1. UNDERSTANDING PREFERENTIAL ALLOTMENTOF SECURITIES Pavan Kumar Vijay

2. WHAT IS PREFERENTIAL ALLOTMENT? ofAn issue by a company Equity shares/Securities convertible into equity / FCDs / Warrants / PCDs / Convertible Preference Shares pursuant to a resolution u/s. 81(1A) of Act,to any select group of personsby way of private placement. 3. ADVANTAGE OF PREFERENTIAL ALLOTMENT

Simple way to raise capital of the Company

No need to appoint Merchant Banker.

Economical way to raise capital.

Minimum Formalities.

4. GOVERNING LAW

The Companies Act, 1956.

Chapter XIII of SEBI (Disclosure and Investor

Protection) Guidelines, 2000.

UnlistedPublic Companies (Preferential Allotment)

Rules, 2003.

SEBI (SAST) Regulations, 1997.

5. THE COMPANIES ACT, 1956 Section 81(1A)of the Companies Act,1956 providesSpecial ResolutionOROrdinary resolution and approval of Central Govt . is required for giving the equity shares or security convertible into equity shares at a later date to a selected group of persons instead of existing shareholders. 6. SEBI(DISCLOSURE AND INVESTOR PROTECTION)GUIDELINES, 2000 7. DIP GUIDELINES PROVISIONS

Pricing

Currency of Shareholders Resolution

Lock-in Requirements

Restrictions

8. PRICING OF PREFERENTIAL ISSUEHigher of the average of weekly high/low of closing prices during:6 months prior to,OR2 weeks prior toRelevant Date = 30 days prior to the date of EGM/AGM where resolution u/s 81(1A) is passed. SharesMinimum Price Security 9. PRICING.. Contd Higher of the average of weekly high/low of closing prices during:6 months prior to, OR2 weeks prior toRelevant Date = 30 days prior to the date of EGM/AGM where resolution u/s 81(1A) is passed. ORas at Companys option-a date 30 days prior to date of exercise of warrants/FCDs. Shares arising out of Warrant/FCD/ PCDMinimum Price Security 10. IILUSTRATION:2 weeks price calculation47/2= 23.5 Average 47 Total22 23 Weekly Low of closing price 23 24 Week 2 24 25 Week 1 Average Weekly high of closing price Week 11. IILUSTRATION:26 weeks price calculation93.5/26= Average 93.5 Total 22.5 20 25 Week 26 24 21 27 Week 2522 23 Weekly Low of closing price 23 24 Week 2 . . 24 25 Week 1 Average Weekly high of closing price Week 12. Pricing Schedule General Meeting 12.08.2005 Relevant Date 13.07.2005 30 days 2 weeks 6 months (27.06.05- 8.07.05) (10.01.05- 8.07.05) 13. DIFFERENCE BETWEEN PRICING OF EQUITY SHARES & WARRANTS Relevant Date30 days prior to the date of EGM/AGM where resolution u/s 81(1A) is passed. ORas at Companys option-a date 30 days prior to date of exercise of warrants/FCDs Relevant Date 30 days prior to the date of EGM/AGM where resolution u/s 81(1A) is passed WARRANTS/FCDs/PCDs SHARES 14. A Company decided to allot shares on preferential basis to certain persons in Jan 2005. The relevant date was fixed on 28th December. In the meanwhile, SEBI notification came in & pursuant to that, limit of 55% was imposed. However, in the present case, the shareholding of the person was crossing the limit of 55% marginally.The question is-Whether there is any violation of law? Can SEBI provide for that the meeting should be held again taking the new relevant date, when the market is high? Queriescontd 15. LOCK IN REQUIREMENTS 3 years from the date of allotment. Allotment to promoters is to be locked in.Subject to maximum of 20% of the total capital of the Company. LOCK-IN PERIODSITUATION- PROMOTERS 16. Lock-in requirements.. Contd 1 year from the date of allotment. Additional issueto promoters or any issue to any person LOCK-IN PERIODSITUATION- PROMOTERS/ NON PROMOTERS 17. Lock-in requirements.. Contd Reduced by earlier lock-in period of warrants/FCDs.Shares acquired on conversion of warrants /FCDs. LOCK-IN PERIODSITUATION 18. Lock-in requirements.. Contd 6 months from therelevant date The entire pre-preferential capital held by the allottees (including promoters) . LOCK-IN PERIODSITUATION 19. QUERIES 1.The SEBI (DIP) Guidelines provides for that the preferential allotment to promoters to be locked in for 3 years from allotment. However, not more than 20% of the total capital of the Company shall be locked in for 3 years. Suppose the shares of the promoters are locked in the public issue & the lock in period is still going on. Meanwhile the Company issues shares on preferential allotment to the tune of 40%. Now, as the DIP Guidelines provide that not more than 20% of total capital shall be locked in. The question is from what moment 3 years shall be reckoned- is it from the date of first lock in or 3 years from the date of preferential allotment? 20. Queries Q. A Company issues warrants on preferential allotment to a person who is already a shareholder of the Company. When would the lock in period of 6 months starts for the pre-preferential holding- is it on allotment of warrants or from the date of conversion of warrants into shares? 21. Q. The SEBI (DIP) guidelines, 2000 provides that the pre-preferential holdings of the allottees shall be locked in for 6 months from the date of relevant date. The question is whether the spouse/ PAC of the allottees can sell off their holdings? Queriescontd 22. RESTRICTIONS Proposed preferential issue allotteeswho havesold any sharesin the listed companywithin 6 months prior to the allotmentthen they are not eligible for the allotment 23. Restrictions.contd A preferential issue cannot be made unlessthe issue is in compliance with theconditions for Continuous Listing ,such asClause 40A of the Listing Agreement. 24. Restrictions.contd Entire shareholding of theproposed allotteesin the company is held by them inDEMATERIALIZED FORM 25. TIME PERIODShareholders Resolution must be implemented within 15 daysexcept in case of pending regulatory approvals. 26. EXPLANATORY STATEMENT REQUIREMENTS

Objects of the issue

Example:

a) To augment long term resources by infusing fresh equity.

b) To raise funds for corporate actions viz., Capital Expenditure, replacing high cost debt and general corporate purposes.

27. Explanatory statement requirements(contd )

Intention of the Promoters/ directors/ key

personnel to subscribe the issue.

Example:

Neither any of the promoters nor any of the Directors, key employees, except Mr. A and Mr. B, have any direct or indirect intention to acquire these further shares in any manner.

28.

Shareholding Pattern before and

after the issue as in Clause 35.

No of Shares heldExample Explanatory statement requirements(contd) Name of shareholders Pre issue shareholding Post holding shareholding Stage I (after allotment of Equity shares) Post holding shareholding Stage II (after conversion of warrants) % ofShares No of Shares Held % of shares No of Shares Held % of share 29. Explanatory statement requirements

Identity of the allottees including the pre

& post preferential issue.

300 100 200 Promoter Warrants Mr. B 200 200 0 Non-Promoter Equity shares Mr. A Post issue holding (No and %) Allotment under preferential Issue Pre Issue Holding(No and %)Categoryinstrument Name of the proposed subscriber 30. ISSUE OF WARRANTS, FCDs ON PREFERENTIAL BASIS

Conversion of warrants, FCD, etc., must be within

18 months of allotment .

In case of warrants,minimum 10% must be paid

upfront on allotment.

If option to convert the warrants into equity

shares is not exercised, then the upfront

payment received shall be forfeited.

31. Time Line- Preferential Allotment Relevant Date 30 days General Meeting (12.08.2005) Filing of application of in-principal approvalDespatch ofIndividual Notices 25 days 15 days BoardMeeting Allotment of Shares 32. Preferential Allotment Viz a Viz Takeover Code. REGULATION 10 & 11 OF SEBI (SAST) PROVIDESNo acquirer shall acquire shares or voting rights,throughmarket purchases and preferential allotment entitle such acquirer to exercise more than fifty five per cent of the voting rightsin the company. 33. LIMITS OF PREFERENTIALALLOTMENTCONSIDERINGTAKEOVER CODE 34. Limits of the Preferential Allotment are calculated taking into account the EXPANDED CAPITAL of the Company & not theEXISTING CAPITALof the Company. 35. Acquirer (holding 20%)Through Preferential Allotment Acquirers holding cannot exceed 24.99% of Expanded Capital. 36. Acquirer (holding 5 %)Through Preferential Allotment Acquirers holding cannot exceed 14.99% of Expanded Capital. 37. Acquirer (holding 0%)Through Preferential Allotment Acquirers holding cannot exceed 14.99% of Expanded Capital. 38. Example: Expanded capital=11764700 Present capital= 1 cr1764700 (14.99% of the Expanded Capital) 14.99% 0 Non- Promoter Shares &% of Expanded CapitalMaximum Allotment in Preferential allotment. Existing shares& %Category 39. QWhat is the exact formula for calculating the % of shareholding, in case of issue of warrants? At what point of time, the number of warrants would be taken into account on the day of issuing warrants or on the date of conversion of warrants into shares? QUERIES 40. Q. Suppose the present holding of a promoter is 54% and after preferential allotment the holdings of the promoter remains same as that of 54% of the expanded capital. The question is whether any disclosure or compliance required in the present situation? What, if, the same question arises in case the promoter is holding 60%? The issue is as there is acquisition of shares but such acquisition has not change the voting rights. The question is what is relevant in terms of takeover code, acquisition or voting rights? Queriescontd 41. Queriescontd Q. Suppose a Promoter is holding 5% shares in a company. What is the limit of acquisition in preferential allotment to the promoter? Is it 5% or 10%? 42. Q. Suppose the present holding of a promoter is 54% and after preferential allotment the holdings of the promoter remains same as that of 54% of the expanded capital. The question is whether any disclosure or compliance required in the present situation Queriescontd 43. Q. What is the maximum limit of preferential allotment? Can a Company through preferential allotment expand its capital without any limit ? Queriescontd 44. RECENT PREFERENTIAL ALLOTMENT

Energy Development Company Ltd.

Rellic Technologies Ltd

Magma Leasing Ltd

Indo Count Ltd

International Hometex Ltd.

Mannappuram General Finance & Leasing Ltd.

Visesh Infotecnics Ltd.

Source: BSEWebsite

45. CHECKLIST ON PREFERENTIAL ISSUE OF SECURITIES 46. Inform the Stock Exchange by fax/ letter/telegram within 15 minutes of conclusion of Board meeting as per the stipulation of Listing Agreement. {Clause 22(a) of Listing Agreement} 2. Hold Board Meeting to consider the preferential issue. 1. Points to consider S.N 47. 3 copies of notice of the meeting should be sent to Stock Exchange at the same time of dispatch to shareholders. (Clause 31(c)- Listing Agreement) 4. Dispatch the general meeting notice together with explanatory statement at least 21 clear days before the date of general meeting .3. Points to consider S.N 48. The Company shall apply for in principal approval in terms of clause 24(a) of the listing Agreement. 6. General meeting shall be held to pass a Special resolution for issue of securities on preferential basis.5. Points to consider S.N 49. Form no 23 shall be filed to ROC within 30 days of passing of resolution along with the requisite fees. 8. The copy of the proceedings of the general meeting shall be forwarded to Stock exchanges promptly. (Clause 31(d) of Listing Agreement)7. Points to consider S.N 50. The currency of the instrument like warrants/FCDs/PCDs shall not exceed beyond 18 months from the date of issue of relevant instrument.10. Allotment pursuant to resolution passed at a meeting of shareholders of a co granting consent for preferential issues shall be completed within 15 days from the date of passing of resolution except in the case of pending regulatory approvals 9. Points to consider S.N 51. Disclosure in Balance Sheet: The details of the money utilized out of the preferential issue shall be disclosed under the appropriate head in the balance sheet of the Company indicating the purpose for which such monies have been utilized. 12. A return of allotment in Form No. 2 shall be filed within 30 days of allotment with the concerned Registrar of Companies after paying the requisite fees11. Points to consider S.N 52. Allotment to promoters up to 20% of the total capital (including the preferential issue) 3 years from allotment. Additional issue to promoters or any issue to any person - 1 year from allotment. Theentire pre-preferential capital held by the allottees - 6 months from the allotment . 13. 53. File documents for final listing of shares with the Stock Exchange 12. 54. THANKS .