This article has been written by Shubham Khunteta, a student of National Law University Odisha, Cuttack. He writes about “Qualified Institutional Buyers (QIBs), an often visible term in Company Law. He explains in detail about such investors or buyers.

Introduction

Investment in the company, either domestic or foreign, can be made by many types of investors who are governed by specified sets of regulations. If the investor is not capable, either by his/her individual financial limit or not permitted, to invest individually till he invests a specified statutorily fixed amount, then he usually participates indirectly through certain institutions, through which he can invest limited sums according to the viability of both, himself and institution.

The institution is usually a collective group of people in which a large number of investors repose faith and the institution collects a whopping investible sum from various investors to invest in the market.

When investing through the institution, investors usually have limited control on their investments in comparison to the individual investment as they hand over the amount for investment to the institution and they, in turn, keep experts to have a vigil on the market. Accordingly, experts recommend the investments to be made and thus the institution in the spree invest in that market.

There are various types of institutions defined in the rules and regulations, but to qualify as a ‘Qualified Institutional Buyer’ (QIB), certain regulations formulated by the SEBI needs to be kept in mind.

As the name itself suggests, it is in the form of an institution and under the institutionalised mechanism, they invest in the company. There are three categories by which we state the representation of holding of specified securities —

1. Promoters or promoter groups;
2. Public shareholding; and Non-promoter non-public shareholding.

Public shareholding can be divided further into — 1) Qualified Institutional Buyers; 2) Central Government/State Government(s)/President of India or Non-institutions.

Definition of Qualified Institutional Buyers

According to Regulation 2(zd)^[1], Qualified Institutional Investors comprises of —

1. A mutual fund, venture capital fund and foreign venture capital investor registered with the Board;
2. A foreign institutional investor and sub-account (other than a sub-account which is a foreign corporate or foreign individual), registered with the Board;
3. A public financial institution as defined in Section 4A of the Companies Act, 1956;
4. A scheduled commercial bank;
5. A multilateral and bilateral development financial institution;
6. A state industrial development corporation;
7. An insurance company registered with the Insurance Regulatory and Development Authority;
8. A provident fund with minimum corpus of twenty-five crore rupees;
9. A pension fund with minimum corpus of twenty-five crore rupees;
10. National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated November 23, 2005, of the Government of India published in the Gazette of India;
11. Insurance funds set up and managed by army, navy or air force of the Union of India;]
12. Insurance funds set up and managed by the Department of Posts, India.]

It is to be kept in mind that the institutions as written in a) to l) only come under the category of QIBs.

Investment Guidelines on Qualified Institutional Buyers

Private Placement to Qualified Institutional Buyers

It is also called as qualified institutional placement or preferential allotment to the qualified institutional buyers. It can only be made by QIBs in listed companies^[2] in accordance with SEBI (Disclosure and Investment Protection Guidelines), 2000. It should be kept in mind that guidelines  shall apply to any issue of equity shares / fully convertible debentures (FCDs) / partly convertible debentures (PCDs)(/ nonconvertible debentures (NCDs) with warrants or any securities (other than warrants)), which are convertible into or exchangeable for equity shares at a later date.

Merchant Bankers^[3] – who will assist the company formulate a placement document and file a due diligence certificate with the stock exchanges for listing of new shares^[4]

The Chapter contains provisions relating to pricing, disclosures, currency of instruments, etc. Under the guidelines, out of the quota fixed for investment by QIBs, a minimum of 10% quota of specified securities shall be allotted to mutual funds and in case, mutual funds are not willing to purchase such minimum amount, this remaining portion may be distributed among other QIBs. It shall be kept in mind that no institution related to a promoter is to be allowed to participate in the investment, but QIBs like lenders who do not hold any share in the Issuer and who obtain the rights in the capacity of lender are not deemed to be a person related to the promoter.

In a book built issue, a process of price discovery, allocation to Qualified Institutional Buyers (QIBs) permitted is 50%. In case the book built issues are made under the requirement of mandatory allocation of 60% to QIBs^[5] . Allotment of the specified securities shall be completed within 12 months from the date of passage of shareholders’ resolution under Section 81(1A) of the Companies Act, 1956. There is no necessity of filing any offer document or notice to be given to SEBI in the case of preferential allotment and QIP. The companies can also offer a discount of up to 5% on the price in qualified institutions placement, subject to the shareholders’ approval^[6] .

The Minimum number of allottees shall not be less than 2 when the issue size is less or equal to 250 crores and for above 250 crores, the minimum number of allottees shall not be less than 5. However, it shall be kept in mind that no single allottee shall be allotted more than 50% of the size. Now, SEBI has removed the cap on the number of QIBs who can participate in large IPOs.

Earlier in an IPO sized under 250 crores, the maximum qualified institutional buyer limit was 15 and for above 250 crores, the limit was 25 QIBs. Now, the SEBI has affirmed that the condition for the number of QIBs for allocation of up to Rs 250 crores will remain the same but for issues above that size, there could be 10 additional investors for every additional allocation of Rs 250 crores, subject to minimum allotment of Rs 5 crore per anchor investor. This means that if the issue size is around Rs 1,000 crore, there can be as many as 45 qualified institutional investors^[7] .

Participation of QIBs in Initial Public Offer

If the issuer of the specified security fails to fulfill the requirements of Regulation 26(1) regarding profitability before issuance of Initial Public Offer, then such issuer can issue IPO by book building process by fulfilling the condition in Regulation 26(2), i.e., the issuer undertakes to allot, at least seventy-five percent of the net offer to public, to qualified institutional buyers and to refund full subscription money if it fails to make the said minimum allotment to qualified institutional buyers^[8] .

QIB’s Evolving Role in the Newly Formed Startups and Small & Medium Enterprises and the Relevance of Institutional Trading Platform

QIBs play an important role in quenching the capital needs of newly formed companies which initially struggle to raise highly needed capital to carry out business flexibly and to prevent shut down due to lack of availability of capital raising mechanisms.

Qualified Institutional Buyers can invest in an entity which is intensive in the use of technology, information technology, intellectual property, data analytics, Bio-technology or Nano-technology to provide products, services or business platforms with substantial value addition. If the capital invested by the QIBs in these companies is equal to or more than 25% of pre-issue capital, then these companies become eligible to register through Institutional trading platform and get listed as a public company, thereby making these companies qualified to issue IPO if certain requirements are met with like other public listed companies^[9] .[ See SEBI notification dated 14 Aug 2015 making amendment to SEBI (Issue of Capital and Disclosure Requirement) (Fourth Amendment) Regulations, 2015

Any other entity, other than extensive background on above can also get their company listed through the platform if the pre-issue capital held by QIBs is at least 50 percent ^[10] .

Conclusion

In conclusion, it can thus be said that ‘Qualified Institutional Buyers’ are a part of public shareholders and play a critical role in investment in a country. They can even invest a day before an IPO so as to make shares’ value attractive and increase the company reputation. Companies often invite them to invest before an IPO so as to stir the interest of other shareholders like retail institutional investors or other non-institutional investors.

There are rules and regulations governing QIBs investments in the company so as to maintain in the market the diversity of representations. It would otherwise lead to monopolisation and reduce the income of the individual investors who rely highly on investments. It is analogous to the principle that there should be equality in participation in the market, and no one should be prejudiced if the person is legitimate and competent to participate in the eyes of the law. Therefore, careful and meticulous reading of requisite provisions should be done before giving a green signal to the investment and to prevent it from getting mired in the cycle of compliance.

Footnotes:

[1] Regulation 2(zd), Securities And Exchange Board Of India (Issue Of Capital And Disclosure Requirements) Regulations, 2009

[2] See, Ch. XIIIA of Securities and Exchange Board Of India (Disclosure And Investor Protection) Guidelines, 2000

[3] Sec 2(cb) of Securities and Exchange Board Of India (Merchant Bankers) Regulations, 1992

[4] <http://www.blog.sanasecurities.com/what-is-qualified-institutional-placement/> accessed on 30/05/2016

[5] See, Rule 19(2)(b) of Security Contracts (Regulation) Rules, 1957

[6] <http://www.livemint.com/Money/3OKIvns7DJf3I2EcBpd71K/Sebi-notifies-IPO-reforms.html> accessed on 31/05/2016

[7] <http://www.vccircle.com/news/finance/2015/08/25/sebi-relaxes-ipo-anchor-investment-norms> accessed on 30/05/2016

[8]. See IPO process <http://www.bseindia.com/Static/markets/PublicIssues/aboutIPO.aspx?expandable=6>

[9].<https://www.nseindia.com/emerge/sme_circ_reg_140815.pdf> accessed on 31/05/2016

[10]nt. Ibid at 8