In this article, Shishira Prakash who is currently pursuing Diploma in Entrepreneurship Administration and Business Law from NUJS, Kolkata, discusses what is a qualified institutional buyer and how are qualified institutional buyers regulated?
Qualified Institutional Buyers (QIB)
Investment in today’ world is made in several different methods. People invest in real estate, gold bonds, debentures, providential funds, fixed deposits, investing in companies through shares and stock and much more. Investing in an Indian company or a foreign company is one of the most common ways used. These investments are made by many kinds of investors in India who are governed by specified sets of rules and regulations in the form of statues like Companies Act, 2013, Company Act rules, and the Securities and Exchange Board of India rules. Due to some difficulties, individuals tend to invest indirectly through investment institutions instead of investing by themselves.
These investing institutions are mainly a collective group of people in who come together and collect the investible amount from various investors and invest them in the investment market.
Even though individuals have limited control when they use these indirect methods to invest, they have an expert handling and recommending the investment which should be made in order to get high returns. These institutional purchasers of securities are deemed financially sophisticated and are legally recognised by exchange boards to need less protection from the issuing companies than most public investors who invest directly.
Definition of Qualified Institutional Buyer
These groups of investors who follow certain regulations and rules formulated by the SEBI are collectively qualified to be known as “Qualified Institutional Buyer” (QIB). SEBI has defined a Qualified Institutional Buyer as follows:
Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets. In terms of clause 2.2.2B (v) of DIP Guidelines, a ‘Qualified Institutional Buyer’ shall mean:
- Scheduled commercial banks;
- Mutual funds;
- Foreign institutional investor registered with SEBI;
- Multilateral and bilateral development financial institutions;
- Venture capital funds registered with SEBI.
- Foreign Venture capital investors registered with SEBI.
- State Industrial Development Corporations.
- Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA).
- Provident Funds with minimum corpus of Rs.25 crores
- Pension Funds with minimum corpus of Rs. 25 crores
- Public financial institution as defined in Companies Act, 2013;
Regulations
The institutions which fall under any of the above mentioned categories are qualified to be a QIB in India.
SEBI through Guidelines for “Qualified Institutions Placement”- Amendments to SEBI (Disclosure and Investor Protection) Guidelines, 2000 introduced additional mode for listed companies to raise funds from domestic markets in the form of Qualifies Institutions Placement.
The listed companies which are eligible to raise funds in domestic market by placing securities with QIBs are those whose equity shares are listed on a stock exchange nationwide and which are complying with the prescribed regulations of minimum public shareholding of the listed agreements. These guidelines are applicable to any kind of securities in the form of equity shares or any other form of securities other than warrants, which can be converted into or exchanged with equity shares at a later date at any time after allotment of security (but, within six months from the date of allotment). These kinds of shares are referred to as “specified securities” and are fully paid up when they are allotted.
The guidelines are also very specific regarding who can be the investors or allottees to these specified securities. It specifically mentions that they can be issued only to QIBs and such QIBs cannot be promoters or related to promoters of the issuer directly or indirectly. Each and every placement is done to the qualified institutional buyers will be on private placement basis.
The SEBI has also prescribed that the aggregate amount raised through QIBs by an issuers in a financial year cannot exceed five times of the net worth of the issuer at the end of its previous financial year. Regulating the pricing of the specified securities, the guidelines provide that the floor price of these securities shall be determined in a similar manner of that of the GDR/ FCCB issues and shall be subject to adjustment in cases of corporate actions such as bonus issue or the pre-emptive right given to the already existing shareholders of the issuer.
In every placement it is a mandate to allot 10% of the securities to Mutual Funds. It is also mandatory in each and every placement to have at least two allottees for an issue of size up to Rupees two fifty crores and at least five when it exceeds the above specified amount. Further, the issuer is also not allowed to allot more that 50 % of the issue size to a single allottee. Another important provision in favour of the issuer and against the investors is that the investors cannot and are not allowed to withdraw their bids or applications after closure of the issue.
All the Qualified Institutional Placements are taken care of and managed by the merchant brokers who are registered with SEBI. They shall exercise due diligence and furnish and submit a due diligence certificate to Stock Exchange Board informing them that the issue is with compliance with all the provisions and requirements given and mentioned by the SEBI.
Between each placement in case of multiple placements of these kinds of specified securities, there shall be a minimum gap of six months between them. In order to obtain in-principle approval and final permission from the Stock Exchange for the listing of these specified securities the Issuers and Merchant Broker shall submit reports, documents and undertakings, if any as prescribed in this regard in the listing agreement. But, on the other hand it is not mandatory to file any offer document or notice to the Exchange board in case of preferential allotment and QIP. The issuing companies are further allowed to offer a discount of up to 5% on the prices of the QIPs, but this discount can be offered only subject to the shareholders’ approval.
Conclusion
The Securities and Exchange Board of India introduced the concept of Qualified Institutional Buyer at the time when Indian corporates were looking for chances to enter into foreign investments overseas to expand their operations, mainly due to two reasons; one, easy availability of funds in those jurisdictions and two, less stringent regulatory environment compared to India.
This concept has become a common route for raising capital due to a twofold reasoning. Firstly, it is advantageous for the issuing company as one, the amount of time taken to complete a QIP is much more less than through public shareholder as there is no long wait for document approvals by SEBI and the whole process can be completed in a span of 4 to 5 days and two, it is cost effective as there is no need to employ a large team of bankers, solicitors, advocates and auditors to obtain approvals. Secondly, the Qualified Institutional Buyers have the ability and opportunity to buy large stakes in company with the advantage of being able to exit and sell their stocks at any point of time post its listing on the exchange unlike waiting for a minimum period of one years when it is investing in an IPO.
Although due to the above mentioned reasons, companies prefer QIP, there are a few negative sides to it too. As QIPs give the Institutional Buyers an opportunity to hold a large stake in the company, it dilutes the existing stakes of the shareholders. Due to this, the companies with a huge amount of promoter holding prefer this method over the companies in which there are significant number of promoters with low stakes, as a further dilution of stakes could mean risking the management control of the company.
So it’s a kind of bootstrap where, while coming over from a particularly problematic situation company enters another possible problematic condition.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:
https://t.me/joinchat/J_
