offer price shall stand revised to the highest price paid or payable for any such acquisition:

Provided that no such acquisition shall be made after the third working day prior to the commencement of the tendering period and until the expiry of the tendering period.

8(10) Where the acquirer or persons acting in concert with him acquires shares of the target company during the period of twenty-six weeks after the tendering period at a price higher than the offer price under these regulations, the acquirer and persons acting in concert shall pay the difference between the highest acquisition price and the offer price, to all the shareholders whose shares were accepted in the open offer, within sixty days from the date of such acquisition:

Provided that this provision shall not be applicable to acquisitions under another open offer under these regulations or pursuant to the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009, or open market purchases made in the ordinary course on the stock exchanges, not being negotiated acquisition of shares of the target company whether by way of bulk deals, block deals or in any other form.

8(11) Where the open offer is subject to a minimum level of acceptances, the acquirer may, subject to the other provisions of this regulation, indicate a lower price, which will not be less than the price determined under this regulation, for acquiring all the acceptances despite the acceptance falling short of the indicated minimum level of acceptance, in the event the open offer does not receive the minimum acceptance.

8(12) In the case of any indirect acquisition, other than the indirect acquisition referred in sub-regulation (2) of regulation 5, the offer price shall stand enhanced by an amount equal to a sum determined at the rate of ten per cent per annum for the period between the earlier of the date on which the primary acquisition is contracted or the date on which the intention or the decision to make the primary acquisition is announced in the public domain, and the date of the detailed public statement, provided such period is more than five working days.

8(13) The offer price for partly paid up shares shall be computed as the difference between the offer price and the amount due towards calls-in-arrears including calls remaining unpaid with interest, if any, thereon.

8(14) The offer price for equity shares carrying differential voting rights shall be determined by the acquirer and the manager to the open offer with full disclosure of justification for the price so determined, being set out in the detailed public statement and the letter of offer:

Provided that such price shall not be lower than the amount determined by applying the percentage rate of premium, if any, that the offer price for the equity shares carrying full voting rights represents to the price parameter computed under clause (d) of sub-regulation 2, or as the case may be, clause (e) of sub-regulation 3, to the volume-weighted average market price of the shares carrying differential voting rights for a period of sixty trading days computed on the same terms as specified in the aforesaid provisions, subject to shares carrying full voting rights and the shares carrying differential voting rights, both being frequently traded shares.

Example

ABC Limited has 2 classes of Equity shares namely Ordinary Equity Shares and DVRs. The open offer price of Ordinary shares in Rs. 130 per share. The 60 Days VWAMP of ordinary shares is Rs. 100 per share and for DVRs Rs. 50 per share. Calculate the minimum offer price for DVRs.

The offer price of ordinary shares is at a 30% premium to its 60day VWAMP. Hence the minimum price for DVRs will be Rs. 65.

8(16) For purposes of clause (e) of sub-regulation (2) and sub-regulation (4), the Board may, at the expense of the acquirer, require valuation of the shares by an independent merchant banker other than the manager to the open offer or an independent chartered accountant in practice having a minimum experience of ten years.

— Definitions

— “Convertible Security” means a security which is convertible into or exchangeable with equity shares of the issuer at a later date, with or without the option of the holder of the security, and includes convertible debt instruments and convertible preference shares.

— “Enterprise Value” means the value calculated as market capitalization of a company plus debt, minority interest and preferred shares, minus total cash and cash equivalents

— “Identified date” means the date falling on the tenth working day prior to the commencement of the tendering period, for the purposes of determining the shareholders to whom the letter of offer shall be sent

— “Frequently traded shares” means shares of a target company in which the traded turnover on any stock exchange during the twelve calendar months preceding the calendar month in which the public announcement is made, is at least ten per cent of the total number of shares of such class of such target company:

Provided that where the total share capital of the target company is not identical throughout such period, the weighted average number of total shares of the target company shall represent the total number of shares.

— “Immediate Relative” means any spouse of a person, and includes parent, brother, sister or child of such person or of the spouse.

— “Tendering Period” means the period within which shareholders may tender their shares in acceptance of an open offer to acquire shares made under these regulations;

— “Offer Period” means the period between the date of entering into an agreement, formal or informal, to acquire shares, voting rights in, or control over a target company requiring a public announcement, or the date of the public announcement, as the case may be, and the date on which the payment of consideration to shareholders who have accepted the open offer is made, or the date on which open offer is withdrawn, as the case may be.

— “Shares” means shares in the equity share capital of a target company carrying voting rights, and includes any security which entitles the holder thereof to exercise voting rights;

Explanation.— For the purpose of this clause shares will include all depository receipts carrying an entitlement to exercise voting rights in the target company;

Additions to Persons Acting in Concert:-

— Promoters and members of the promoter group.

— Immediate relatives.

— A collective investment scheme and its collective investment management company, trustees and trustee company.

Associate Means:-

— any immediate relative of such person;

— trusts of which such person or his immediate relative is a trustee;

— partnership firm in which such person or his immediate relative is a partner; and members of Hindu undivided families of which such;

— person is a coparcener;

— “Promoter” has the same meaning as in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 and includes a member of the promoter group.

— “Promoter Group” has the same meaning as in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.

— “Volume Weighted Average Market Price” means the product of the number of equity shares traded on a stock exchange and the price of each equity share divided by the total number of equity shares traded on the stock exchange.

— “Volume Weighted Average Price” means the product of the number of equity shares bought and price of each such equity share divided by the total number of equity shares bought.

— Example Volume Weighted Average Market price

— “Weighted Average Number Of Total Shares” means the number of shares at the beginning of a period, adjusted for shares cancelled, bought back or issued during the aforesaid period, multiplied by a time-weighing factor.

Example Weighted Average No. of Shares

200,000 shares of A Limited were outstanding as 1^st April, 2011. The Company issued 100,000 equity shares on 1^st Oct, 2011.

Weighted Average No. of shares outstanding during the year

= {[12 x 200,000] + [100,000 x 6]} / 12 = 250,000.

The open offer for minority shareholders would need to be made even if the ‘control’ has been acquired without crossing the threshold shareholding limit of 25 % stake

Take Over code triggers in case of acquiring either stake or control - Jet Etihad deal cannot circumvent the code with 24% stake-need to look the control aspect

Amid a continuing stalemate over a proposed buyout of 24 per cent stake in Jet Airways by Abu Dhabi carrier Etihad, SEBI on Tuesday said any entity acquiring control of a listed Indian company would need to make an open offer for public shareholders.

The open offer for minority shareholders would need to be made even if the ‘control’ has been acquired without crossing the threshold shareholding limit (25 per cent), SEBI Chairman U. K. Sinha said.

While Mr. Sinha refused to comment specifically on the issues surrounding Jet-Etihad deal, he said that SEBI’s position is very clear about any deals involving substantial acquisition of shares and takeovers. “I am not talking about any specific deal, but SEBI is very clear on such issues. If somebody has acquired stake in a company beyond a certain threshold then the acquirer has to make an open offer to others. That is the first position.

“The second position is that even if the acquirer has got less than the threshold but he has got the control over the company then also he has to make an open offer. So SEBI will be looking into any case where there is a suspicion or belief that control has been acquired. SEBI will apply its tests and take a decision accordingly,” he said.

As per SEBI’s takover regulations, any entity acquiring a 25 per cent or more stakes in a listed company needs to make a mandatory open offer for purchase of additional 26 per cent shares from the public shareholders. However, the open offer obligations also apply to the entities acquiring ‘control’ of a listed company with a stake less than this threshold limit of 25 per cent.

SEBI rules define ‘control’ as “the right to appoint majority of directors, or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner”.

As per the proposed deal between Jet and Etihad, the Abu Dhabi carrier is acquiring 24 per cent stake in the Indian airline company, which is below the threshold limit of 25 per cent. However, there have been concerns that Etihad was getting voting rights and other powers in excess of those equivalent to its proposed 24 per cent stake.

Jet has, however, been saying that it would comply with all relevant regulations on this deal and there have been talks that the deal could be re-structured to meet the norms.

As per the deal, Etihad would hold 24 per cent stake, while Jet Chairman Naresh Goyal would have 51 per cent and the remainder 25 per cent would be with public shareholders.

Who is a Promoter? - See the definitions below under Companies Act and under SEBI

As per the Companies Act 2013, Promoter means a person—

1. who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or

2. who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

3. in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity.

SEBI Issue of Capital and Disclosure (ICDR) Regulations has a far more elaborate definition applicable to publicly listed companies. In the ICDR ‘promoter’ is defined as (in 2 za & zb):

1. the person or persons who are in control of the issuer;

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

3. the person or persons named in the offer document as promoters:

Provided that a director or officer of the issuer or a person, if acting as such merely in his professional capacity, shall not be deemed as a promoter:

‘Promoter group’ includes:

1. the promoter;

2. an immediate relative of the promoter (i.e., any spouse of that person, or any parent, brother, sister or child of the person or of the spouse);

· in case promoter is a body corporate:

1. a subsidiary or holding company of such body corporate;

2. any body corporate in which the promoter holds 10% or more of the equity share capital or which holds 10% or more of the equity share capital of the promoter;

3. any body corporate in which a group of individuals or companies or combinations thereof which hold 20% or more of the equity share capital in that body corporate also holds 20% or more of the equity share capital of the issuer;

· in case the promoter is an individual:

1. anybody corporate in which 10% or more of the equity share capital is held by the promoter or an immediate relative of the promoter or a firm or Hindu Undivided Family in which the promoter or any one or more of his immediate relative is a member;

2. anybody corporate in which a body corporate as provided in (a) above holds 10% or more, of the equity share capital;

3. any Hindu Undivided Family or firm in which the aggregate shareholding of the promoter and his immediate relatives is equal to or more than 10% of the total;

provided that a financial institution, scheduled bank, foreign institutional investor and mutual fund shall not be deemed to be a promoter merely by virtue of the fact that 10 % or more of the equity share capital of the issuer is held by such person.

Promoter’s Liabilities – What happens if you are a promoter?

Under the Companies Act:

A Promoter becomes personally liable for any untrue statements made in the prospectus of the company on the basis of which a person subscribes to shares of the company. The promoter must also disclose his profits in full in the prospectus. If a person suffers any loss due to such untrue statements, the promoter will be sued for damages and may also be prosecuted criminally. Further, promoters of the company are held liable for all pre-incorporation contracts.

Under the ICDR Regulations:

Promoters are like the anchors of a ship. Unfortunately, there are many fly by night operators whose only intention is to float a business plan, collect public funds, siphon those funds and leave the shareholders with a failed company. Under the ICDR regulations, promoters have a much higher liability.

First, the promoters must make a minimum contribution. When a company plans an Initial Public Offering (IPO), the promoters of the company must contribute at least 25% of the post issued capital of the company. This is to ensure that the promoters are serious about the venture or at least serious enough to contribute a meaningful portion of their own capital to the business.

Second, this minimum contribution of 25% made by the promoters shall be locked in for at least 3 years. This means that the promoter cannot sell these many shares for a period of 3 years from the date of allotment of shares in the IPO. In addition, anything over and above the minimum contribution (of 25%) which the promoter holds shall be locked in for a period of 1 year from the date of allotment of share.

Third, if you are the promoter, it brings with it a long list of compliance things to do!

Amongst others things, the promoters have to:

· Disclose all litigations filed and pending against them in the offer document.

· State that there name is appearing as a wilful defaulter in the records of Credit Information Bureau of India Limited (CIBIL), if that is the case.

· They must disclose if they are debarred from accessing the capital markets (in which case they can no longer be named as promoters in the offer document / prospectus).

· The promoter must disclose their shareholding in the company at the end of every quarter.

· Disclose and get shareholder approval for all their Related Party Transactions.

In addition there are restrictions on the number of shares they can buy or sell in the company in a single financial year.

In case the promoter is found violating any of the provisions mentioned above, he risks not only a civil / criminal action against him but also risks being barred by SEBI from accessing the capital markets i.e. from raising funds from the market in future.

Can you cease to be the Promoter?

For many years, the general principle had been – ‘Once a promoter, always a promoter’. In particular, based on the clause (both in the Companies Act and in the ICDR) which states that a promoter is someone who has been named as such in a prospectus, it becomes a lifelong designation.

There may be instances where a promoter may not want to be bound by all these compliance requirements. What if the promoter sells his entire stake or a majority of his stake? What if the company is now being run by / under the direction of a different group/ person(s)?

The fact that I promoted a business venture and the company behind it and that my name appears as a promoter in the incorporation document should not follow me forever. This is especially important in the present day business environment where newer businesses are being started and sold by serial entrepreneurs.

In past there have been many instances where companies ceased to treat certain promoters as such. This was done by a simple notification in the form of corporate announcement made to the stock exchanges where shares of the company were listed and to the Registrar of Companies (ROC). In all cases one thing was common, the promoters who wished to be de-classified as such reduced their holding in the company to at least below 5%, in most cases for below than that.

SEBI has now issued rules to enable a promoter to de-classify themselves as such. Once a person ceases to be a promoter, he will no longer have to comply with the above requirements.

Update on lockin period (Aug 2021)

The lock-in of promoters shareholding to the extent of minimum promoters contribution (i.e. 20% of post issue capital) shall be for a period of eighteen months from the date of allotment in IPO/further public offering (FPO) instead of existing three years, in the following cases:

a) If the object of the issue involves only offer for sale.

b) If the object of the issue involves only raising of funds for other than for capital expenditure for a project (more than 50% of the fresh issue size).

c) In case of combined offering (fresh issue + offer for sale), the object of the issue involves financing for other than capital expenditure for a project (more than 50%of the issue size excluding OFS portion).

SEBI also to amend takeover regulations by doing away with certain disclosure obligations for acquirers and promoters

Inter-se Transfer of Shares among promoters not to trigger Take Over Code

Acquisition Of Shares Or Voting Rights Pursuant To Inter-Se Transfer Among Qualifying Parties Under SEBI (Substantial Acquisition Of Shares And Takeover) Regulations, 2011

General Exemption from making an open offer:

According to Regulation 10(1) (a), acquisition pursuant to inter se transfer of shares among the qualifying parties are exempted from the obligation to make an open offer under regulation 3 and regulation 4.

Who are Qualifying Parties?

The qualifying parties are:

i) Immediate relatives;

ii) Persons named as promoters in the shareholding pattern filed by the target company in terms of the listing agreement or these regulations for not less than three years prior to the proposed acquisition;

iii) A company, its subsidiaries, its holding company, other subsidiaries of such holding company, persons holding not less than 50% of the equity shares of such company, other companies in which such persons hold not less than 50% of the equity shares, and their subsidiaries subject to control over such qualifying parties being exclusively held by the same persons.

iv) PACs for not less than 3 years prior to the proposed acquisition, and disclosed as such pursuant to filings under the listing agreement.

v) Shareholders of a target company who have been PACs for a period of not less than 3 years prior to the proposed acquisition and are disclosed as such pursuant to filings under the listing agreement, and any company in which the entire equity share capital is owned by such shareholders in the same proportion as their holding in the target company without any differential entitlement to exercise voting rights in such company.

Conditions to be satisfied for availing the above general exemption:

a) Acquirer to give prior notice of proposed acquisition (at least 4 working days prior to proposed acquisition) to stock exchanges where shares of the target company are listed (Regulation 10(5)).

b) If the shares of the target company are frequently traded, the acquisition price per share shall not be higher by more than 25% of the Volume Weighted Average Price (VWAMP) for a period of 60 trading days preceding the date of issuance of notice to stock exchanges as per (a) above, as traded on the stock exchange where the maximum volume of trading in shares of the target company are recorded during such period.

If the shares of the target company are infrequently traded, the acquisition price shall not be higher by more than 25% of the price as per regulation 8(2)(c).

c) The transferor and the transferee shall have complied with applicable disclosure requirements set out in chapter V.

What Regulations 8(2)(c) says:

In the case of direct acquisition of share or voting rights in, or control over the target company, and indirect acquisition of shares or voting rights in, or control over the target company where the parameters referred to in sub-regulation (2) of regulation 5 are met, the offer price shall be:

(c) The highest price paid or payable for any acquisition, whether by the acquirer or by any person acting in concert with him during the twenty six weeks immediately preceding the date of public announcement.

Reclassification of Promoter Holding as Public
Securities and Exchange Board of India (Sebi) in the December 2014 had issued a discussion paper in the matter of promoter reclassification in this regard.

The regulations were cleared by the regulator in the recent board meeting However, as regulations on reclassification of promoters as public shareholders are yet to be notified.

As per the new regulations Sebi would allow the reclassification after the signing of a separation agreement and promoter holding falling below five per cent. The regulator will also allow reclassification on a case-to-case basis if it feels the move is appropriate.

More than two dozen companies including Mindtree, Indiabulls Real Estate, Infosys, Hindustaan oil exploration, Sun Pharma and Pennar Industries had to re-classify certain shareholders as promoters or had to put their plans of reclassification on hold.

These companies had classified or proposed to classify some of their shareholders as an ordinary shareholder as in certain cases the promoters holding had fallen below five per cent.

Some of these companies had received letters by the National Stock Exchange (NSE) asking the companies to maintain a status quo on the promoter reclassification, pending the regulations from the markets regulator.

Complaince Requirements for Listed Cos under SEBI (LODR) Regulations (earlier Listing Agreement) - Disclosures, CG practices

SEBI (Listing Obligations and Disclosure Requirements) Regulations

1. Material disclosures

The 2015 Regulations have rearranged and augmented the existing disclosure obligations of a listed entity. Regulation 30 which corresponds to Clause 36 of the equity listing agreement requires every listed entity to make such event based and information disclosures which are "material" in the opinion of the board of directors.

1.1 Deemed material: Certain events as provided in Schedule III¹ are deemed "material" and they incorporate the earlier disclosures of Clause 36, such as (i) acquisition of control, shares or voting rights² (direct or indirect), (ii) forms of inorganic restructuring like schemes of arrangement, sale or disposal of units, business divisions, subsidiaries; (iii) organic restructuring of share capital like issuance, forfeiture, split-ups, consolidation, transfer restrictions; and (iv) revision of ratings. However, the 2015 Regulations also include new disclosure obligations with an objective to promote informed investor decision making.

Firstly, board decisions pertaining to dividends, cash bonuses, buy-back, funding, issue of bonus shares, re-issue of forfeited shares, capital alterations, financial results, and voluntary delisting shall be considered "material". The listed entity must disclose such decision to the stock exchange within 30 minutes from the closure of the board meeting. Non-compliance may result in fines, suspension of trading, freezing of promoter or promoter group shares or any other action as determined by SEBI. Under the old clause, there was no such requirement; and listed companies were only mandated to disclose the relevant information immediately. This permitted companies to make disclosures within a reasonable time period. With specified time-frame under the 2015 Regulations, companies have to ensure that the compliance officer prepares the disclosure statement in prescribed formats³ and uploads it with the stock exchanges within 30 minutes. This short time frame may be unrealistic and is likely to create technical issues such as failure of connectivity, inadequate detailing, etc. if the prescribed formats are too elaborate.

Secondly, it is mandatory to disclose frauds and defaults committed by promoter, key managerial personnel or the company itself, as well as any arrest of the promoters or key managerial personnel. Fraud is committed when there is an act or omission with intent to deceive, irrespective whether there is any gain or not. In a fraud allegation, the accused must prove that the intent was absent based on lack of active participation, connivance or any knowledge of the alleged acts. Generally, such argument will necessitate production of documented proofs of board processes like meeting papers, minutes, etc. Further, involvement in fraud and statutory default are disqualifications for continuation and appointment as directors or key managerial personnel under the Companies Act. Thus, it becomes extremely important that directors and managerial personnel highlight their reservations and insist on recording their dissent in board noting and minutes. It also mandates companies to put in place effective vigil mechanism which will ensure protection of whistleblowers against any victimization, and not just as a listing compliance.

1.2 Materiality thresholds: Apart from disclosure of deemed "material" events and information, certain events as specified in Paragraph B of Schedule III shall be disclosed if they trigger the materiality thresholds. These events include (i) commencement of business of any unit/division or delay in commencement; (ii) change in the character and nature of the business; (iii) capacity addition or product launch; (iv) effects due to change in the regulatory framework; (v) granting, withdrawal, suspension or cancellation of licenses; (vi) litigation, disputes or regulatory assessment and their impact; etc. An event or information is material if omission of the event or disclosure of information is likely to result in (i) discontinuity or alteration of already available public information; or (ii) significant market reaction. Based on these guidelines, the board must frame a policy for determination of materiality, identify suitable events and information for reporting, and upload details on the website. The board is also empowered to authorize one key managerial personnel for the purpose of determining materiality.

This element of subjectivity and the board's determination of appropriate timing for making disclosures may not necessarily be binding on SEBI. For instance, SEBI recently imposed a penalty of INR 20 million (about US$ 308,700)4 on NDTV for delayed disclosure of tax claim amounting to INR 4.5 billion (about US$ 70 million) raised by the Income Tax department.⁵ NDTV informed the stock exchanges about the claim after a stay order was passed by the Income Tax Appellate Tribunal in the matter. While imposing the penalty, SEBI observed that the belated disclosure as such did not affect the scrip price, nonetheless such disclosure was material and should have been made as soon as the claim was raised. This indicates the cautious approach of SEBI regarding material disclosures. Accordingly, companies must ensure that they determine materiality of events and disclosure timing rather meticulously and provide impact assessments of such disclosures to the stock exchanges.

2. Stricter governance requirements on board of directors

The 2015 Regulations in certain instances moves beyond mere alignment with governance requirements and thresholds as provided under the Companies Act and adopts a stricter approach towards the composition of board, its committees and the duties of directors. It tends to retain the higher requirements of Clause 49 of the equity listing agreement as well as amends some of the voluntary guidelines, to make them mandatory.

2.1 Board composition and its committees: For instance, as per Companies Act, at least 1/3rd of the board of directors of a listed company must comprise of independent directors. However, Regulation 17 retains the earlier threshold requiring 50% of the board to be independent, if the chairperson is not a non-executive director. Similarly, while the Companies Act requires that the audit committee members must be financially literate (i.e. capable of reading and understanding financial statements), Regulation 18(1)(c) maintains the mandate of having at least 1 member who possesses "accounting or related financial management expertise".⁶Further, it also retains the requirement of valid quorum of at least 2 independent directors for conducting an audit committee meeting, thereby making it indirectly imperative for all listed companies to appoint at least 2 independent directors. The 2015 Regulations also provide for constitution of "risk management committee" for top 100 listed entities determined on the basis of market capitalization at the end of previous financial year. Earlier, the listing agreement merely mandated the board to inform the shareholders regarding risk assessment and minimization procedures adopted for the same without requirement of a specific committee as such. Furthermore, constitution of remuneration committee and framing of whistleblower policy are now made mandatory compliances as opposed to voluntary practice under the listing agreement. Additionally, Regulation 46 requires disclosure of composition of various board committees on company's website.

2.2 Duties of the board: Section 166 of the Companies Act codifies the fiduciary duties of directors and breach of the duties is punishable with fine between INR 100,000 (about US$ 1,500) to INR 500,000 (about US$ 7,700). The 2015 Regulations further elaborate these codified duties, and provide principle-based guidelines in Regulation ⁴. These principles impose a collective duty on the board of directors for ensuring good governance. For instance, it is mandated that the board must (i) disclose any matter that directly affects the company; (ii) conduct itself so as to meet expectations of operational transparency while maintaining confidentiality; (iii) monitor effectiveness of governance practices; (iv) align managerial remuneration with long term interests of the company and the shareholders; (v) ensure transparent nomination; (vi) monitor and manage conflict of interest; (vii) ensure integrity of accounting and financial reporting systems; etc. These principles are subjective and whether the duty has been fulfilled or not will be determined on a case-to-case basis. Further, it is expressly provided that in case of any ambiguity or inconsistency between the principles and the specific regulations, the principles shall prevail. It is unclear at this stage as to how will listed companies' boards ensure collective compliance with these ideologies and whether breach by any individual will result in impugning liability on the entire board as officer-in-default.

3. Related Party Transactions

Related party transactions ("RPTs") continue to garner constant attention for Indian companies. The Companies Act initially mandated special resolution for specific RPTs exceeding prescribed threshold. The Ministry of Corporate Affairs through an amendment in 2015 replaced the requirement of special resolution by an ordinary resolution. It also issued a circular⁷ clarifying that only such related parties who are related to the particular transaction should abstain from voting on the proposed resolution. One of the objectives for notifying the 2015 Regulations was to streamline the process of RPT approval for listed companies in light of these changes.

3.1 Scope of RPTs: The 2015 Regulations defines RPT as transfer of resources, services or obligations between a listed entity and a related party, regardless of whether a price is charged. Further, "transaction" must be interpreted to include a single or a group of transactions under a particular contract. This definition is wider in scope than the Companies Act. As per Section 188 of the Companies Act, a transaction with related party is not an RPT and does not require prior board or shareholders' approval as long as it is at an "arm's-length" basis occurring in the "ordinary course of business". In light of the scope of RPTs under the 2015 Regulations, the exemption is taken away irrespective of the size of the listed entity and the value of the transaction in question. Hence, any transaction which is a RPT will require not only prior audit committee approval as mandated under Regulation 23(2), but also require board approval. However, shareholders' approval will be only necessitated if the transaction is a material RPT.

3.2 Approval of RPTs: Regulation 23(1) requires every listed entity to formulate a policy on materiality of RPTs. It also provides that any transaction with a particular related party (taken individually or combined with other transactions during the financial year) which exceeds 10% of listed company's annual consolidated turnover shall be considered a material RPT. It appears that a listed company may determine the variety of RPTs which will be classified as material ones. Since such materiality cannot transgress the threshold prescribed under the Companies Act; companies must take them into consideration while framing the policy on material RPTs. In order to align with the recent amendment in Companies Act, the 2015 Regulations substitute the old mandate of approving RPTs through special resolution, thereby permitting listed entities to approve RPTs through an ordinary resolution. But, the restriction on voting by related parties is not done away with, despite the clarification issued by the Ministry of Corporate Affairs which allows non-interested related parties to vote for approving a particular RPT. Regulation 23(4) read along with 23(7) states that while approving material RPTs, all related parties whether or not concerned with the particular RPT, must abstain from exercising their votes. Therefore, the RPTs approval process under the 2015 Regulations take away major exceptions and overall continue to remain stricter in comparison to the Companies Act.

4. Corporate governance for listed start-ups

In August 2015, SEBI amended the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 to enable listing of certain categories of start-ups⁸ without undergoing an initial public offer. The underlying objective was to liberalize the stricter listing compliances and disincentivize start-ups opting to list on foreign stock exchanges. These start-ups must alter their structure into public companies prior to listing. Further, they can raise capital only through rights issue and private placement (which were otherwise available under Companies Act) and cannot invite retail investments or make any public offer. SEBI's model agreement for listing on the institutional trading platform did not relax the start-ups from complying with the corporate governance requirements as contained in the Companies Act. For instance, a listed start-up has to necessarily appoint 1/3rd of its board with independent directors, appoint 1 woman director, constitute board committees, set up vigil mechanism and put in place various internal controls and systems. Compliance with corporate governance provisions involves structural and compliance costs, substantial time for a start-up and continues to act as a deterrent for listing, despite floating of the alternative mechanism.

In order to exempt start-ups from such governance requirements, the 2015 Regulations seem to make a failed attempt. Regulation 15(2) exempts compliance with corporate governance practices for (i) companies with paid-up equity capital below INR 100 million (about US$ 1.5 million) and net worth less than INR 250 million (about US$ 3.9 million), and (ii) companies listed on SME exchanges. However, effect of such exemption is nullified by Regulation 15(3) which states that provisions of Companies Act shall apply where they are triggered. Thus, a listed start-up will continue to be governed by similar corporate governance parameters as that of a listed public company, even though it does not raise funds through a public offer.

Conclusion

Contravention of the 2015 Regulations will result in imposition of fines, suspension of trading, freezing of promoter or promoter group shares, or any other action as SEBI may deem fit. Further, the 2015 Regulations give statutory status to the contractual clauses of listing agreements and thus, breach of the 2015 Regulations will invoke penalty clauses under the SEBI Act. These regulations have stirred mixed reactions. Some brand them as "old wine in new bottle" while some are concerned about the method of its implementation. As discussed above, the new regulations retain stricter standards than the Companies Act in order to promote governance of listed entities and protect investor interests. The 2015 Regulations have adopted a unilateral approach for all kinds of businesses and the enthusiasm to ensure ethical conduct has resulted in some level of disconnect with the business realities. The timely compliances will involve cost and resources for listed entities and may cause implementational difficulties for medium and small companies. This makes the 90 day time period fairly critical for listed companies to assess their preparedness for ensuring compliance and avoiding hefty penalties.

SEBI vide its Notification No. SEBI/LAD-NRO/GN/2015-16/013 dated 2^nd September, 2015 had notified SECURITIES AND EXCHANGE BOARD OF INDIA (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015 which have become effective from 01^st December, 2015. These Regulations prescribe different Disclosure Requirements for different types of listed securities. This Article is an attempt to simplify various regulations and contains ONLY regulations and impact thereon of the entity whose equity shares are listed on the stock exchange. This Article covers:-

1. Broad Features of the Regulations

2. Applicability of the Regulations

3. Common Obligations to Be Performed By Listed Entities

4. Quarterly Compliances Including Time Thereof

5. Events Requiring Prior Intimation

6. Events Requiring Intimation within 24 Hours of Occurrence of Event

7. Composition of Board and Its Committees Thereof

8. Related Party Transaction

9. Agendas of Board Meeting As Per Regulation

10. Agendas of Audit Committee Meetings

11. Agendas to Be Placed At Upcoming General Meeting

BROAD FEATURES

1. Time Limit to comply with other provisions: 90 Days i.e. became effective from 01^st December, 2015

2. The Regulations have been structured and designed in such a way so that they are aligned with Companies Act, 2013.

3. In order to avoid any sort of confusion or overlapping, pre-listing as well as post listing requirements have been incorporated in the Listing Regulations.

4. The Listing Regulations have been divided into 2 parts:-

a) Substantive Provisions are contained in main body of Listing Regulations.

b) Procedural requirements in form of Schedules.

APPLICABILITY OF THE REGULATIONS

The regulations are applicable on listed entities who have listed their any of the following designated securities on recognised stock exchange:-

(a) specified securities listed on main board or SME Exchange or institutional trading platform;

(b) Non-convertible debt securities, non-convertible redeemable preference shares, perpetual debt instrument, perpetual non-cumulative preference shares;

(d) securitised debt instruments;

(e) Units issued by mutual funds;

(f) Any other securities as may be specified by the Board.

COMMON OBLIGATIONS OF LISTED ENTITIES

This part deals with the obligations and responsibilities upon all the listed entities. A responsibility has been cast upon KMP’S, Directors, and Promoters that they shall comply with responsibilities or obligations assigned to them under the regulations. The following are the common obligations on Listed entities:-

Regulation No.	Nature of Compliance	Compliance
6	COMPLIANCE OFFICER	A listed entity shall appoint a qualified Company Secretary as the Compliance Officer. The Compliance officer so appointed shall be responsible for ensuring conformity with regulatory compliance, co-ordination and reporting to the Board, ensuring that correct procedures have been followed that would result in correctness of information filed by listed entity under the regulations and monitoring email address of grievance redressal division.
7	SHARE TRANSFER AGENT	The listed entity shall appoint a share transfer agent or manage the share transfer facility in house. Where the facility is managed in house then as and when the total number of holders exceeds one lakh, then the listed entity has 2 options:- Either to register with the Board as Category II Share transfer agent OR to appoint Registrar to an Issue and Share Transfer Agent registered with the Board. Compliance Certificate: The Listed entity shall ensure that it submits a Compliance Certificate to the exchange duly signed by the listed entity and authorised representative of the Share Transfer Agent within one (1) month of end of each half Financial Year, certifying that the entity has ensured all activities in relation to both physical and electronic share transfer facility that are maintained either in house or by Registrar to an issue and share transfer agent registered with the Board. Manner of Appointment of New Share Transfer Agent: Incase of any change or appointment of new share transfer agent, the listed entity shall enter into tripartite agreement between the existing share transfer agent , the new transfer agent and the listed entity. Intimation of Appointment of New Share Transfer Agent:- The listed entity shall inform about the appointment of New Share Transfer Agent within Seven (7) days of entering into Agreement. The Agreement referred herein-above shall be placed at the subsequent Board Meeting.
9	PRESERVATION OF DOCUMENTS.	The listed entity has to bifurcate and categorise policy into 2 types:- Documents whose preservation shall be permanent in nature Documents whose preservation shall be of not less than 8 years. Provided that listed entity may preserve the documents in electronic mode.
24	COMPLIANCE WITH RESPECT TO UNLISTED MATERIAL SUBSIDIARY	Atleast one Independent Director on Board shall be a Director on Board of Unlisted Material Subsidiary. The management of the unlisted subsidiary shall periodically bring to the notice of the board of directors of the listed entity, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary A listed entity shall not dispose of shares in its material subsidiary resulting in reduction of its shareholding (either on its own or together with other subsidiaries) to less than fifty percent or cease the exercise of control over the subsidiary without passing a special resolution in its General Meeting except in cases where such divestment is made under a scheme of arrangement duly approved by a Court/Tribunal. Selling, disposing and leasing of assets amounting to more than twenty percent of the assets of the material subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders by way of special resolution, unless the sale/disposal/lease is made under a scheme of arrangement duly approved by a Court/Tribunal.

QUARTERLY COMPLIANCES

Regulation No.	Time Limit	Compliance / Intimation to Stock Exchange about
13(3)	Within 21 days from end of Quarter	A statement giving the number of investor complaints pending at the beginning of the quarter, those received during the quarter, disposed of during the quarter and those remaining unresolved at the end of the quarter
27(2)	Within 15 days from close of quarter	A listed entity shall submit quarterly compliance report on corporate governance in the format as specified by the Board from time to time to the recognised stock exchange(s)
31(1)	Within 21 days from end of each quarter; 1 day prior to listing of its securities on the stock exchange(s); within 10 days of any capital restructuring of the listed entity resulting in a change exceeding two per cent of the total paid-up share capital	A listed entity shall submit a statement showing holding of securities and shareholding pattern separately for each class of securities
33(3)	Within 45 days from end of quarter	The listed entity shall submit quarterly and year-to-date standalone financial results to the stock exchange within forty-five days of end of each quarter, other than the last quarter.
32(1)		A listed entity shall submit to the stock exchange the following statement(s) on a quarterly basis for public issue, rights issue, preferential issue etc. ,- (a) indicating deviations, if any, in the use of proceeds from the objects stated in the offer document or explanatory statement to the notice for the general meeting, as applicable; (b) indicating category wise variation (capital expenditure, sales and marketing, working capital etc.) between projected utilisation of funds made by it in its offer document or explanatory statement to the notice for the general meeting, as applicable and the actual utilisation of funds

PRIOR INTIMATION OF BOARD MEETING AT WHICH FOLLOWING AGENDAS WILL / PROPOSED TO BE DISCUSSED / OTHER EVENTS

Regulation No.	The Board Meeting at which following agendas are to be discussed:	Compliance / Intimation to Stock Exchange about
29(1)	Financial Results	atleast 5 days in advance (excluding date of meeting and date of intimation)
29(2)	proposal for buyback of securities	at least 2 working days in advance, excluding the date of the intimation and date of the meeting:
	proposal for voluntary delisting by the listed entity from the stock exchange(s);
	fund raising by way of further public offer, rights issue, American Depository Receipts/Global Depository Receipts/Foreign Currency Convertible Bonds, qualified institutions placement, debt issue, preferential issue or any other method and for determination of issue price
	declaration/recommendation of dividend, issue of convertible securities including convertible debentures or of debentures carrying a right to subscribe to equity shares or the passing over of dividend
	the proposal for declaration of bonus securities where such proposal is communicated to the board of directors of the listed entity as part of the agenda papers
29(3)	any alteration in the form or nature of any of its securities that are listed on the stock exchange or in the rights or privileges of the holders thereof	at least 11 working days in Advance
	any alteration in the date on which, the interest on debentures or bonds, or the redemption amount of redeemable shares or of debentures or bonds, shall be payable	at least 11 working days in Advance
42(2)	A listed entity shall give notice in to stock exchange(s) of record date specifying the purpose of the record date	Advance notice of atleast 7 working days (excluding the date of intimation and the record date)
42(3)	A listed entity shall recommend or declare all dividend and/or cash bonuses	Atleast 5 working days (excluding the date of intimation and the record date) before the record date
46(3)	A listed entity shall update any change in the content of its website	Within 2 working days from the date of such change in content

ANNUAL / YEARLY COMPLIANCES

Regulation No.	Time Limit	Compliance / Intimation to Stock Exchange about
33(3)	Within 60 days from end of Financial Year	listed entity shall submit audited standalone financial results for the financial year, along with the audit report and either Form A (for audit report with unmodified opinion) or Form B (for audit report with modified opinion)
34	Within 21 working days of it being approved and adopted in the Annual General Meeting as per the provisions of the Companies Act, 2013	A listed entity shall submit the annual report to the stock exchange
36(2)	Not less than 21 days before the Annual General Meeting.	A listed entity shall send annual report to the holders of securities

INTIMATION WITHIN 24 HOURS OF OCCURRENCE OF EVENT

This is further divided into 2 parts:

(i) Disclosures to be given even when materiality does not triggers / guidelines of materiality are not applicable

(ii) Disclosures to be given even when materiality triggers / guidelines of materiality are applicable

The same are detailed in Part A of Schedule III of the regulations.

COMPOSITION OF BOARD AND ITS COMMITTEES

Particulars	Board	Audit Committee	Nomination & Remuneration Committee	Stakeholder Relationship Committee	Risk Management
Applicability	All Listed Entities	All Listed Entities	All Listed Entities	All Listed Entities	Top 100 Listed Entities
Min. No. Of Members	Atleast 3	Atleast 3	Atleast 3	Atleast 3	Atleast 3
Kind of Directors (Executive (E) / No-Executive) (NE)	Both [E & NE]	Both [ E & NE]	Only NE	Both [E& NE]	Both [E & NE]
No. of Independent Directors Required	Depends upon the Chairperson. (C.P.) If C.P. is executive or non-executive but related to promoter then atleast 50% of Members shall be Independent otherwise atleast 1/3rd of Directors shall be Independent.	Atleast 2/3 rd of Members shall be Independent Directors.	Atleast 50% of Members shall be Independent Directors.	No such criteria and condition is essential.	No such criteria and condition is essential
Chairperson	C.P. may be Independent and may not be Independent	C.P. Shall be Independent.	C.P. Shall be Independent and also that C.P. of Company shall not chair the Committee.	C.P. Shall be a non-executive director and may or may not be Independent Director.	C.P. shall be a member of the board of directors and senior executives of the listed entity may be members of the committee
Presence at AGM	All directors shall be present at AGM, if any Director is absent the Chairman shall explain the absence of directors.	C.P. of ACM shall be present at AGM.	C.P. may be present at AGM	No Such criteria or essential condition.	No Such criteria or essential condition.
Other Members	–	–	–	The Board shall decide composition of other members of the Committee	The Board shall decide composition of other members of the Committee But majority shall be members of the Board

RELATED PARTY TRANSACTIONS

1. The listed entity shall formulate a policy on materiality of related party and dealing with related party transaction (RPT).

2. ALL RPT shall require prior approval of Audit Committee.

3. The Audit Committee may grant omnibus approval of the transactions and shall satisfy itself of the need and such approval shall be in the interest of the listed entity also that the approval so granted shall be for one year only.

4. All existing material related party contracts and arrangement which extend beyond date of notification shall be required to be approved at First General Meeting after notification of Rules.

AGENDAS OF BOARD MEETING

1. To grant Leave of Absence, if any.

2. To take note of minutes of last Board Meeting.

3. To take note of minutes of Audit Committee meeting.

4. To take note of minutes of Nomination and Remuneration Committee.

5. To take note of minutes of other committee meeting(s).

6. To take note of minutes of meeting of Board of Directors of Subsidiary Company (It must be noted that only for Unlisted Company is mandatory)

7. To take note of significant transactions entered into by Unlisted Subsidiary.

8. To take note of Complaints received during the quarter.

9. To review the Compliance of Applicable Laws on the entity.

10. To consider and approve a Code of Conduct of all Board Members and senior management level.

11. To recommend to members fees payable to Non-executive Directors and the number of Stock Options to be granted except to Independent Directors.

12. To discuss on Annual Operating plans and budgets.

13. Other Agendas specified Under Part A of Schedule II.

AGENDAS of AUDIT COMMITTEE MEETING

1. To grant leave of Absence, if any. (but however it must be noted that as per Secretarial Standard-1 there shall be 100% of attendance of members of Committee of Board)

2. To grant omnibus approval for Related Party Transaction. (It must be noted that approval granted herein shall not exceed for more than 1 year)

3. To review Related Party Transactions of the Company for Quarter ended / Half Yearly ended / FY ended

4. To Consider the Audited / Unaudited Quarterly, Half-Yearly / Annual Financial Statements.

5. To recommend appointment of Auditors of the Company.

6. To approve material related party transaction. (This transactions shall be subject to approval of shareholders of the Company in General Meeting)

7. To review the financial statements, in particular, the investments made by the unlisted subsidiary

8. Other Agendas as specified in PART C of Schedule II of the Regulations.

AGENDA OF UPCOMING GENERAL MEETING

1. To approve related party transactions existing as on date i.e. before.

2. To approve material related party transaction, if any.

Disclosure Requirements for Listed Entities - Regulation 30 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015

1. In order to enable investors to make well-informed investment decisions, timely, adequate and accurate disclosure of information on an ongoing basis is essential. Also, there is a need of uniformity in disclosures made by listed entities to ensure compliance in letter and spirit. Towards this end, Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (hereinafter referred to as “Listing Regulations”) deals with disclosure of material events by the listed entity whose equity and convertibles securities are listed. Such entity is required to make disclosure of events specified under Part A of Schedule III of the Listing Regulations.

2. The Listing Regulations divide the events that need to be disclosed broadly in two categories. The events that have to be necessarily disclosed without applying any test of materiality are indicated in Para A of Part A of Schedule III of the Listing Regulation. Para B of Part A of Schedule III indicates the events that should be disclosed by the listed entity, if considered material.

This circular indicates the details that need to be provided while disclosing events given in Para A and Para B of Schedule III. The guidance on when an event / information can be said to have occurred have also been placed (Details on SEBI website).

The details are given to provide guidance to listed entity and the entity has the responsibility to make disclosures that are appropriate and would be consistent with the facts of each event. In case the listed entity does not disclose such specified details, it shall state appropriate reasoning for the same as part of the disclosure.

Sample Disclosure

Corporate Website - requirements of disclosures under companies Act and Listing Regulations

The Companies Act, 2013 and the Companies Rules, 2014 does not mandate a company to maintain a website. However, upon happening of certain prescribed events, it provides for certain disclosures to be made mandatorily on the website of the company, if any website is maintained by the said company. In some cases, the “if any” option is not available to the company concerned under the Act. For companies whose equity is listed, SEBI has made it mandatory as per the equity listing agreement to maintain a functional and updated website with effect from April 2011.

The following are the disclosures prescribed under the said Act & Rules.

Information Pertaining to Registered Office [Section 12(3)(c)]:Every Company must get its website address, if any, printed on its letterheads, business letters, billheads, letter papers and in all its notices and other official publications.

Change of Object for raising money through Prospectus [Section 13(8)(i)]: A company which has raised money by issuing prospectus and has still some unutilised amount of the money so raised, shall not change its objects for which it raised money through the prospectus unless a Special Resolution is passed by the company. The details of such a resolution as may be prescribed shall be published on the Website of the company,if any, indicating there in the justification for such change.

Unpaid Dividends [Section 124(2)]: A company after transferring the amount of unpaid dividends to a separate bank account of “Unpaid Dividend Account” will have to prepare a statement containing the shareholder’s names, their last known addresses, and the unpaid dividend to be paid to them on the company’s Website, if any.

Corporate Social Responsibility [Section 135(4)(a)]:The Board of every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year, shall after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company's website, if any, in such manner as may be prescribed under the Rule 9 of the Companies (Corporate Social Responsibility Policy) Rules, 20I4

Placing of financial statements and other documents of a listed company on the website [Section 136(1)(a)]: A listed company shall also place its financial statements including consolidated financial statements, if any, auditor’s report and all other documents required by law to be attached thereto, on its website, which is maintained by or on behalf of the company. The third proviso to this section provides that every company having a subsidiary or subsidiaries shall publish separate audited accounts in respect of each of its subsidiary on its website, if any.

Vigil Mechanism in Audit Committee for Listed Companies and other Prescribed Companies[Proviso to Section 177(10)]: The vigil mechanism under sub-section (9) of Section 177 pertaining to setting up of an Audit Committee shall provide for adequate safeguards against victimisation of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases. Provided that the details of establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board’s report.

Compromises, Arrangements and Amalgamation[Proviso to Section 230(3)]:A notice of meeting ordered by the Tribunal for the purpose of Compromise and Arrangements must be served upon the Creditors or class of Creditors, Shareholders or Debenture holders and other members. Such notice should also be published on the Website of the Company, if any. [Rules not notified]

Code for Independent Directors [Schedule IV(IV)(6)] : The terms and conditions of appointment of independent directors shall also be posted on the company’s website

Noticeof candidature of a person for directorship:

Rule 13(2) of the companies (Appointment and Qualification of Directors) Rules, 2014

The company shall, at least seven days before the general meeting, inform its members of the candidature of a person for the office of a director or the intention of a member to propose such person as a candidate for that office - by placing notice of such candidature or intention on the website of the company, if any

Notice of resignation of director:

Rule 15 of the Companies (Appointment and Qualification of Directors) Rules, 2014

The Company shall within thirty days from the date of receipt of notice of resignation from a director, intimate the Registrar in Form DIR-12 and post the information on its website, if any.

Form and particulars of advertisement or circulars:

Rule 4(3) of the Companies (Acceptance of Deposits) Rules, 2014

Every company inviting deposits from the public shall upload a copy of the circular on its website, if any.

Recognitions to Company Secretary/ Company Secretary in Practice under the Regulations are as under:

Regulation 6 provides that a listed entity shall appoint a qualified Company Secretary as the compliance officer.
Regulation 7 (3) requires that the listed entity shall submit a compliance certificate to the exchange, duly signed by both the compliance officer of the listed entity and the authorised representative of the share transfer agent, wherever applicable, within one month of end of each half of the financial year, certifying that all activities in relation to both physical and electronic share transfer facility are maintained either in house or by Registrar to an issue and share transfer agent registered with SEBI.
Regulation 40 (9) requires that the share transfer agent and/ or the in-house share transfer facility, as the case may be, produces a certificate from a practicing company secretary within one month of the end of each half of the financial year, certifying that all certificates have been issued within thirty days of the date of lodgement for transfer, sub-division, consolidation, renewal, exchange or endorsement of calls/allotment monies.
Regulation 56 (1) (d) provides that a half-yearly certificate regarding maintenance of hundred percent asset cover in respect of listed non convertible debt securities, by either a practicing company secretary or a practicing chartered accountant, along with the half yearly financial results.
Schedule V, Clause E requires compliance certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance to be annexed with the directors’ report.

Employee Stock Option Scheme- ESOP Compliance of Companies Act and SEBI guidelines Benefits of Employee Stock Option Plan Employee Stock Option Plans are one of the best tools to attract, encourage and retain employees. Today, these ESOPs are being increasingly used as a compensation tool by companies with the basic premise of creating wealth for the employees. ESOPs also motivate employees to have long-term career aspirations in the organization.

Employee Stock Option Scheme allowable by SEBI in India

In October 2014 SEBI had notified new ESOP regulations, including for purchase of shares by employee welfare trusts from the secondary market .It had allowed companies to have employee stock option Trusts, where they can buy their own company shares subject to certain conditions.

The company may implement the scheme either directly or by an irrevocable trust. If the scheme involves secondary acquisition and / or gift, then it is mandatory for the company to implement such scheme through a trust and such an implementation has to be decided upfront at the time of taking shareholders’ approval for setting up the scheme.

· A company may implement several schemes, as permitted under the New Regulations, through a single trust, provided it maintains proper books of accounts for each scheme to give a true and fair view of the state of affairs of each scheme.

· The trust deed and any modifications thereto is mandatorily to be filed with the stock exchange(s) in India where the company’s shares are listed. SEBI may specify the minimum provisions to be included in the trust deed.

· A director, key managerial personnel or promoter of the company or its holding, subsidiary or associate company or any relative of such person; or a person who beneficially holds 10 per cent or more of the paidup share capital of the company cannot be appointed as a trustee.

· The trustees of such trust shall not vote in respect of the shares held by such trust.

· The trustees should ensure appropriate approval from the shareholders in order to implement the scheme and undertake secondary acquisition.

· The trust shall not deal in derivatives and shall undertake only delivery based transactions for the purpose of secondary acquisitions.

· The company may lend money to the trust (subject to requirements of the Companies Act6 ) on appropriate terms and conditions to acquire the shares either through new issue or secondary acquisition.

· The shareholding of the trust shall be shown as ‘nonpromoter and non-public shareholding’ for disclosure purpose to the stock exchange.

· Secondary acquisition in a financial year by the trust shall not exceed 2 per cent of the paid up equity capital as at the end of the previous financial year.

· The total number of shares under secondary acquisition held by the trust (including multiple trusts and schemes, if any) shall not exceed the prescribed limits as at the end of the financial year immediately prior to the year in which the shareholder approval is obtained for the secondary acquisition.

· The un-appropriated inventory of shares which are not backed by grants, acquired through secondary acquisition by the trust under the New Regulations, shall be appropriated within a reasonable period which shall not extend beyond the end of the subsequent financial year. If such trust existing as on the date of notification of the New Regulations is not able to appropriate the unappropriated inventory within one year of such notification, the same shall be disclosed to the stock exchange at the end of such period and then the same shall be sold on the recognized stock exchange where shares of the company are listed, within a period of five years from the date of notification.

· The trust shall be required to hold the shares acquired through secondary acquisition for a minimum period of six months except under specified circumstances.

· The trust can undertake off-market transfer of shares only under the following circumstances: - transfer to the employees pursuant to the scheme; - when participating in an open offer under regulation7 specified by the SEBI, or when participating in buy-back, delisting or any other exit offered by the company generally to its shareholders.

· The trust shall not become a mechanism for trading in shares and shall not sell the shares in secondary market except under certain specified circumstances.

Matters requiring Specialist Expert guidance

· Designing and Documentation of ESOP Schemes taking care of the corporate objectives and management perspective.

· Grant Letters, Notice of Grant Letters.

· Compliance under Companies Act 2013 including providing resolutions, secretarial services for ESOP, communication letters between the Employee & Company.

ESOP Grant Letter Fromat

To: Employee

Sub: Offer of Stock Options under CTEL ESOP Scheme - 2011

We are pleased to note that you have been identified as an eligible employee for issue of Stock options under CTEL ESOP Scheme - 2011. As per the recommendation of the Compensation/Nomination & Remuneration Committee of Directors of CamTechnology Enterprises Limited, you are being offered 1,00,000 (One Lakh only) options on 10^th July, 2015, which can be converted into Equity Shares of Cam Technology Enterprises Limited.

We have been advised that the conversion price of the share is fixed at Rs. 38/- (Rupees Thirty Eight Only) of the face value of Rs. 10/-each.

VESTING PERIOD:

The vesting of Options takes place at the expiry of Three (3) years from the date of granting of options i.e., on 10^th July, 2018.

EXERCISE OF OPTION:

The vested options can be exercised within a period of 5 years from the date of vesting of shares, by submitting duly filled-in and signed letter of exercise of option (proforma enclosed) together with the payment of Rs. 38/- (Rupees Thirty Eight only) per share in respect of the number of shares being issued. The Employee can Exercise the Vested Options at any time during the exercise period, subject to continuance of his employment with the Company except the circumstances as stated in the CTEL ESOP Scheme - 2011.

The Company shall deduct taxes, if required, in respect of Exercise of the Options.

The share certificates will be issued/ respective demat accounts will be credited on exercise of the Options. Please note that in the event employee terminates employment with the Company, the options to the extent not vested shall lapse/expire and be forfeited forthwith. All the vested options shall be exercised with in a period of 90 (Ninety) days from the date of resignation. However in case of abandonment of employment without the Company’s consent or in case of termination due to breach of policies or terms of employment of the Company all the options (both vested and unvested) shall lapse.

Pursuant to Regulation 16(2) of the SEBI (share Based Employee Benefits) Regulations, 2014, a copy of Disclosure Document containing Statement of Risks, Information about the Company & Salient features of the Scheme, statutorily required to be disclosed, is enclosed. A nomination form is also herewith enclosed.

Please sign the duplicate copy of this ESOP Grant letter and return it to us on or before 25^th July, 2015 as a token of your acceptance of offer and acknowledgement that you have received and read a copy of CTEL ESOP Scheme - 2011, failing which the offer shall stand cancelled.

Wishing you a long and fruitful association with the Company.

Best Regards,

ESOP VALUATION

Listed Companies Compliances :

INFORMATION ASYMMETRY

Quiet period:

A period when corporates generally maintain silence, ostensibly not to provide selective investors any price- sensitive information.

Many a time, corporate communications departments, particularly those belonging to us-listed companies, cite the us securities and exchange commission (sec) rules to not discuss anything related to their operations. this particularly applies in the weeks before the end of the quarter to the time the results are published. the quiet period could extend from anywhere between 21 days and 45 days, depending on how fast a company publishes its results. but surprisingly enough, there is no sec rule mandating a corporate to remain silent before it publishes its results. the definition of the period runs thus: ''starting when an issuer hires an underwriter and ending 25 days after the security begins trading, during which the issuer cannot comment publicly on the offering due to sec rules.'' most corporates are, however, advised by their lawyers not to open their mouths before they publish their results as a matter of good corporate practice. "the quiet period is more a matter of practice rather than any regulation," informs an industry insider. a company if it wants to favour someone. the concept of the quiet period has been diluted in a way.'' either way, corporates would rather err on the side of caution.

Delisting In India

Aarati Krishnan | Updated on June 25, 2020 Business Line

With Covid battering investor sentiment, quite a few listed companies — Prabhat Dairy, Vedanta, Hexaware Technologies and Adani Power — have proposed to bid goodbye to the market by voluntarily delisting their shares. Going by history, this may be the beginning of a long-winded saga.

Elaborate rules

To ensure that companies don’t take a revolving door approach to markets, SEBI specifies an elaborate set of regulations not prevalent in other markets for companies wanting to go private.

To delist, a company needs approval from its board and votes in the ratio of 2:1 from its public shareholders. Once the exchanges grant in-principle approval, the company is required to mail letters of offer to shareholders, with a detailed rationale.

To ensure that promoters pay a fair price to delist, they are required to open a book-built auction on the exchanges to invite bids from public shareholders. The floor price is decided by a long formula from SEBI’s takeover code (the highest of negotiated price or acquisition price paid for the company, weighted average traded price in the 60 days leading up to the offer and so on). If the share is infrequently traded, an independent valuer must determine the floor price. Investors can bid any price at or above the floor pricee;this forms the basis of the ‘discovered price’ at which promoters are obliged to mop up shares.

If the discovered price is unacceptable to the promoter, or if the offer fails to get him to a 90 per cent shareholding, the delisting fails. Where it succeeds, shareholders have a full year after the offer closes to tender their shares at the discovered price.

In theory, these regulations would seem a pretty good way to balance the interests of promoters seeking to go private with investors who are being pushed to permanently give up their rights to a profit share in the business. In practise, however, a good number of delisting offers remain in limbo due to an unending tug-of-war between promoters and investors.

Games investors play

Despite the auction mechanism and formula-based floor price, the exit price has proved the key sticking point for many a delisting offer.

Last year, an attempt by BOC UK, the parent of industrial gases-maker Linde India, to delist the latter failed after the book-building process ‘discovered’ a price of ₹2,025 per share, against the floor price of ₹428.5 set by the company. Reports suggest that a mutual fund holding a 9 per cent-plus stake in the company was unwilling to tender its shares below ₹2,000, scuttling the offer.

This isn’t a lone case. When SEBI reviewed its voluntary delisting regulations in 2014, it found that of the 38 attempts from 2009 to 2014, nine failed. Seven transactions were concluded at the floor price, while the discovered price averaged a 70 per cent premium. In 11 offers, investors demanded two-three times the floor price, prompting promoters to shelve the idea. A second review in 2018 showed that not much changed. Of the 15 companies that launched offers, only seven were concluded at floor price, with eight ‘discovering’ prices 8-240 per cent above the floor price. Notable in this batch were Panasonic Appliances (₹380 versus ₹167), Fulford India (₹2,400 versus ₹702), Essar Oil (₹263 versus ₹146), and Essar Ports (₹133 versus ₹94).

Given that the promoter mopping up a 90 per cent stake is a pre-condition to delist, even a single shareholder demanding an outlandish price can scuttle a delisting proposal that others are okay to go with. Speculative bidders can also use clever ploys to manipulate the auction price, from cornering shares in low-float companies to cartelising, while small shareholders remain clueless on how the process works.

While these findings led SEBI to make multiple tweaks to its delisting rules — setting the delisting threshold at 90 per cent, aligning the floor price formula with the takeover code and bringing in a provision for promoters to make a counter-offer — this hasn’t materially improved outcomes.

Games companies play

If over-smart investors play their part in thwarting delisting offers, company promoters do their bit too. Many promoters, in an inversion of their IPO strategy, choose moribund markets or a sectoral downturn to launch their delisting offers. It is no coincidence that market lows such as 2003-04, 2008-09 and 2013-14 saw a long line-up of delisting candidates.

Where the sector or markets are not faring too badly, some companies report a sudden deterioration in their finances that miraculously coincides with their delisting plans. Reckitt Benckiser India, a solid FMCG performer, reported a series of profit dips and even a quarterly loss during its delisting efforts in 2002-03. Vedanta, on the verge of delisting, has just announced a loss of over ₹12,521 crore for the March 2020 quarter, after a massive impairment charge.

Promoters are also not averse to some behind-the-scenes parleying. A favourite ploy is to offload part holdings or issue new shares to ‘friendly’ entities which then help the delisting along by masquerading as public shareholders. A recent SEBI order detailed how Astra Zeneca Pharma, after two failed attempts to delist in 2004 and 2010 at a high discovered price, placed a chunk of its shares with a group of FIIs, allegedly to help a third delisting attempt.

The way forward

Resolving this stalemate is quite important because, in the long run, forcing companies that are keen on going dark to remain publicly listed is counter-productive. In the Indian context, given weak boards, promoters with high equity stakes have many methods to decimate shareholder value — from siphoning off funds through related party deals to shifting profitable lines to unlisted arms or cutting back on dividends.

SEBI can consider three specific tweaks to its delisting regulations to smoothen the road.

One, the FOMO resulting from high discovered prices is a key reason why public investors are reluctant to bid in delisting offers. This can perhaps be addressed by reviewing the floor pricing formula. Given that an investor tendering in a delisting offer makes an irreversible decision to give up his share in all future profits, using traded prices or negotiated prices as valuation benchmarks for the business appears inappropriate. Valuation based on fundamental metrics such as book value or discounted cash flows may help arrive at a fairer exit price for investors. Companies must be required to commission such valuation reports by independent valuers, disclose the numbers and set the floor price based on them, with a control premium factored in.

Two, in IPOs, allowing retail investors to bid at cutoff prices set by institutions/large investors has proved an effective way to ensure that they don’t need to take a valuation call. This should be possible for the reverse book-building process too.

Finally, independent directors can be required to provide objective advice to public shareholders on delisting offers. Better still, they must commission independent reports from consultants or proxy advisory firms to arm shareholders with objective recommendations on delisting offers.

Vedanta Delisting Offer Fails

10^th Oct 2020 Vedanta Ltd.'s delisting offer is deemed to have failed as per terms of the delisting regulations, the company said in an exchange filing. A large number of unconfirmed bids and some technical glitches in the tender process are likely to have contributed to the failure.

The post offer public announcement of the company said that 125.47 crore shares were validly tendered by public shareholders. The reverse book building process for public shareholders to tender their shares, which began on October 5 had concluded on Friday. For successful delisting of the shares, 134.12 crore shares needed to have been validly tendered for the promoter shareholding to cross the 90% shareholding threshold as per regulations.

"Accordingly, the acquirers will not acquire any equity shares tendered by the public shareholders in the delisting offer and the equity shares will continue to remain listed on the stock exchanges," the statement said. The offer failure could put the Vedanta stock price under pressure, said Deven Choksey, managing director of financial services firm KRChoksey. “In the short-term the problem would be on the traders’ side who have acquired shares in the hope of an arbitrage play. They may want to come up for sale. That could put the price under pressure, that possibility can't be ruled out." But, the share price may recover in the medium term, Choksey said, as the higher-than-market prices at which shares were tendered indicate the fair price of the stock. The fundamentals of the business have not changed, he pointed out.

“The cash generating business of Cairn India Ltd. and Hindustan Zinc Ltd. distribute handsome dividend and that is where the argument is for recovery in the stock price along with the recovery in the metal cycle." A large number of shares were bid at Rs 320 a piece, a substantial premium to Vedanta’s Friday closing price of around Rs 120.

Shareholders that tendered their shares in the reverse book building process will get them back within 10 working days, according to regulation.

Preferential Allotment Pricing : Look Back period 6months to 12 weeks

Given the poor market sentiment, the Securities and Exchange Board of India (SEBI) has made it easier for listed companies to mop up funds through fresh issuance of shares or preferential allotment. Under the new rule, preferential issues can be priced near the prevailing share prices if preferential allotment of shares had become unviable since prices are down 60-70 per cent from their peak.

Under SEBI’s previous formula for preferential allotments, pricing for the new shares should be based on the average six-month price of the shares already trading on the stock exchanges, or the previous 15 days, whichever was higher. But under that formula, a company offering preferential allotment would have failed to attract new buyers now, since the shares would be pegged to prices in January or February, when markets were near their all-time highs.

Bhavin Shah, Partner, PwC India, said, “Many deals were stuck because of the pricing misalignment. This amendment paves the way for these transactions and will help ease liquidity for several companies.”

For example, if IndusInd Bank had gone in for a preferential issue based on SEBI’s old formula, the shares would have had to be priced at more than ₹1,500 per share (with a one-year lock-in as mandated) given the Bank’s high share price in the past six months on the BSE and the NSE. However, its shares have crashed and now trade at around ₹450.

The new rule

Now, however, companies can price preferential issues taking the average of the high and low price of the share during the preceding 12 weeks or the past two weeks, whichever was higher.

Simply put, IndusInd can now offer a preferential issue at ₹350-450 a share, the range it has been trading over the past few weeks. However, under the new formula, the shares will remain locked in for three years.

“Even with a three-year lock-in, the new preferential norms are attractive. Most companies are available at throwaway valuations and long-term investors will take the bet,” said Kishor Ostwal, MD, CNI Global Research.

“The extended lock-in is entirely fair. It will ensure short- to medium-term fund requirement for companies and ensure that investors do not abuse the new rule,” said Yash Ashar, Partner, Cyril Amarchand Mangaldas.

Room for flexibility

Companies, mainly banks, are starved for funds, and investors are giving them a tough time with bargains. “It also makes sense for investors to cost-average their previous holdings at a lower price now in preferential allotment, since only the new shares issued will be locked in. Old holdings can be offloaded once prices move up, said Ostwal.

“Importantly, the relaxation is available to investment by promoters as well, and this, coupled with the relaxation from open-offer obligations, announced recently, provides room for creative flexibility in overall deal structuring,” said Vishal Yaduvanshi, Partner, IndusLaw.

“In the current circumstances, linking the floor price for preferential issues with a six-month look-back period was not justified. It was dampening investor interest,” said Jitesh Shahani, Partner, L&L.

Prohibition of Insider Trading (PIT) Regulations

Prannoy Roy was the chairman and whole time director and Radhika Roy was the managing director during period under investigation and were part of the decision making chain that had led to crystallization of the UPSI.

Discussions pertaining to reorganisation of the company started on September 7, 2007 and the disclosure was made on April 16, 2008. Hence, September 7, 2007 to April 16, 2008 was UPSI period.

Prannoy Roy and Radhika Roy sold shares on April 17, 2008, when the trading window for them was closed and made a profit of Rs 16,97,38,335. By doing so, they violated PIT norms and also acted in contravention of NDTV's code of conduct for prevention of insider trading which prohibited them from trading at least till 24 hours after the information was disclosed to the stock exchanges.

Sebi noted that Prannoy Roy and Radhika Roy together made a gain of Rs 16.97 crore while indulging in insider trading in the shares of New Delhi Television Ltd (NDTV) while in possession of UPSI relating to the proposed reorganization of the company.

The amount has to be paid jointly or severally by them along with 6 per cent interest from April 17, 2008 till the date of actual payment. All the entities have violated Prohibition of Insider Trading (PIT) Regulations, Sebi said in three separate orders passed late on 27Nov 2020.Roys have been restrained from accessing the securities market for two years and directed to disgorge illegal gains along with 6 per cent interest per annum.

Regulator Sebi has barred NDTV promoters, Prannoy Roy and Radhika Roy, from the securities market for two years and also directed them to disgorge illegal gains of more than Rs 16.97 crore for indulging in insider trading more than 12 years ago.

Besides, the watchdog has barred seven individuals and entities for insider trading in the shares of the company for a period varying from one to two years. Also, some of them have been asked to disgorge illegal gains made from trading in the shares when they were in possession of Unpublished Price Sensitive Information (UPSI).

Promoters Contribution in FPO

Dec 2020 : SEBI has done away with the applicability of minimum promoters’ contribution norm and the subsequent lock-in requirements for the issuers making FPO

At present, promoters are mandated to contribute 20 per cent towards FPO. Besides, in case of any issue of capital to the public, the minimum promoters contribution needs to be locked-in for three years.

IndusLaw’s Lahoty explained that with the effective removal of minimum promoters’ contribution, SEBI has moved towards converging regulation for rights issues and FPOs, which will help more companies, especially those not having a track-record of distributing dividends, to consider FPOs as an option without relying on promoters’ willingness to invest more or being locked for a long time.

SECURITIES APPELLATE TRIBUNAL

The orders of SEBI can be appealed to Securities Appellate Tribunal.

Dilip S. Pense Vs. SEBI (order dated 19th November 2009)

The charge of insider trading being one of the most heinous act, the degree of proof required is higher degree of preponderance of probability.

Hariharan Vaidyalingam vs SEBI

SEBI Regulations for listed companies : PIT, PFUTP, SAST, LODR, ESOP, preferential, Delisting. SEBI orders and appeal

The open offer for minority shareholders would need to be made even if the ‘control’ has been acquired without crossing the threshold shareholding limit of 25 % stake

Complaince Requirements for Listed Cos under SEBI (LODR) Regulations (earlier Listing Agreement) - Disclosures, CG practices

SEBI (Listing Obligations and Disclosure Requirements) Regulations

1. Material disclosures

2. Stricter governance requirements on board of directors

3. Related Party Transactions

4. Corporate governance for listed start-ups

Conclusion

To: Employee

Sub: Offer of Stock Options under CTEL ESOP Scheme - 2011

VESTING PERIOD:

Elaborate rules

Games investors play

Games companies play

The way forward

The new rule

Room for flexibility