Reforms in the Primary Market

1.0 Objective:

This memorandum seeks to review the regulations governing the public offerings
market and make proposals for amendments to the regulatory framework.

2.0 Background and Need for review:

2.1. Securities market, including the market for public offerings, is dynamic and need to
keep pace with the evolving environment. Thus, in order to keep pace with the
changing economic environment and to address concerns of various market
participants especially the investing community and the issuers, the regulations
governing the primary market have been amended time to time.

2.2. To address the requirements of various market participants, the extant regulatory
framework and various public issue related processes needs to be reviewed with
an aim to improve the public offerings market. Such a review intends to facilitate
capital raising for industry through the public offerings route while also protecting
the interest of investors.

3.0 Reference to consultations with Market Participants

3.1. With the above backdrop, SEBI has been examining various suggestions from
market participants and issues which are felt necessary for facilitating the issuers
while safeguarding the interest of investors were flagged for discussion in the
Primary Market Advisory Committee of SEBI (hereinafter referred to as PMAC).

3.2. Further, meetings were also held with market intermediaries and industry bodies in
the recent past to understand their concerns and solicit their suggestions on
various policy matters. The current provisions, issues, recommendations of PMAC /

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 market participants and SEBIs views & recommendation are detailed in the
following paragraphs for consideration.

4.0 Current provisions, issues, recommendations of PMAC / market participants

and SEBIs views & recommendation

4.1. Revisiting the minimum offer to public norm under Rule 19 (2) (b) of
Securities Contract Regulation (Rules), 1957

4.1.1. Current provision:

4.1.1.1. As per the Securities Contracts (Regulation) Rules, 1957 ((hereinafter referred to
as SCRR); under rule 19(2)(b) an issuer has to offer and allot at least 25% of the
post-issue equity capital to the public through an offer document, if the market
capitalisation of the company post listing is less than Rs. 4000 crores.

4.1.1.2. If the market capitalisation is more than Rs. 4000 crores, a 10% dilution is
permitted. Further, the company has to achieve 25% public shareholding within a
period of 3 years.

4.1.2. Issues/ Concerns:

4.1.2.1. Currently, a company with a post capitalization of Rs. 3999 crore, has to do a
minimum offer of Rs. 1000 crore (25% dilution), but if the post capitalization is Rs.
4001 crore, the minimum offer size could be Rs. 400 crore (10% dilution). Thus,
under the current structure there is an incentive for a firm having post capitalization
less than Rs. 4000 crore to over value itself, as with a valuation of Rs. 4000 crore
and more, a 10% dilution is possible.

4.1.2.2. Further, companies with post capitalisation of Rs. 4000 crores are granted 3 years
time to comply with minimum public shareholding norms of 25%.

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4.1.2.3. With the economic growth that India has experienced over the last few years, and
the fact that a number of companies did get capital from financial / strategic
investors over the last few years, such companies may desire to go public and get
listed. In such cases, promoter would have already gone through one round of
dilution while allotting shares to strategic investors, employees, etc. IPO would be a
second round of dilution.

4.1.2.4. Often, companies are not even in need of the fund associated with such a large
dilution and end up jacking the objects of the issue.

4.1.2.5. SEBI is in receipt of representations from various market participants which, inter-
alia, highlights the above issues.

4.1.2.6. The said issue was also highlighted by Merchant Bankers in the meeting of
representatives of various merchant banks with the Chairman. The following was
recorded in the minutes of the said meeting:

one critical change in IPO decision making is that earlier only one promoter
was making decisions but now in addition to promoters, professional investors such
as private equity players are also part of decision making team. In this regard,
practical difficulties were highlighted in the requirement that for IPO purpose, PE
investors cannot be categorized as Public but can be classified as public after the
listing date..

4.1.3. Option 1

It is believed that the ideal structure should be in such a way that - higher the
capitalization of the issuer, higher should be the proposed issue size.
Hence, it is proposed that there has to be a step up proposal as under:
Post Issue Minimum issue Size Issue Size in Rs.
Capitalisation Formula Crore
Less than Rs. 1601 25% of post issue Below Rs. 400 Cr.

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 crores capitalisation
Between Rs. 1601 Rs. 400 crore + 20% above Rs. 400-480 Cr.
Crores and Rs. 2000 Rs. 1600 crore
crores
Between Rs. 2001 Rs. 480 crore + 15% above Rs. 480-630 Cr.
Crores and Rs 3000 Rs. 2000 crore
crores
Between Rs. 3001 Rs. 480 crore + 10% above Rs. 630-730 Cr.
Crores and Rs 4000 Rs. 3000 crore
crores
Above 4000 crores Rs. 730 crore + 5% above Rs. 730 Cr and above
Rs. 4000 crore

4.1.4. PMAC Recommendation (Option 2)

4.1.4.1. PMAC in the past had deliberated on the proposal and recommended that the
incumbent non-promoter shareholders in an unlisted company (desirous of listing),
such as, AIFs, mutual funds, and such other categories of investors
registered with SEBI (collectively classified as QIBs under SEBI (ICDR)
Regulations, 2009) may be treated as part of the public shareholders, post listing,
subject to the following conditions:

At least 25% equity shares should be offered to public, or

At least 10% of equity shares should be offered to public, if the IPO amount, i.e.
issue size. (Number of shares offered and allotted to public in terms of an offer
document multiplied by the offer price) is more than Rs. 400 crores and IPO dilution
taken together with incumbent shareholding of QIBs on a post issue basis is at
least 25%; or

At least 10%. of equity shares should be offered to public, if the post issue capital
of the company calculated at offer price is more than Rs. 4000 crores

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4.1.4.2. The shareholding of such QIBs would be subject to lockin for one year as per the
existing requirements.

4.1.5. AIBI Recommendation (Option 3)

Association of Investment Bankers of India (hereinafter referred to as AIBI) in its
letter dated February 04, 2014 has suggested the following:
Minimum dilution in the IPO to be10%, for companies above Rs. 4000 Crore
market capitalisation
In other cases, minimum dilution to public shall be 25% or Rs. 400 crore,
whichever is lower
In case of dilution less than 25%, minimum public shareholding of 25% to be
achieved within 3 years of listing

4.1.6. Analysis

4.1.6.1. The above 3 recommendations envisage to remove the flaw in the existing
structure

4.1.6.2. A detailed analysis on proposed issue size based on current regulations, and
various options is as under

Market Current Option % Option % Option %

Capitalisation Structure 1 holding 2 holding 3 holding
100 25 25 25 25 25 25 25
500 125 125 25 125 25 125 25
1000 250 250 25 250 25 250 25
1600 400 400 25 400 25 400 25
2000 500 480 24 400 25 400 20
2500 625 555 22.20 400 25 400 16
3500 875 680 19.43 400 25 400 11.43

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 3900 975 720 18.46 400 25 400 10.26
3999 999.75 729.9 18.25 400 25 400 10.00
4001 400.1 730.05 18.25 400.1 10 400.1 10
4100 410 735 17.93 410 10 410 10
4500 450 755 16.78 450 10 450 10
5000 500 780 15.60 500 10 500 10
7500 750 905 12.07 750 10 750 10
10000 1000 1030 10.30 1000 10 1000 10
12500 1250 1155 9.24 1250 10 1250 10
15000 1500 1280 8.53 1500 10 1500 10

4.1.7. Pros and cons of the three options

Option 1
Option 1, is based on the premise that higher the post issue capitalisation, higher
should be the minimum issue size.
The said premise appears to be just, however under the said option, companies
with post capitalisation between Rs. 4,000 crore to Rs. 10,000 crore, the required
dilution will be much higher as compared to the current regulatory requirements.
With the larger objective of reviving the primary market, making the existing
regulations stringent may not be desirable.

Option 2
Option 2 ensures that minimum public shareholding post listing will be 25% for
issuers with market capitalisation of less than Rs. 4000 crores, and at the same
time makes room for issuer to a lower dilution subject to 25% dilution or Rs. 400
crore, whichever is lower
There wont be any change in the extant regulations for companies with post
capitalisation of Rs. 4000 crore and above and for companies with post
capitalisation of Rs. 1600 crore and below
However, under option 2, there will still be inconsistencies for companies with
capitalisation of Rs. 4000 crore and above vis--vis companies with less than Rs.

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 4000 crore as companies with capitalisation of Rs. 4000 crore and more will get 3
years time for achieving 25% whereas other companies will be required to have
25% immediately post listing.

Option 3
Option 3 is similar to that of Option 2 except that, Option 2 ensures 25% public
shareholding immediately post listing, whereas under option 3, 3 years time will be
granted for compliance with Minimum Public shareholding requirements.
The proposal under option 3 is in line with the current requirements for achieving
25% public shareholding within 3 years for companies with capitalisation of Rs.
4000 crore and above
Thus, under option 3, the existing structure of issue size can be improvised and at
the same time a minimum dilution of 25% or Rs. 400 crore will ensure sufficient
public shareholders.

In view of the above analysis, amongst the 3 options, Option 3 may be preferred.

4.1.8. SEBI's recommendation

In view of the analysis above, it is proposed to accept the proposal at paragraph

4.1.5 (option 3 AIBI recommendation) and accordingly take up the matter with
Ministry of Finance, Government of India to amend the minimum offer to public
norms under SCRR.

4.2. Minimum public shareholding for public sector undertakings under Securities
Contracts (Regulation) Rules, 1957

4.2.1. Background

4.2.1.1. Prior to September 1993, rule 19 (2) (b) of the Securities Contracts (Regulation)
Rules, 1957, required a minimum public offer of 60% of the issued capital of a
company for getting listed on a recognized stock exchange. Subsequently, rule 19

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 (2) (b) was amended on September 20, 1993 through which the minimum public
offer by a company for getting listed on a stock exchange was brought down to
25%. This was done to encourage the listing of large number of companies to
broaden the market.

4.2.1.2. In 1999, SEBI laid down a different set of requirements of listing for companies in
the IT sector. These requirements, inter-alia, included offering at least 10% of the
securities issued by the company to the public. Subsequently, in April 2000, SEBI
extended this requirement to companies in the media (including advertisement),
entertainment and telecommunication sectors, subject to the condition that not less
than 75% of the companys revenue and profit emanate from these sectors.

4.2.1.3. SEBI issued a circular on April 13, 2006 amending the listing agreement to
streamline continuous listing requirements which, inter-alia, provided for
requirement of minimum of 10% for certain categories of the companies and 25%
of public shareholding for rest of the companies.

4.2.1.4. In order to harmonize the initial and continuous listing requirements, a discussion
paper on requirement of public holding for listing was placed by the Ministry of
Finance on February 01, 2008 for public comments. Among other proposals, it was
proposed in the discussion paper that for a company to be listed and continue to be
listed, it must have a public stake of 25%. Based on the public comments received,
Government of India, vide notifications dated June 04, 2010 and August 09, 2010,
amended the SCRR. The amended rule 19(2)(b) and newly introduced rule 19A of
SCRR require the listed companies to achieve and maintain minimum public
shareholding of 25% of the total number of issued shares for listed companies in
private sector (Non-PSUs) and 10% for Public Sector Undertakings (PSUs).
Further, a time period of three years was provided from the date of notification to
companies to achieve minimum public shareholding (hereinafter referred to as
MPS) in the manner specified by SEBI.

4.2.1.5. The proviso to the rule 19A(3) of SCRR provides as follows : -

Page 8 of 27
 "Provided that a listed public sector company-
(a) which has public shareholding below ten per cent, on the date of
commencement of the Securities Contracts (Regulation) (Second Amendment)
Rules, 2010 shall increase its public shareholding to at least ten per cent, in the
manner specified by the Securities and Exchange Board of India, within a period of
three years from the date of such commencement;

(b) whose public shareholding reduces below ten per cent, after the date of
commencement of the Securities Contracts (Regulation) (Second Amendment)
Rules, 2010 shall increase its public shareholding to at least ten per cent, in the
manner specified by the Securities and Exchange Board of India, within a period of
twelve months from the date of such reduction."

4.2.1.6. In order to align the requirements in the Listing Agreement with the requirements
specified in rule 19(2)(b) and rule 19A of SCRR and to specify the manner in which
public shareholding may be raised to the prescribed minimum level, SEBI issued a
circular No. CIR/CFD/DIL/10/2010 dated December 16, 2010 to suitably amend
clause 40A of the Listing Agreement. This circular, inter-alia, provided the following
methods for complying with the minimum public shareholding requirement:

a. Issuance of shares to the public through prospectus;

b. Offer for sale of shares held by promoters to public through prospectus;

c. Sale of shares held by promoters through the secondary market i.e. OFS
through Stock Exchange.

4.2.1.7. Subsequently, SEBI issued another circular dated February 08, 2012 which inter-
alia provided that listed companies may achieve the minimum public shareholding
requirement through Institutional Placement Programme (IPP). With a view to
further facilitate listed companies to comply with the minimum public shareholding
requirements within the time specified in the SCRR, pursuant to the approval of the
Board, SEBI issued the circular dated August 29, 2012 which specified the

Page 9 of 27
 following additional methods to comply with the minimum public shareholding
requirement:

a. Rights Issues to public shareholders, with promoters/promoter group

shareholders forgoing their rights entitlement;
b. Bonus Issues to public shareholders, with promoters/promoter group
shareholders forgoing their bonus entitlement;
c. Any other method as may be approved by SEBI, on a case to case basis.

4.2.2. Rationale for the MPS requirement for listed companies

4.2.2.1. A large number of shares distributed among a large number of shareholders are
essential for the sustenance of a continuous market for listed securities to provide
liquidity to the investors and to discover fair prices.

4.2.2.2. The larger the number of shares and the number of shareholders, i.e., the larger
the public float, the less the scope for price manipulation and lesser concentration
in the hands of promoters.

4.2.2.3. Larger the public float, the more effective is the instrument of listing as a tool for
redistribution of wealth in the country. The larger public float provides an
opportunity to the general public to have a share in the increased wealth generated
by the competitive private enterprise and prevents cornering of the benefits flowing
from the policies of the Government and public institutions by a handful of
promoters.

4.2.3. Enhancing MPS requirement from 10% to 25% for PSUs

4.2.3.1. While all non PSUs are required to have minimum 25% public shareholding
irrespective of their size or market capitalization, PSUs are required to have
minimum public shareholding of only10%.

Page 10 of 27
4.2.3.2. It is felt that this rule is discriminatory in nature and would be inconsistent with the
broader market design as envisaged through the amendments. Current rule
exempts all public sector companies irrespective of their size or market
capitalization.

4.2.3.3. In view of the objective of MPS, it is proposed that rule 19A of SCRR may be
amended and all the listed companies including PSUs shall be required to achieve
and maintain minimum public shareholding of 25% of the total number of issued
shares.

4.2.3.4. PSUs which are having difficulty in diluting up to 25% and desirous of achieving the
MPS requirement through other means may seek relaxation from SEBI on case to
case basis as per SEBI circular dated August 29, 2012. Such requests would be
considered by SEBI based on merit.

4.2.3.5. Further, in line with earlier amendments dated June 04, 2010 and August 09, 2010,
a time period of three years may be provided from the date of notification to PSUs
to achieve minimum public shareholding in the manner specified by SEBI.

4.2.4. Impact of the said proposal:

4.2.4.1. As on May 19, 2014, there are total 38 companies which have public shareholding
is less than 25%. Out of 38 PSUs, 36 are active and 2 are suspended. In order to
increase public shareholding to 25%, these companies need to offload shares
worth INR 57,922 crores as on the prices level of May 19, 2014. Table below
depicts such PSUs at different level of public shareholding and the amount need to
be divested:

% of Amount need to be divested in INR Crores

divestment 0- 500- 1000- 1500- 2000- 3000- 36000- Total
required 500 1000 1500 2000 2500 3500 36500
0% - 4.99 % 6 6

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 5% - 9.99 % 5 1 1 1 8
10% -14.99 % 8 1 2 1 1 13
15% -19.99 % 6 1 2 1 10
20%-24.99 % 1 1
Total 26 3 2 3 1 2 1 38

4.2.4.2. Out of 38 PSUs, 1 PSU (Coal India Limited) would require to offload INR 36,058.87
crores which is approximately 62% of the total amount that need to be offloaded.

4.2.4.3. There are total 26 PSUs that are required to divest less than INR 500 crore and
excluding Coal India Limited, there are 8 PSUs that would require to offload more
than INR 1,000 crore.

4.2.4.4. Further, there are 24 PSUs that would require offloading more than 10% of the total
shareholding.

4.2.5. SEBI's recommendation

The Board may consider and approve the proposal made at paragraph 4.2.3 and
accordingly take up the matter with Ministry of Finance, Government of India to
amend the MPS norms under SCRR.

4.3. Allocation to various categories of investor

4.3.1. Current Regulations:

4.3.1.1. As per the current regulatory framework, the issuer is required to allot shares in an
IPO to the following investor categories Qualified Institutional Buyers (QIBs); Non
Institutional Buyers (NIIs) and Retail Individual Investors (RIIs). The Issue structure
is as follows:

Page 12 of 27
 Current Issue Structure Companies with Companies without
profitability track profitability track
record (ICDR record (ICDR -
Regulation 26(1)) Regulation 26(2))
Total QIB (proportionate) 50% 75%
Of which,
Anchor (30% of QIB) 15% 22.5%
(Discretionary)#
Reservation for MF (1/3 of 5% 7.5%
Anchor) (Discretionary)
Non Anchor 35% 52.5%
Reservation for MF (5% of 1.75% 2.6%
QIB) (Proportionate)

Retail (proportionate) 35% 10%

Non Institutional 15% 15%
(proportionate)

4.3.1.2. The requirement to allot at least 75% of the issue to QIBs in case of companies
which do not have a profitability track record (i.e. Regulation 26(2) of ICDR
Regulations) was introduced in October 2012. The rationale behind the said
requirement is that QIBs being large, well-informed investors are better equipped to
analyze the credentials and financials of such companies. To reduce exposure of
retail investors in such companies, their proportion was reduced to 10%.

4.3.1.3. Concept of Anchor Investors was introduced in July 2009. It was felt that this will
help in building a committed set of investors for IPOs, thereby reducing the
dependence of the issuer on the market, as also in some way validate the offer
price for the subsequent QIB / public investors

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 4.3.2. AIBI recommendation:

4.3.2.1. AIBI in its aforesaid letter to SEBI has inter-alia, stated as under:

4.3.2.2. In a market environment where successful closure of IPOs is a challenge on

account of weak market sentiments, QIB investors, who are considered price and
demand leaders, also come into the issue on the last day and the fate of the issue,
in large part, is known only on the last day.

4.3.2.3. Retail investors, largely bid at the cut-off price and, in most cases, follow the QIB
investors.

4.3.2.4. Anchor investors comprise only 15% / 22.5% of the issue size currently.

4.3.2.5. In order to bring in serious investors early into the issue and to give momentum to
the issue, AIBI has proposed the following issue structure:

Proposed Issue Structure Companies with Companies without

profitability track record profitability track record
(Reg 26(1)) (Reg 26(2))
Total QIB (proportionate) 60% 75%
Of which
Anchor (60% of QIB) 36% 45%
(Discretionary)
Reservation for MF and IC (1/3 12% 15%
of Anchor) (Discretionary)
Non Anchor 24% 30%
Reservation for MF and IC 4.8% 6%
(20% of QIB) (Proportionate)

Retail (proportionate) 30% 10%

Non Institutional 10% 15%

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 (proportionate)

4.3.3. Analysis:

4.3.3.1. The requirement to allot at least 75% of the issue to QIBs in case of companies
which do not have a profitability track record (i.e. Regulation 26(2) of ICDR
Regulations) was introduced recently i.e. in October 2012. To reduce exposure of
retail investors in such companies, their proportion was reduced to 10% from 35%
previously.

4.3.3.2. Increasing QIB portion from current up to 50% to up to 60% under profitability
route will reduce the direct exposure of retail investors from 35% to 30%. Further,
it will also reduce the exposure of high net worth individual bidding under the NII
category by 5%.

4.3.3.3. The proposal to increase the QIB bucket to 60% under the profitability route would
thus reduce the investment bucket available to individuals for investments in an
IPO.

4.3.3.4. However, increasing Anchor portion from up to 30% of QIB portion to up to 60%
of QIB portion Higher allocation to anchor investors will help in building the issue
book early and, thereby provide opportunity to the issuer to reward early investors.

4.3.3.5. Further, making too many changes in the allocation bucket which was reviewed in
the Board meeting held in August 2012 may not be desirable at this point of time

4.3.3.6. Thus, we may accept the recommendation of AIBI to increase the anchor
investor bucket to 60% and maintain status quo with respect to other rules in
this regard

4.3.3.7. In view of the above, the revised structure would be as under:

Page 15 of 27
 Proposed Issue Structure Companies with Companies without
profitability track record profitability track record
(Reg 26(1)) (Reg 26(2))
Total QIB (proportionate) 50% 75%
Of which
Anchor (60% of QIB) 30% 45%
(Discretionary)
Reservation for MF (1/3 of 10% 15%
Anchor) (Discretionary)
Non Anchor 20% 30%
Reservation for MF (5% of QIB) 1% 1.5%
(Proportionate)

Retail (proportionate) 35% 10%

Non Institutional 15% 15%
(proportionate)

4.3.4. SEBI's recommendation

In view of the above, it is proposed to accept the recommendation of AIBI to

increase the anchor investor bucket to 60% and maintain status quo with respect to
other rules on allocation to various categories of investors

4.4. Eligibility of shares for Offer for Sale in an IPO with respect to bonus issues
on shares held for more than a year

4.4.1. Current provision:

4.4.1.1. Regulation 26(6) of SEBI (ICDR) Regulations, 2009 (hereinafter referred to as

ICDR Regulations) specifies about the eligibility of shares that are to be offered
for sale in an issue. As per the said regulation, shares that are held for a period of
less than one year are not eligible to be offered for sale.

Page 16 of 27
4.4.1.2. Thus, the bonus shares issued in last one year prior to filing of the draft offer
documents are not permitted to be offered for sale even if the original shares are
held for more than a year.

4.4.2. PMAC Recommendation

The Committee deliberated on the issue and recommended that bonus shares,
issued in last one year prior to filing of the draft offer document may also be
allowed to be offered for sale, provided that these bonus shares were issued out of
the reserves existing one year prior to filing of the draft offer document.

4.4.3. SEBIs views and recommendation

4.4.3.1. The recommendation of PMAC may be accepted as pre-issue shareholders are

currently being restricted from offering shares in an offer for sale even if the shares
are due to a bonus issue in last one year on the shares that were held for more
than a year. Many companies undertake a bonus issue before filing DRHP on
account of expanding the capital base and thereby providing better liquidity in the
scrip post-listing. Currently, such companies plan an IPO after a year from such
bonus issues. Thus, accepting the recommendation of PMAC would help issuers to
access the market immediately rather than wait for 1 year after such a bonus issue.

4.4.3.2. However, we may consider putting a condition that such bonus issue should be out
of free reserves and share premium existing in the books of account as on the
financial year preceding the financial year in which the draft offer document is filed
and should not be issued by utilization of revaluation reserves or unrealized profits
of the issuer.

4.4.3.3. The aforesaid proposal would also be in line with the requirements of shares which
can be offered for lock-in as part of promoters contribution (Regulation 33 (1) of the
ICDR Regulations).

Page 17 of 27
 4.5. Benchmarking pricing formula to 'volume weighted average price' instead of
'closing price' for preferential issue and Qualified Institutions Placement

4.5.1. Current provisions

4.5.1.1. The formula to determine the floor price for issuance of equity shares through
preferential issue and qualified institutions placement ('QIP') route are in reference
to closing price of equity shares. For example, the formula for calculating the floor
price in preferential issues is prescribed under regulation 76 of the SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2009 ('ICDR Regulations'). The
said regulation 76 reads as under:

"Pricing of equity shares.

76. (1) If the equity shares of the issuer have been listed on a recognised
stock exchange for a period of twenty six weeks or more as on the relevant
date, the equity shares shall be allotted at a price not less than higher of the
following:

(a) The average of the weekly high and low of the closing prices of the
related equity shares quoted on the recognised stock exchange during
the twenty six weeks preceding the relevant date;
or
(b) The average of the weekly high and low of the closing prices of the
related equity shares quoted on a recognised stock exchange during the
two weeks preceding the relevant date.

(2) If the equity shares of the issuer have been listed on a recognised stock
exchange for a period of less than twenty six weeks as on the relevant date,
the equity shares shall be allotted at a price not less than the higher of the
following:

Page 18 of 27
 (a) the price at which equity shares were issued by the issuer in its initial
public offer or the value per share arrived at in a scheme of arrangement
under sections 391 to 394 of the Companies Act, 1956, pursuant to
which the equity shares of the issuer were listed, as the case may be;
or
(b) the average of the weekly high and low of the closing prices of the
related equity shares quoted on the recognised stock exchange during
the period shares have been listed preceding the relevant date;
or
(c) the average of the weekly high and low of the closing prices of the
related equity shares quoted on a recognised stock exchange during the
two weeks preceding the relevant date.

(3) Where the price of the equity shares is determined in terms of sub-
regulation (2), such price shall be recomputed by the issuer on completion of
twenty six weeks from the date of listing on a recognised stock exchange
with reference to the average of the weekly high and low of the closing
prices of the related equity shares quoted on the recognised stock
exchange during these twenty six weeks and if such recomputed price is
higher than the price paid on allotment, the difference shall be paid by the
allottees to the issuer.

(4) Any preferential issue of specified securities, to qualified institutional

buyers not exceeding five in number, shall be made at a price not less than
the average of the weekly high and low of the closing prices of the related
equity shares quoted on a recognised stock exchange during the two weeks
preceding the relevant date.

Explanation: For the purpose of this regulation, stock exchange means

any of the recognised stock exchanges in which the equity shares are listed
and in which the highest trading volume in respect of the equity shares of the

Page 19 of 27
 issuer has been recorded during the preceding twenty six weeks prior to the
relevant date."

With regard to pricing in QIP, regulation 85 of ICDR Regulations reads as under:

85. (1) The qualified institutions placement shall be made at a price not less
than the average of the weekly high and low of the closing prices of the
equity shares of the same class quoted on the stock exchange during the
two weeks preceding the relevant date:

Provided that the issuer may offer a discount of not more than five per cent.
on the price so calculated for the qualified institutions placement, subject to
approval of shareholders as specified in clause (a) of regulation 82 of these
regulations.

4.5.2. SEBIs View

4.5.2.1. The pricing formulae specified in ICDR Regulations seek to result in a

representative price by smoothening the effect of day-to-day volatilities affecting the
stock price. In this context, the 'closing price' of shares may not be the best
representative price at which the shares have been transacted for it to be used as a
benchmark in the pricing formula. Instead, 'volume weighted average price'
('VWAP') is a better representative in this regard as it eliminates the outlier effects
of high and low prices. Such a price is a more accurate determinant of the prices at
which shares are actually transacted.

4.5.2.2. Using VWAP as a parameter for pricing would be in line with the provisions under
SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011
('Takeover Regulations 2011') which, for determining the offer price, utilizes the
volume-weighted average market price of shares as a parameter for computing the
offer price to be paid by the acquirer. The provision of VWAP was introduced in the
Takeover Regulations 2011 pursuant to recommendation of the Takeover

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 Regulations Advisory Committee ('TRAC') which justified the usage of this criteria
based on grounds mentioned earlier.

4.5.2.3. In view of the above, we may consider replacing 'closing price' with 'volume
weighted average price' in the pricing formula for preferential issues under
regulation 76.

4.5.2.4. As regards QIP, the framework for QIP issuances was put in place by SEBI in the
year 2006 to provide an efficient domestic alternative to the GDR/FCCB route and
also add depth to the domestic markets besides discouraging the export of capital.
Currently, the pricing formula for ADRs/GDRs/FCCBs is consistent with the pricing
formula notified by SEBI for allotment under the QIP regime i.e. the pricing should
not be less than the average of the weekly high and low of the closing prices of
the related shares quoted on the stock exchange during the two weeks preceding
the relevant date.

4.5.2.5. In the meanwhile, a committee was constituted by the Government of India ('GoI')
to comprehensively review the extant "Issue of FCCBs and Ordinary Shares
(Through DR Mechanism) Scheme, 1993". GoI has accepted the report of the said
committee. Press release dated May 13, 2014 issued by GoI in this respect is
placed at Annexure-1. The new Scheme suggested by the committee as part of
the report would be notified at a later stage after the necessary tax related
amendments are notified. It is observed from clause (6) the draft Depository
Receipts Scheme, 2013 that where a listed company makes a qualified institutional
placement of permissible securities to a foreign depository for the purpose of issue
of depository receipts, the minimum pricing norms for such placement as applicable
under the ICDR shall be complied with. Accordingly, the pricing norms have been
made to align with the provisions under ICDR Regulations. However, as the
scheme is yet to be notified, we may not amend the pricing formula now. Once the
scheme is notified, the norms may be suitably amended to ensure that provisions
under ICDR Regulations and Depository Receipts Scheme are aligned.

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4.5.3. Recommendation

In view of the above, it is proposed to replace 'closing price' with 'volume weighted
average price' in the pricing formula for preferential issues under regulation 76.

4.6. Adjustments to price for preferential issues in the event of actions such as
stock split, bonus issue, etc.

4.6.1. Current provisions

ICDR Regulations, currently, do not specify any adjustments to be made to the

pricing formula for preferential issues if there are events such as stock split, bonus
issue, etc. during the period considered, for pricing, preceding the relevant date.
However, in case of QIP, there is a provision under regulation 85(4) of ICDR for
carrying out suitable adjustments to pricing in case of events such as bonus issue,
stock split, consolidation, rights, etc. Additionally, regulation 85(4)(f) also provides
that appropriate adjustments to pricing shall be made if the issuer is involved in any
other similar event, which in the opinion of the concerned stock exchange, requires
adjustments. The said regulation 85(4) reads as under:

"85(4) The prices determined for qualified institutions placement shall be subject
to appropriate adjustments if the issuer :

(a) makes an issue of equity shares by way of capitalization of profits or

reserves, other than by way of a dividend on shares;
(b) makes a rights issue of equity shares;
(c) consolidates its outstanding equity shares into a smaller number of
shares;
(d) divides its outstanding equity shares including by way of stock split;
(e) re-classifies any of its equity shares into other securities of the issuer;
(f) is involved in such other similar events or circumstances, which in the
opinion of the concerned stock exchange, requires adjustments."

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 4.6.2. PMAC recommendation

The issue was discussed by the PMAC of SEBI which agreed that the impact of
corporate actions may be factored in the pricing of preferential issues and a
suitable methodology for the same may be devised keeping in view the current
practice being followed by the stock exchanges.

4.6.3. SEBIs view

4.6.3.1. As per current practice followed by the stock exchanges, suitable adjustment is
made to the price determined in accordance with the pricing formula for preferential
issue to give effect of corporate actions.

4.6.3.2. The requirement of adjusting price in the event of corporate actions is rather implicit
even in the absence of specific provisions in the regulations. However, in view of
the fact that the said requirement is already explicitly provided for QIP which is not
the case for preferential issue, we may also consider introducing the provisions for
adjustment in preferential issuances, to ensure uniformity.

4.6.4. Recommendation

In view of the above, the extant provisions for QIP under regulation 85(4) of ICDR
Regulations may be replicated for making adjustments to price in preferential
issues.

4.7. Pricing of infrequently traded shares

4.7.1. Current provisions

Currently, there are no specific provisions, under ICDR Regulations, pertaining to

preferential issuance for pricing of infrequently traded shares. If a scrip has

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inadequate trading history i.e. it is infrequently traded in the period preceding the
relevant date, then the formula prescribed under regulation 76 of ICDR Regulations
may not result in a representative floor price for preferential issuance.

In this connection, regulation 8(2)(e) in the Takeover Regulations 2011 specifies a

methodology to determine offer price in case of infrequently traded shares. The
said regulation 8(2)(e) reads as under:

"Offer Price
8. (2) In the case of direct acquisition of shares 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 the highest of,
......
(e) 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
......"

Further, the term 'frequently traded shares' is defined under regulation 2(1)(j) of the
Takeover Regulations 2011 to mean the following:

"2(1)(j) 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 the target company:

Provided that where the share capital of a particular class of shares of the target
company is not identical throughout such period, the weighted average number of

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 total shares of such class of the target company shall represent the total number of
shares;

4.7.2. PMAC recommendation

The issue of pricing infrequently traded shares allotted in preferential issuances has
also been discussed by PMAC which recommended that infrequently traded shares
may be priced on the basis of Takeover Regulations 2011.

4.7.3. SEBIs view

As per current market practice, for pricing of infrequently traded shares, methods
provided under aforesaid provisions of Takeover Regulations 2011 are adopted
and an Auditor's certificate to this effect is obtained. This seems to be the best
possible alternative for dealing with such a scenario.

4.7.4. Recommendation

In view of the above, it should first be ascertained whether the shares are
frequently traded in accordance with the definition prescribed under regulation
2(1)(j) of Takeover Regulations 2011 and in case the shares are not frequently
traded then the methodology prescribed under regulation 8(2)(e) of Takeover
Regulations 2011 may be adopted for pricing of such shares for allotment under
preferential issuances.

5.0 Proposal for consideration and approval

The Board is requested to:-

5.1. Consider and approve the proposals under the following headings:-

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 1. Revisiting the minimum offer to public norm under Rule 19 (2) (b) of
Securities Contract Regulation (Rules), 1957 at Para 4.1.8
2. Minimum public shareholding for public sector undertakings under Securities
Contracts (Regulation) Rules, 1957 at Para 4.2.5
3. Allocation to various categories of investor at Para 4.3.4
4. Eligibility of shares for Offer for Sale in an IPO with respect to bonus issues
on shares held for more than a year at Para 4.4.3
5. Proposals for Preferential issues at Paras 4.5.3, 4.6.4 and 4.7.4

5.2. Authorize the Chairman to take consequential and incidental steps to give effect to
the decisions including making necessary amendments to ICDR regulations /
Listing Agreement.

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 Annexure - 1

The Press release dated May 13, 2014 issued by the Government of India is
available on the website of Ministry of Finance

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