In this article, Parth Jain who is currently pursuing Diploma in Entrepreneurship Administration and Business Law from NUJS, Kolkata, discusses What is a qualified placement investment?

Introduction

Timely and adequate access to capital is imperative for the growth of any business. The stock markets serve as an important nexus between investors with surplus funds and companies requiring capital. It has always been an aspiration for entrepreneurs, promoters and venture capital backed companies is to access the capital markets through an Initial Public Offer (“IPO”).

Apart from the distinct advantage of being able to tap large pools of capital from retail and institutional investors at the desired valuation, an IPO provides greater recognition to a company, unlocks greater value for its shareholders and employees holding stock options by providing much needed liquidity and require such company to adopt stringent corporate governance practices due to enhanced regulatory intervention.

Alternatives available to listed companies for raising capital

A publicly listed company may need to tap the capital markets more than once in order to meet its business objectives, after its initial capital raised through an IPO is dried up. The Companies Act, 2013 along with the rules framed there under (“Act”) and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (“ICDR”) are the principal laws governing issue of capital by Indian companies. Under the Act and ICDR, the following options are available to a listed company for raising subsequent capital:

1. Issuance of securities to its existing shareholders by way of Rights Issue.
2. Making a Follow on Public Offer (“FPO”) (think of it as IPO 2.0).
3. Preferential Issue of securities to a select group of investors, including its promoters.
4. Making a Qualified Institutional Placement (“QIP”) to a select group of investors known as Qualified Institutional Buyers (“QIB”).

While an FPO or a Rights Issue may seem lucrative, the process for either of the alternatives is almost as time and effort consuming as it is in case of an IPO, requiring months of planning, stringent compliances, enhanced disclosures and incurrence of significant costs. Such stringent requirements primarily exist to prevent any wrongdoings by companies and promoters since public money is getting tapped. Thus, a Rights Issue or an FPO may not be a viable option for a company which is in immediate need of long term capital. In such a case a Preferential Issue to a select group of individual or institutional investors or a QIP to a QIB is the most viable option. Both the aforesaid options are cost and time effective and have proved to be a significant tool for companies wanting to attract private capital.

A Preferential Issue is an issue of specified securities by a listed company issuer to any select person or group of persons on a private placement basis, in terms of Chapter VII of the ICDR. In a Preferential Issue, securities are allotted only to a pre-defined set of investors or existing promoters of a company, subject to the applicable requirements as regards pricing, disclosures and lock-in. A QIP can be considered as a special case of a Preferential Issue where eligible securities are allotted only to QIBs. In contrast to a Preferential Issue, shares issued under a QIP are not subject to a lock-in, can be issued at an attractive price taking into consideration only the most recent price implications and involve comparatively less disclosures to be made.

What is a Qualified Institutional Placement?

The Securities and Exchange Board of India (“SEBI”) issued a circular on May 8, 2006 under the erstwhile SEBI (Disclosure and Investor Protection Guidelines) 2000, allowing listed companies to raise private capital domestically by way of QIPs. Prior to this juncture, Indian companies used to excessively depend on foreign capital by issuing securities such as American Depository Receipts and Global Depository Receipts, which led to an undesirable export of domestic equity capital markets, which was a major concern for SEBI.

A QIP issuance involves allotment of eligible securities being equity shares, non-convertible debt instruments along with warrants and convertible securities other than warrants by a listed company, to Qualified Institutional Buyers, on private placement basis. In addition to the provisions applicable to companies raising capital under the Act, QIP issuances by listed companies are governed by the provisions of Chapter VIII of ICDR. Unlike an IPO or an FPO, only QIBs can participate in a QIP issuance. The main premise behind a QIP issuance is that it’s relatively easy for a company to convince a clutch of big ticket investors for raising money than to convince the entire public at large in case of an IPO or an FPO, thus resulting in time, cost and process efficiencies.

Who is a Qualified Institutional Buyer?

The term QIB is defined under Regulation 2(1)(zd) of the ICDR which, inter alia, include mutual funds, Foreign Institutional Investors, insurance companies, scheduled commercial banks, multilateral and bilateral financial institutions, pension funds and provident funds with minimum corpus of Rs. 25 crore, public financial institutions and others. QIBs exclude promoters and persons belonging to the promoter group. Thus, it can be seen that QIBs are mainly large institutions who are well informed and sophisticated players in the stock markets, requiring relatively less protection from SEBI as compared to the average retail investor. Since these investors are capable to making well informed decisions and generally perform their own due-diligence, it seems logical to subject QIPs to less stringent regulations, making it a speedy process for issuer companies.

What are the conditions for a Qualified Institutional Placement?

Special Resolution by shareholder

A listed company is required to obtain prior approval of its shareholders by way of special resolution for making a QIP. The QIP has to be completed within a period of 12 months from the date of passing the aforesaid special resolution. An issuer cannot make a QIP until the next six months, once a QIP issuance is completed.

The class of securities for which QIP is proposed should be listed with a recognized stock exchange for a period of at least one year prior to sending the notice of the extra-ordinary general meeting where the approval of the shareholders is being sought. Further, the issuer should be in compliance with the requirement of minimum public shareholding stipulated by SEBI which is currently 25%. It may be pertinent to note that companies which had not met the minimum public shareholding criteria in the past were not allowed to increase their public shareholding by way of a QIP and had to opt for Preferential Allotment, until the introduction of Institutional Placement Programme by SEBI.

Appointment of a Merchant Banker

An issuer is further required to appoint a SEBI registered Merchant Banker to manage the issue and carry out due diligence. The Merchant Banker is responsible for seeking in-principle approval for listing of the eligible securities to be issued under QIP and furnishing a due diligence certificate to the stock exchanges stating that the QIP issuance confirms to the requirements stated under Chapter VII of the ICDR.

Filing a Placement Document

The issuer is required to make the QIP on the basis of a Placement Document which should contain all material disclosures stipulated under Schedule XVIII of the ICDR. A Placement Document is a relatively simple document, compared to a prospectus which is issued in case of IPO or an FPO, with limited disclosure requirements. Unlike a prospectus, the issuer can circulate the Placement Document only to a select group of investors. The Placement Document is required to be filed by the issuer with the stock exchange while seeking in principle approval for listing the securities offered under the QIP issuance.

Pricing

A floor price has been set by SEBI for issuers making a QIP. The issuer is required to make the QIP at a price not less than the average of the weekly high and low of the closing prices of the equity shares of the same class quoted on the stock exchange during the two weeks preceding the relevant date. The price arrived at may be discounted by a further 5%.

It may be pertinent to note that in case of a Preferential Allotment, the issue price is the higher of the average 52 weekly high and low or the two weekly high and low price. Thus, the final price computed for a Preferential Allotment may be disadvantageous for the issuer, if it’s share price has fallen significantly, immediately before the relevant date. Likewise, if the issue price may be unfavourable for the Preferential Issue investor, if the share price of the issuer has increased significantly prior to the Preferential Issue. Thus, the requirement of factoring in the most recent price fluctuations of the shares of the issuing company (being the two weekly high and low) ensures fair pricing for both the issuer and the QIB.

Allotment Restrictions

An issuer is not allowed to make allotment to its Promoters and persons belonging to the Promoter Group. In case of an issue of non-convertible debt with warrants, QIBs have the option of subscribing to either or both the securities. QIBs are prohibited from withdrawing their bids after the closure of the issue. The minimum number of allottees shall be two for issue sizes upto Rs. 250 crore and five for issue sizes exceeding Rs. 250 crore. Not more than 50% of the issue size can be allotted to a single allottee. Further, amounts raised by way of QIPs cannot exceed five times the net worth of an issuer as per its audited balance sheet of the previous financial year. Convertible securities having a conversion tenure of more than 60 days cannot be issued.

Restrictions on transfer

The securities allotted to a QIB under a QIP are not subject to lock-in. However, the securities acquired by a QIB under a QIP issuance cannot be sold privately for a period of one year from the date of allotment. The QIB is free to sell the securities on the stock exchange acquired anytime after allotment. It may be noted that shares issued under a Preferential Allotment are subject to a lock-in period of one year.

Conclusion

QIPs have been traditionally been used by issuers to pare their debt, when the time is ripe.QIPs are subject to less rigorous disclosures and regulations in comparison to IPOs and FPOs. Cost savings also accrue to the issuer in terms of less legal and advisor fees, no expenditure on advertising and road shows and deployment of few resources for managing the QIP. QIPs provide a competitive advantage to domestic companies with an easy access to large pools of capital. QIP is thus, a flexible mechanism for companies wanting to mobilize large capital from QIBs at a fraction of the cost of and within a short time. Its popularity with issuers stands testimony to its overall advantages.