Request for Informal Guidance under Securities and Exchange Board of India (Informal Guidance) Scheme, 2003

Sep 13, 2006

Informal Guidance

LETTERS OF MATRIX LABORATORIES LIMITED TO SEBI UNDER SEBI (INFORMAL GUIDANCE) SCHEME, 2003

Letter No.SEBI-1/2005-06 5^th December, 2005

The Securities and Exchange Board of India

1^st Floor, ‘B’ Wing

Mittal Court, Nariman Point

Mumbai 400 021

Dear Sir,

Sub: Request under the SEBI (Informal Guidance) Scheme, 2003

We furnish the following facts for your favour of kind clarification on the eligibility of Employees of the Company who have been granted options in February 2005, July 2005 and who will become the Employees of Joint Venture formed by the company with effect from January 2006 consequent on definitive agreements entered.

FACTS OF THE CASE :

A. About the Company (Matrix)

Matrix Laboratories Limited (hereinafter referred to as the “Company”) is a public limited company listed on BSE and NSE, and is engaged in the manufacture of Active Pharmaceutical Ingredients (APIs) and Solid Oral Dosage Forms. Matrix is one of the fastest growing API manufacturers in India and focuses on regulated markets such as US and EU.

The company has a wide range of products in CNS, anti-bacterial, anti-AIDs, anti-asthmatic, cardiovascular, gastro intestinal, anti-fungal, pain management and life style related therapeutic segments. Four of its API’s manufacturing facilities of the company are approved by the US FDA. The combined FDA approved capacity for API’s is one of the largest in the country. The company’s Finished Dosage Forms (FDF) manufacturing facilities has a capacity to manufacture 2 billion tablets, 300 million capsules on two-shift basis per annum.

With about 2300 employees, including over 300 R&D scientists, Matrix focuses on developing APIs with non-fringing processes to associate with generic players in regulated markets.

For the financial year ended 31^st March 2005, Matrix reported a profit after tax (PAT) of Rs.130.27 Crores on sales of Rs.636.76 Crores. Newbridge Capital/TPG Ventures, US and Temasek Holdings, Singapore, are the strategic investors in Matrix with combined holding of about 40%.

B. Background of the Joint venture partner- Aspen Pharmacare Holdings Limited (Aspen)

Aspen is Africa’s largest pharmaceutical manufacturer and a major supplier of branded and generic pharmaceutical products to the southern African and selected international markets. It has a total group turnover of US $ 461 million and net profit of US $ 79 million for the year ended June 2005. Aspen is listed on JSE Limited in South Africa and has a present market capitalization exceeding US $ 2 billion.

Aspen’s Oral Solid Dosage (OSD) facility was the world’s first generics manufacturing facility to receive FDA tentative approval for the supply of generic triple combination ARV therapy to the PEPFAR programme. Aspen pioneered the formulation and development of generic ARVs under voluntary licences from the innovator companies and subsequently launched different ARV products. In 2003, Aspen was selected as one of only three ARV manufacturers worldwide recognized by the Clinton Foundation initiative for combating HIV/AIDS.

Aspen’s strong business foundation in South Africa provides the launching pad for its global expansion. The Aspen group has made strategic investments in the United Kingdom and Australia in line with its plan to harness synergies internationally.

C. Employee Stock Option Scheme 2004 (ESOP 2004)

The Members of Matrix Laboratories Limited (Matrix) at their 19^th Annual General Meeting (AGM) held on 16^th December, 2004 have approved Employee Stock Option Scheme 2004 (ESOP 2004). A copy of the extract of the resolution along with explanatory statement is enclosed for your information – Annexure -1.

Subsequent to the approval of the ESOP 2004, Compensation Committee at its meetings held on 5^th February 2005 and 28^th July 2005 have granted stock options to employees of the Company situated at Corporate Office and factory locations. Matrix has various manufacturing locations all over India. Among them the manufacturing Unit 2 is situated at Sy.No.10 & 42, Gaddapotharam, Kazipally Industrial area, Medak District, Andhra Pradesh and the employees of this unit were also granted stock options.

As per the Scheme, the stock options granted vest over a period of four years with 25% each year.

The vesting scheduled dates are as under:

Date of Grant	Vesting Schedule
5^th February 2005	1^st Vesting – February 5, 2006
	2^nd Vesting – February 5, 2007
	3^rd Vesting – February 5, 2008
	4^th Vesting – February 5, 2009
28^th July 2005	1^st Vesting – July 28, 2006
	2^nd Vesting – July 28, 2007
	3^rd Vesting – July 28, 2008
	4^th Vesting – July 28, 2009

SUBSEQUENT DEVELOPMENTS – PROPOSAL TO TRANSFER UNIT 2 TO JOINT VENTURE

Matrix has signed definitive agreements on 22^nd September 2005 (post options granted) with Aspen for setting up a Joint Venture Company in India. The salient features of the agreement are as follows:

Matrix has agreed to sell its Unit 2 on as is where basis to the Joint Venture Company to be set up by Matrix and Aspen. Matrix has also obtained the approval of the members under Section 293(1)(a) of the Companies Act, 1956 for selling the said Unit 2 to Joint Venture Company.
A new company was incorporated on 21^st September 2005 by name Astrix Laboratories Limited (Astrix) for Joint Venture purpose and all other closing formalities including selling off the Unit 2 to Joint Venture Company will be completed before December 2, 2005.
Matrix and Aspen will hold equity in the Joint Venture Company (Astrix) equally ie.. 50% each.
As per the accounting standards, Matrix is allowed to consolidate the revenues and profits of joint venture company to the extent of its share of 50%.
After the closure of the transaction, some of the employees of Matrix will stand transferred to Astrix and become the employees of the joint venture company.
Joint Venture Company may also recruit employees independently in future based on its requirement.

PRAYER

Against this background, we would like to know that as on the date of vesting i.e. 5^th February 2006 and 28^th July, 2006 as some of the employees of Matrix will become employees of Joint Venture Company we would like to understand the status of these employees with reference to the ESOP scheme and eligibility.

Whether Matrix continue to grant options as per their eligibility till the end of the scheme though they are not employees of the company.

In the normal course they would have got options vested in the month of February and July 2006, February and July 2007, February and July 2008, February & July 2009 and that the company has to grant them shares upon exercise of options by the above said grantees.

We feel that all of them are eligible to exercise their options already granted at the time of vesting period mentioned in the ESOP scheme approved.

We shall be high obliged if you could kindly clarify whether the stand taken by us on this issue is correct or otherwise. Since the vesting date is fast approaching, we will be highly obliged if you can furnish us your opinion on a priority basis. Should you required any further information or clarification, we shall be pleased to furnish you the same.

We would also like to know whether we can also extend the ESOP scheme of Matrix to the employees of 50% controlled companies of Matrix.

The requisite fee towards the opinion is enclosed in the form of Demand Draft for Rs.25,000/- (Rupees Twenty Five Thousand only) in your favour drawn on HDFC Bank, payable at Mumbai dated :16/11/2005.

Thanking you,

Yours faithfully,

for MATRIX LABORATORIES LIMITED

N.ANJANEYULU

COMPANY SECRETARY

Encl : 1. Members Resolution along with Explanatory Statement

2. Demand Draft for Rs.25,000/- dated: 16/11/2005

Contact Nos. :- Office : 040-55377665/27888000 Ext : 634

Mobile – 09848777543

ANNEXURE I

EXTRACT OF THE RESOLUTION PASSED AT THE NINETEENTH ANNUAL GENERAL MEETING OF MATRIX LABORATORIES LIMITED HELD ON THURSDAY THE 16^TH DAY OF DECEMBER 2004 AT 10.30 A.M. AT HOTEL VICEROY, CONVENTION HALL, TANKBUND ROAD, HYDERABAD

Employee Stock Option Scheme 2004 (ESOP 2004)

“RESOLVED that pursuant to the provisions of Section 81(1A) and all other applicable provisions, if any, of the Companies Act, 1956, the Memorandum and Articles of Association of the Company and subject to such other approvals, permissions and sanctions as may be necessary and subject to such conditions and modifications as may be prescribed or imposed while granting such approvals, permissions and sanctions, the consent of the Company be and is hereby accorded to the Board of Directors of the Company (hereinafter referred to as “the Board” which term shall be deemed to include any Committee, including the ESOP Compensation Committee which the Board may constitute to exercise its powers, including the powers, conferred by this resolution), to create, offer, issue and allot at any time to or to the benefit of such person(s) who are in permanent employment of the Company, including any Directors of the Company, whether whole time or otherwise, options exercisable into equity shares being not more than 5,000,000 equity shares (Post-Bonus Issue of Equity Shares) of Rs.2/- each of the Company under a scheme titled “Employee Stock Option Plan 2004” (hereinafter referred to as the “ESOP 2004”), in one or more tranches, and on such terms and conditions as may be fixed or determined by the Compensation Committee in accordance with the provisions of the law and guidelines issued by the relevant Authority, each option granted being exercisable for one Equity share of the Company.”

“RESOLVED FURTHER that the Compensation Committee be and is hereby authorized to issue and allot Equity shares upon exercise of such options from time to time in accordance with the ESOP 2004 and such Equity shares shall rank pari-passu in all respects with the then existing Equity shares of the Company.”

“RESOLVED FURTHER that in case the equity shares of the company are either sub-divided or consolidated, then the number of shares to be allotted and the price of acquisition of the shares by the aforesaid allottees under the ESOP 2004 shall automatically stand augmented or reduced, as the case may be, in the same proportion as the present face value of Rs.2/- per equity share bears to the revised face value of the equity shares of the Company after such sub-division or consolidation, without affecting any other rights or obligations of the said allottees.”

“RESOLVED FURTHER that the Compensation Committee be and is hereby authorized to make modifications, changes, variations, alterations or revisions in the said ESOP 2004 as it may deem fit, from time to time in its sole and absolute discretion in conformity with the provisions of the Companies Act, 1956, the Memorandum and Articles of Association of the Company and any other Regulations in force for the time being.”

Employee Stock Option Scheme 2004 (ESOP 2004) – Explanatory Statement u/s 173(2)

Human Resource is the key resource for the continuing growth and development of the Company. To motivate the employees and enable them to participate in the long-term growth and financial success of the organization, with a common objective of maximizing the shareholder value, it is proposed to introduce an Employee Stock Option Plan (ESOP). ESOP would not only enable the Company to attract and motivate employees by rewarding performance as also to retain best talents but also enable the employees to develop a sense of ownership with the organization.

The Compensation Committee will administer the ESOP 2004 and formulate the detailed terms and conditions.

The Compensation Committee will, specify, inter alia, the following:

Quantum of options to be granted to an employee
Conditions under which options vested in employees may lapse
Time period within which an employee may exercise vested options in the event of termination and resignation.
Rights of an employee to exercise all vested options at one time or at various points of time within the exercise period.
Procedure for making fair and reasonable adjustment to the number of options and to the exercise period, in case of rights issues, bonus issues, other corporate actions, or otherwise.
Lock in period for the shares issued pursuant to exercise of options.
Any other related or incidental matter.

The salient features of the ESOP 2004 are presented below:-

1. Total Number of options to be granted.

Options exercisable into not more than 5,000,000 Equity shares (Post-Bonus Issue of Equity Shares) of Rs.2/- each of the Company will be available for being granted to eligible employees and directors of the Company.

2. Identification of classes of employees entitled to participate in the ESOP

All permanent employees and directors of the Company (excluding promoters) as may be decided by the Compensation Committee, from time to time, would be entitled to options under the ESOP 2004.

However, the employees would be granted Stock options based on performance and such other criteria as the Compensation Committee may, in its absolute discretion decide.

The options granted to an employee will not be transferable to any person and shall not be pledged, hypothecated, mortgaged or otherwise alienated in any manner.

3. Requirements of vesting and period of vesting

The options granted shall vest so long as the employee continues to be in the employment of the Company. Vesting of the options shall take place over a maximum period of 4 years with a minimum vesting period of 1 year from the date of grant.

The Compensation Committee may, in its discretion, lay down certain performance metrics on the achievement of which the granted options would vest, the detailed terms and conditions relating to such performance-based vesting, and the proportion in which options granted under ESOP 2004 would vest (subject to the minimum and maximum vesting period as specified above).

4. Exercise Price:

Options would be granted at a discount of 20% to the six months’ average closing market price of the equity shares on the National Stock Exchange prior to the date of grant.

5. Exercise Period and the process of Exercise:

The Exercise period would commence from the date of vesting and will expire on completion of five years from the date of vesting of options.

The options will be exercisable by the Employees by a written application to the Company to exercise the options in such manner, and on execution of such documents, as may be prescribed by the ESOP Compensation Committee from time to time.

The options will lapse if not exercised within the specified exercise period.

6. Appraisal Process for determining the eligibility of the employees to ESOP.

The appraisal process for determining the eligibility of the employee will be specified by the Compensation Committee, and will be based on criteria such as seniority of employee, length of service, performance record, merit of the employee, future potential contribution by the employee and / or such other criteria that may be determined by the Compensation Committee at its sole discretion.

The Compensation Committee would also determine the weight/ relative importance to be attached to each criteria for determining the eligibility of the employees.

7. Maximum number of options to be issued per employee and in aggregate

The number of options that may be granted to employees under the Scheme shall be determined by the Compensation Committee from time to time.

8. Disclosure and Accounting Policies:

The Company shall comply with the disclosure and accounting policies prescribed by concerned Authorities.

9. Method of option valuation

To calculate the stock based compensation, the Company shall use the Intrinsic Value method for valuation of the options granted. The difference between the employee compensation cost that shall have been recognized if it had used the fair value of the options and the impact of this difference on profits and on EPS of the Company shall be disclosed in the Directors’ Report.

As the ESOP 2004 provides for issue of shares to be offered to persons other than existing shareholders of the company, consent of the members is sought pursuant to Section 81(1A) and all other applicable provisions, if any, of the Companies Act, 1956 and as per clause 6 of the SEBI Guidelines.

None of the Directors of the Company, are in any way, concerned or interested in the resolution, except to the extent of the securities that may be offered to them under the scheme.

From: Anjaneyulu.Nidjelli@matrixlabsindia.com [mailto:Anjaneyulu.Nidjelli@matrixlabsindia.com]
Sent: Wednesday, February 01, 2006 2:20 PM
To: Srishtic
Subject: Re: Informal Guidance request by Matrix Laboratories Ltd.

Madam,

We request an interpretive letter for letter dated December 5, 2005.

Kindly do the needful.

With kind regards

Anjaneyulu.

SEBI’S INTERPRETIVE LETTER UNDER SEBI (INFORMAL GUIDANCE) SCHEME, 2003

CFD/DIL/SC/76645/2006

Neelam Bhardwaj

Deputy General Manager

Corporation Finance Department

Division of Issues and Listing

(: +91 22 2216 4723 (D), 2216 4428/29 (Extn.: 104)

Fax: +91-22 2216 4482 Email: neelamb@sebi.gov.in

September 13, 2006

Shri N. Anjaneyulu

Company Secretary

Matrix Laboratories Ltd.

1-1-151/1, IV Floor,

Siram Towers,

Alexander Road,

Secunderabad – 500 003.

Dear Sir,

Sub.: Request for Informal Guidance under Securities and Exchange Board of India (Informal Guidance) Scheme, 2003.

Ref.: Your letters dated December 5, 2005 and February 1, 2006.

1.0 Please refer to your letters cited above seeking interpretive letter under the SEBI (Informal Guidance) Scheme, 2003.

2.0 It is, inter-alia, informed by you, vide your letters under reference that -

i) Matrix Laboratories Ltd. (the company) is a public limited company listed on the Bombay Stock Exchange Ltd. and National Stock Exchange of India Ltd.

ii) The members of the company at its Annual General Meeting held on December 16, 2004 have approved the Employee Stock Option Scheme, 2004 (ESOP 2004). Subsequent to the said approval, the Compensation Committee, at its meetings held on February 5, 2005 and July 28, 2005, has granted stock options to the employees of the company situated at corporate office and factory locations.

iii) In the resolution passed at the aforesaid Annual General Meeting held on December 16, 2004, wherein shareholders approved the ESOP 2004 of the company, it is stated that -

a) The options under ESOP 2004 of the company can be granted only to the permanent employee of the company.

b) The options granted shall vest so long as the employee continues to be in the employment of the company.

iv) The company has signed agreements on September 22, 2005 with Aspen Pharma Care Holdings Ltd. (Aspen) for setting up a joint venture company in India. As per the said agreement, the company and Aspen will hold equity in the joint venture company. A new company by the name of Astrix Laboratories Ltd. (Astrix) was incorporated on September 21, 2005 for the purpose of selling unit 2 of the company to the joint venture company. Some of the employees of the company will stand transferred to Astrix and become the employees of the joint venture company.

3.0 In view of the above you have sought informal guidance on the following issues -

i) Whether the company can continue to grant options to employees, who have been transferred to its JV Company, namely, Astrix Laboratories Ltd., pursuant to the sale of manufacturing unit no. 2, as per their eligibility till the end of ESOP 2004 even though they are not the employees of the company (Matrix).

ii) Whether the employees who do not continue to be employees of the company can exercise their options already granted at the vesting period.

iii) Whether the company can extend its scheme to the employees of 50% controlled companies of the company.

4.0 Without necessarily agreeing with your analysis, our views in relation to the issues raised in your letters under reference are as follows -

i) Our views on the issues at 3.0 (i) above -

a) The SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 (Guidelines) govern the provisions relating to employee stock options. In terms of clause 2A of the Guidelines, employee stock option means an option granted by a company, inter-alia, to employees, which gives such employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price. Further, in terms of clause 2.1.1 of the Guidelines, an employee means, inter alia, a permanent employee of the company, including an employee of its subsidiary / holding company. However, the company, while granting such stock option, has to comply with the provisions of the Guidelines such as, appointment of Compensation Committee, formulation of terms and conditions of such option, etc.

b) Therefore, in terms of the Guidelines, a company may grant an option, inter alia, to its employee, including an employee of its subsidiary/ holding company. The option granted can be exercised by such employee by making an application to the company for the issue of shares against the option vested by him, as per the terms and conditions of the scheme.

c) However, in the case under reference, as noted from ESOP 2004 approved by the shareholders of the company, option under ESOP 2004 can be granted only to the permanent employee of the company and the options granted shall vest so long as the employee continues to be in the employment of the company. Therefore, no option can be granted under ESOP 2004 of the company to employees who are not in employment of the company.

ii) Our views on the issues at 3.0 (ii) above:

a) If the option granted to the permanent employee of the company has vested in terms of the ESOP 2004, such employee may exercise his option within the exercise period in terms of the ESOP 2004.

iii) Our views on the issues at 3.0 (iii) above:

a) In terms of the Guidelines, options under ESOS can be granted by a listed company to its employee, director or an employee or director of its subsidiary or holding company. In terms of Clause 6 of the Guidelines, a company cannot offer ESOS to employees unless shareholders of such company approve ESOS by passing a special resolution in the General Meeting. The Guidelines further provide that the approval of shareholders by way of a separate resolution in the General Meeting shall be obtained by the company in case of grant of option to employees of subsidiary or holding company.

b) In terms of Clause 7 of the Guidelines, the company may, by a special resolution in General Meeting, vary the terms of ESOS offered pursuant to an earlier resolution but not yet exercised by the employees, provided that such variation is not prejudicial to the interest of the option holders.

c) In the case under reference, shareholders of the company had approved grant of options under ESOP 2004 of the company to its permanent employees. Therefore, the option under ESOP 2004 can be granted only to permanent employees of the company.

d) If the joint venture is a subsidiary of the company (Matrix), the company can grant ESOS option to the employees of such subsidiary, provided that a separate special resolution is passed by its shareholders in a meeting to change the terms of the ESOP 2004 in terms of clause 6, read with Clause 7 of the Guidelines.

5.0 This position is based on the representation made to the Division in your aforesaid letter. Different facts or conditions might require a different result.

6.0 This letter does not express decision of the Board on the questions referred. You may note that the above views are expressed only with respect to the clarification sought on SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 and do not affect the applicability of any other law or requirement.

Yours faithfully,

Neelam Bhardwaj