The government is set to impose a lock-in period of one year or three years for offloading securities issued through the preferential allotment route.
Also, promoters and their relatives will not be eligible for preferential allotment of shares. Similar guidelines are also being put in place for sweat equity.
The department of company affairs is going to issue a notification to this effect soon. Following amendments to the Companies Act, 1956, with effect from December 2000, corporates can issue sweat equity if authorised by a special resolution in a general meeting.
For listed companies, the Act prescribes that the shares be issued in accordance with the regulations of the Securities and Exchanges Board of India. Through the Rules, the department will lay down the policy guidelines.
Government officials told Business Standard that the department had also proposed a set of disclosure norms for preferential allotment.
Officials said the decisions were based on the recommendations of the J R Verma committee appointed to look into preferential allotment, sweat equity and employees' stock options given by private limited companies.
Esop rules would, however, be issued only after the passage of the Companies (Amendment) Bill, 2003, they added.
The move to implement lock-in norms is aimed at curbing market price manipulation by preferential shareholders.
Stock market analysts say investors have lost close to Rs 5,000 crore (Rs 50 billion) in the past due to manipulation by promoters who used the preferential allotment route to their advantage.
"There is a possibility that some shareholders are allotted preference shares at prices much higher than the prevailing market price, which may trigger a rise in share prices. The preference shareholder may then sell his ordinary shares at a higher price," said an official.
Preferential allotment was one of the most common routes employed by promoters to hike their stake in a company when share prices dropped, officials pointed out.
Also, several companies have issued preference shares to their foreign partners to transfer ownership to them in the future.
Officials said the move would prevent promoter-shareholders from benefiting from a rise in share prices following the allotment of preferential shares.
The department of company affairs has also proposed that preferential allotment norms be brought under the purview of the Companies Act, 1956, so that it can prosecute violators. A proposal to put in a four-year lock-in period was proposed earlier by the department.
