This article is written by Asmita Topdar. In this article, Asmita discusses Legal and regulatory framework governing QIBs in India.

Introduction

The existence of cut-throat competition to sustain oneself in the burgeoning competitive market is extremely high. Every day a novice organisation enters the market with huge expectations to grow and become one of the well knowns in the market. To achieve this, adequate funds are required at every stage of business right from planning to achieve the final goal of profit. Requirement of funds burgeons at various stages of the whole journey specially during expansion or diversification of the business. Inevitably finance plays a crucial role in the very existence of a company. The initial investment by the proprietor/s is not always sufficient for the long running of a business and hence every company irrespective of its size has to look out for available sources of finance before it. The founders or the promoters have to critically assess their financial needs and choose the best suitable source from which they can fund their needs.

There are various ways of raising fund like :

• Trade credit
• Issuing equity and preferential shares
• Issuing debentures
• Mutual funds
• Initial public offering (IPO)

Initial Public Offering (IPO)

An initial public offering, or IPO, is the very first sale of its shares issued by a company to the public.[1] For the purpose of raising funds from the market, a private company can go public by sale of its shares to general public using this very process of Initial public offering. This private company could be either a new entity or an already established company which decides to raise funds from market and wants to be listed on a stock exchange and hence goes public.[2]

Before a company goes for an IPO, it is considered to be a private company having relatively handful of investors comprised of early investors like family, friends, new founders etc along with professionals like angel investors and venture capitalists (VCs). A company goes public when the company starts issuing its shares to individuals other than the early investors and institutional investors. Institutional investor is an organisation formed by group of investors who pool in funds to invest and purchase securities, property, and asset in a company. An ‘issuer’ is a company which offers its shares for raising finance.

Types of Investors

Under IPO category, company issues the total number of shares divided into 3 major parts for 3 different categories of investors. Investors can apply for shares under any of these categories:

• Retail Individual Investor (RII)

1. Has limit of less than Rs. 2 Lakh for applying for shares in a company.
2. Allocation of 35% share from the total shares issued.
3. Only eligible people to bid under this category are Indian residents, NRIs and Hindu Undivided Families (HUFs).

• Non-Institutional Investors

1. Can apply for shares of more than Rs. 2 Lakh.
2. Investors under this category are entitled to 15% of the total shares issued also known as High Net worth Individual (HNI) quota.
3. Hindu Undivided Families (HUF), resident Indian Individuals, Societies and trusts companies, NRIs, are eligible to bid.

• Qualified Institutional Buyers (QIBs)

1. 50% shares reserved for investors under this category.
2. 5 % from this 50% may be reserved for mutual funds.
3. Financial institutions such as banks, insurance companies, mutual funds, Foreign Institutional Investors (FIIs) etc are permitted to bid for shares.

Qualified Institutional Buyer

Certain guidelines have been formulated by SEBI (Securities and Exchange Board of India) in order to regulate the investors and those investors who qualify and are regulated by these SEBI guidelines are known as Qualified institutional Buyers (QIBs). They are those institutional investors who are generally considered to have sound expertise and required financial might to evaluate and invest in the capital markets.^[3]

QIB has been defined by SEBI under section 2(zd) in SEBI (ICDR) Regulations, 2009 as

• a scheduled commercial bank
• an insurance company registered with the Insurance Regulatory and Development Authority (IRDA)
• a state industrial development corporation
• a foreign institutional investor and sub-account registered with the Board (other than a sub-account which is a foreign corporate or foreign individual);
• a provident fund with minimum corpus of 25 crore rupees
• a foreign venture capital, venture capital fund and mutual fund investor registered with the Board
• a public financial institution as defined in section 4A of the Companies Act, 1956
• a bilateral and multilateral development financial institution
• National Investment Fund set up by resolution no. F. No. 2/3/2005-DDIIa pension fund with minimum corpus of twenty five crore rupees dated November 23, 2005 of the Government of India published in the Gazette of India
• a provident fund with minimum corpus of twenty five crore rupees
• insurance funds set up and managed by army, navy or air force of the Union of India [4]

Legal and regulatory framework governing QIBs

In order to ensure transparency in the process of investment for the public, SEBI has formulated and introduced some changes in the legal framework of investment procedure. While the allocation pattern for both retail investors and QIBs has remained unchanged, SEBI has brought changes in order to safeguard the interest of the big investors from misuse of discretionary power of shares allocation conferred on the merchant bankers.

1. The Issuer should have minimum average ‘operating profit before tax’ of Rs. 15 crore , arrived at on the premise of consolidation and restatement during the period of 3 most profitable years out of the immediately 5 previous years as against having profit in at least 3 out of 5 years. [Regulation 26(1)(b)]
2. Where Issuers do not have track record or fail to adhere the eligibility criteria, the limit of mandatory allotment to QIBs has been increased from 50% to 75% in order to minimize the risks of naive investors. If the condition stipulated in regulation 26(1) cannot be satisfied, the Issuer may go public if the issue is made through the book-building process and at least 75% of the net offer is allotted to public, to Qualified Institutional Buyers (QIBs) and full subscription money is refunded in case of failure to make the said minimum allotment to QIBs. [Regulation 26(2)] Moreover, for the purpose of compliance of the eligibility condition specified in sub-regulation (2) of regulation 26 and regulation 27, it has also been specified that the 75% portion as a whole of net offer to public proposed to be compulsorily allotted to Qualified Institutional Buyers cannot be underwritten [amendment in proviso to Regulation 13(2)][5]
3. The Issuer has to declare the price band or floor price at least 5 working days before the opening of the bid in case of making an IPO. [Regulation 30(2)]
4. The Issuer has to announce the price band or floor price of the issue on the websites of those stock exchanges where the securities are proposed to be listed and application forms duly filled with these prices have to be made available on the websites of the concerned stock exchanges. [Regulation 30(3A)]
5. However if the post issue shareholding of the promoters is less than 20%, then alternative investment funds may contribute to meet such shortfall, subject to a maximum of 10% of the post issue capital. [Regulation 32(1)(a)] Such contribution shall be locked in for a period of 3 years as specified in Regulation 36(a).
6. In case of IPO, minimum of 20% of the post issue capital have to be contributed by the promoters of the Issuer.
7. The allocation in the net offer to public category shall be as follows: [6]

8. Existing range of Rs. 5000 – Rs. 7000 has been enhanced to Rs. 10,000 – Rs 15000 towards minimum application size. [Regulation 49(1)][7]

Conclusion

Thus, the changes introduced by SEBI have injected transparency in the system. Business community will certainly welcome more reforms to safeguard the interests of the institutional investors. Further initiatives may be taken for bringing greater transparency in the process.

[1] Hayes, C. A. (2017, March 24). IPO Basics: What Is An IPO? Retrieved from https://www.investopedia.com/university/ipo/ipo.asp

[2] Definition of Ipo | What is Ipo? Ipo Meaning. (n.d.). Retrieved from https://economictimes.indiatimes.com/definition/ipo

[3] Pandey, A. (2017, June 30). What is a Qualified Institutional Buyer and how are Qualified Institutional Buyers regulated? Retrieved from https://blog.ipleaders.in/qualified-institutional-buyer/

[4] (n.d.). Retrieved from https://www.sebi.gov.in/acts/icdrreg09.pdf

[5] Get In Touch. (n.d.). Retrieved from http://corporateprofessionals.com/amendment-in-sebi-icdr-regulations-2009

[6] Get In Touch. (n.d.). Retrieved from http://corporateprofessionals.com/amendment-in-sebi-icdr-regulations-2009

[7] Get In Touch. (n.d.). Retrieved from http://corporateprofessionals.com/amendment-in-sebi-icdr-regulations-2009