April 27, 2004
Mrs. Neelam Bharadwaj
Division of Issues and Listing,
Corporation Finance Department,
Securities & Exchange Board of India
Mittal Court
Nariman Point, Mumbai - 400021
Dear Madam,
Re.: Guidance letter from the Securities and Exchange Board of India ("SEBI") under the SEBI (Informal Guidance) Scheme, 2003 for implementation of an Employee Share Purchase Scheme ("ESPS") by an unlisted company, as a part of its initial public offering of Equity Shares
This request for informal guidance is being made under the SEBI (Informal Guidance) Scheme, 2003 ("Scheme") for issuing a no-action letter based on the facts and circumstances mentioned below.
1. Background
Tata Consultancy Services Limited ("TCS Limited") is an existing company in which the software business of TCS Division of Tata Sons Limited is proposed to be transferred through and in accordance with the scheme sanctioned by the Bombay High Court. TCS Limited proposes to launch its Initial Public Offering, of its equity shares consisting of issue of new shares and offer for sale by certain existing shareholders ("IPO")through a 100% book built issue.
One of the key strategic objectives of TCS Limited of getting its Equity Share listed, is to have an employee incentivisation plan in the form of an ESPS to provide a sense of ownership and participation to employees and to also provide them with an opportunity to share in the historical gains of the business. Hence TCS Limited proposes to have an ESPS alongwith the IPO.
2. Regulatory Regime - SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 (the "ESPS Guidelines")
2.1 The ESPS Guidelines define an ‘employee stock purchase scheme (ESPS)’ as a scheme under which the company offers shares to employees as part of a public issue or otherwise. Regulation 3 states that the ESPS Guidelines apply to any company whose shares are listed on any recognized stock exchange in India.
2.2 Regulation 22.2 of the ESPS Guidelines provides that the shares arising upon exercise of option issued by an unlisted company which are to be vested or be exercised after a company is listed, may be listed, after the IPO by such company subject to fulfillment of the following requirements:
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- The shareholders of the listed company in a general meeting shall ratify issuance of the ESPS. The explanatory statement for this resolution would have to comply with the disclosure requirements of ESPS Guidelines.
- Disclosures have to be made in the offer document for the IPO in relation to:
- Intention of the holders of shares allotted under an ESPS, to sell their shares within 3 months after the date of listing of shares in such IPO.
- Specific disclosures relating to the intention of sale of shares allotted under an ESPS within 3 months after the date of listing of shares, by directors, senior management personnel and employees having more than 1% of the issued capital, including details of names, designations and number of shares and the quantum they intend to sell;
- Disclosures regarding shares issued in the last three years separately and cumulatively prior to the date of the prospectus, including details as per Clause 19 of the ESPS Guidelines, which are the details regarding number of shares issued, the price, employee wise details of shares issued, senior managerial personnel, employees receiving more than 5% of shares issued in a year; details of employees receiving 1% or more of the issued capital at time of issuance, diluted earning per share and consideration received against the issuance of the shares.
2.3 The Committee on ESOPS regarding amendments to the ESPS Guidelines constituted by SEBI has in its review of the ESPS Guidelines vide report dated April 5, 2004 recommended that no options may be granted under a pre initial public offering ESOP scheme unless the same is in compliance with the ESPS Guidelines. Therefore, an unlisted company undertaking an initial public offering of shares would have to comply with the ESPS Guidelines to undertake an ESOP or ESPS Scheme prior to or as a part of an initial public offering.
3. Proposal
TCS Limited proposes to issue equity shares to select eligible employees under an ESPS Scheme as a part of its IPO in terms of the ESPS Guidelines. TCS Limited shall pass a resolution in general meeting in accordance with the requirements of Regulation 19 of the ESPS Guidelines approving the ESPS and making complete disclosures. The proposed ESPS Scheme would provide as follows:
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- The Equity Shares would be offered to the eligible employees at par (as per Regulation 18.1 of the ESPS Guidelines)
- Issue of Equity Shares of TCS Limited to its employees/directors and to the employees/directors of its subsidiary and holding companies (as per Regulation 2.1(1) of the ESPS Guidelines);
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- TCS Limited would pass a shareholders resolution and ensure compliance with the accounting norms set out under the ESPS Guidelines and other accounting standards applicable to TCS Limited (under Regulation 2(2)(b) read with Regulation 18.1 and Regulation 19.2 read with Schedule II of the ESPS Guidelines);
- TCS Limited agrees that the Equity Shares issued under the ESPS Scheme shall be locked in for a period of twelve months from the date of allotment; (as per Regulation 18.2 of the ESPS Guidelines)
TCS Limited would make the disclosures as required in the draft Red Herring Prospectus, the Red Herring Prospectus and the Prospectus to be issued.; (as per Regulation 22.2 of the ESPS Guidelines)
- Details of the price of the Equity Shares, the number of Equity Shares and the appraisal process to be disclosed to the shareholders at the time of informing them about the general body meeting (as per Regulation 17.1, Regulation 17.2 and Regulation 17.5 of the ESPS Guidelines)
The offer of Equity Shares issued by TCS Limited under the ESPS Scheme to employees would be made as part of the IPO and the Equity Shares would be allotted along with the Equity Shares allotted through the IPO.
4. Request for Guidance
4.1 In view of the above, we would like to seek your guidance as to whether TCS Limited, an unlisted company proposing an initial public offering, can implement an employee share purchase scheme (in the manner detailed above) to offer Equity Shares to employees as defined under ESOP Guidelines, as a part of its initial public offering of Equity Shares in accordance with the SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999.
In compliance with the SEBI (Informal Guidance) Scheme, 2003, please find enclosed a demand draft (Demand Draft No. 259307 dated April 24, 2004 and drawn on ICICI Bank Limited, Nariman Point Branch) for Rs. 25,000/-, being the fee for the requested guidance.
As TCS Limited has not yet filed its draft red herring prospectus with SEBI, it has requested that this letter as well as your guidance letter should receive confidential treatment for a period of 90 days from the date of your response.
As we propose to file the draft red herring prospectus with SEBI in early May 2004, we would request you to provide your guidance at the earliest.
TCS Limited has authorized DSP Merrill Lynch to interact with you in this regard and provide any further information/clarification that you may require.
Thanking you,
Yours faithfully,
Authorised Signatories
Encl: As above
GENERAL MANAGER
CORPORATION FINANCE DEPARTMENT
DIVISION OF ISSUES AND LISTING
( (Direct) : 22842826
(Board) : 22850451- 56, 22880962 - 70 (Extn.: 367)
Fax : 22045633
E-mail : neelamb@sebi.gov.in
CFD/DIL/SC/ 10163 /2004
May 18, 2004
DSP Merrill Lynch Ltd.
Mafatlal Centre, 10th Floor,
Nariman Point,
Mumbai – 400 021.
Dear Sir/ Madam
Sub.: Request for No Action Letter under Securities and Exchange Board of India (Informal Guidance) Scheme, 2003 in relation to the proposed implementation of Employee Stock Option Scheme by TCS Ltd., an unlisted company, as part of its initial public offering of equity shares.
This is with reference to your letter dated April 27, 2004 seeking "No-Action Letter" for implementation of an Employee Share Purchase Scheme (ESPS) by TCS Ltd., an unlisted company, as part of its initial public offering of equity shares.
It is represented by you, inter alia, vide the letter under reference that TCS Ltd. proposes to launch its IPO of equity shares consisting of issue of new shares and offer for sale by certain existing shareholders through a 100% book built issue. One of the key strategic objectives of TCS Ltd. of getting its equity shares listed is to have an employee incentivisation plan in the form of an ESPS to provide a sense of ownership and participation to employees and to also provide them with an opportunity to share in the historical gains of the business. Hence, the company has proposed to have an ESPS issue along with the IPO. For the purpose, it is represented by you that the company would frame an ESP Scheme which would provide for compliance with the provisions of the SEBI (Employees Stock Option Scheme and Employees Stock Purchase Scheme) Guidelines, 1999 ["the ESOS & ESPS Guidelines"], even though these Guidelines are not applicable to ESPS issue by unlisted companies.
The representations have been examined and we would like to inform you that the ESOS & ESPS Guidelines do not provide for ESPS issue by an unlisted company as part of its IPO and that such issue would not be permissible. We would like to further inform you that the unlisted company may issue shares to such employees as are mentioned in the relevant provisions of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 by way of reservations or firm allotments, subject to compliance with those provisions.
Therefore we express our inability to issue the no action letter as requested by you.
This position is based on the representation made to the Division of Issues and Listing in your dated April 27, 2004. Different facts or conditions might require a different result. This letter expresses the Division’s position on enforcement action only. It does not express decision of the Board on the questions presented.
Yours faithfully,
Neelam Bhardwaj