Who are Qualified Institutional Buyers (QIBs)?
Qualified Institutional Buyers (QIB) are investors who follow the rules and regulations governed by SEBI. As per SEBI, QIBs are institutional investors who possess the necessary expertise and financial strength to carefully evaluate and invest in capital markets.
As per clause 2.2.2B (v) of the DIP (Disclosure and Investor Protection) Guidelines which were formulated in 2000, SEBI defines the following as Qualified Institutional Investors (QIBs):
- Any Mutual fund, venture capital fund, Alternative Investment Fund and foreign venture capital investor registered with SEBI
- Foreign institutional investor registered with SEBI
- Public financial institution defined in section 4A of the Companies Act, 1956
- Scheduled commercial bank
- Multilateral and bilateral development financial institution
- State industrial development corporation
- An insurance company registered with the Insurance Regulatory and Development Authority
- Provident fund with minimum corpus of twenty five crore rupees
- Pension fund with minimum corpus of twenty five crore rupees
- National Investment Fund
- Insurance funds set up and managed by army, navy or air force of the Union of India
- Insurance funds set up and managed by the Department of Posts, India
It is not necessary for these entities to register as QIBs with SEBI. If an entity falls under the above-specified categories, they can participate as QIBs in the primary issuance process.
How Does Qualified Institutional Buyers Practise Works?
The Securities and Exchange Board of India (SEBI) introduced the concept of QIBs when Indian companies of varying sizes were looking to expand their operations rapidly. Through QIB, these Indian companies could start operating overseas, take advantage of a less stringent regulatory environment than India, and bring in jobs along with foreign exchange.
A qualified institutional buyer participates by investing in the qualified institutional placement (QIP) of an issuing company. QIP is a process where the listed companies raise money through the issue of securities to institutional buyers. A SEBI registered merchant banker on behalf of institutional buyers with due diligence manages the allotment in QIP. Also, these Merchant bankers make the allotments in compliance with the requirements mentioned in Chapter VIII of the SEBI (ICDR) Regulations, 2009.
Regulations on a Qualified Institutional Buyers
Generally, a qualified institutional buyer has lesser regulations and lower scrutiny. However, there are some rules and regulations that monitor how QIBs can function. The following are some of the regulations on QIB –
- Any listed company that is eligible to raise funds in the domestic market can place its securities with QIBs. However, the equity shares of this listed company should be available on a stock exchange. Also, they should comply with the necessary regulations of a minimum public shareholding pattern. Thus, such entities can raise funds through the qualified institutional buyers’ route. Also, these guidelines apply for securities in the form of equity shares or any other security other than warrants. They can be converted or exchanged with equity shares at a later date ( within six months of the date of allotment). Thus, these securities are known as ‘ specified securities’. They are fully paid during allotment.
- SEBI guidelines are also particular regarding who can be the investors or allottees to these specified securities. It mentions that if QIBs subscribes them, then such institutional buyers cannot be promoters or related to promoters of the issuer directly or indirectly. Moreover, every placement to QIBs is on a private placement basis.
- These guidelines also mentions the aggregate amount that the corporations can raise through QIBs by the issuer. In a financial year, the amount raised cannot exceed five times the issuer’s net worth at the end of its previous financial year. Furthermore, it has issued guidelines to regulate the pricing of these specified securities. The floor price of these specified securities can be determined similar to GDR/FCCB issues. Any adjustment is possible through corporate actions such as bonus issues or pre-emptive rights given to existing shareholders of the issuer.
- The Merchant Bankers registered with SEBI manage the Qualified Institutional Placements (QIPs). They exercise due diligence and it is compulsory to submit a due diligence certificate to the stock exchange. This certificate ensures that all provisions and requirements given by SEBI have complied.
- In case of multiple placements of specified securities, it is mandatory to have a six months gap between the two placements. Also, the issuer and merchant banker must submit all reports, documents and undertakings to obtain approval from the stock exchange for listing these securities. However, in QIPs and preferential allotment, it is not mandatory to submit these documents. Moreover, the issuing company can offer a discount of up to 5% on QIPs, but this discount can be offered only after existing shareholders approval.
Advantages and Disadvantages of a QIBs
It is advantageous for the issuing company where the time taken to complete the QIP process is lesser as there is no long wait for documents approval by SEBI. The whole process can be completed within 4-5 days.
This is a cost-effective process as it does not require employing a team of bankers, advocates, auditors and solicitors for approvals.
QIBs can buy large stakes in a company where they have the advantage to exit and sell the stocks at any point of time post listing.
The qualified institutional placements allow institutional buyers to hold a large stake in the company. As a result, it dilutes the stakes of existing shareholders. Therefore, companies with large promoter holdings prefer this method over those with lower promoter stakes because further dilution of stakes can risk the company’s management control.
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