Qualified Institutional Placement

Qualified Institutional Placements (QIPs) are viable route of raising money for companies. It is being viewed as a new mantra to ensure a vibrant onshore private placement equity market.

The Securities Exchange Board of India (SEBI), with effect from May 8, 2006, inserted Chapter XIIIA into the SEBI (Disclosure & Investor Protection){DIP} Guidelines, 2000, to provide guidelines for Qualified Institutional Placements.

After it was felt that several Indian companies were using American Depository Receipts (ADRs), Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs) routes to raise funds, resulting in an "export of domestic equity markets", SEBI allowed listed companies to raise funds from the domestic markets through Qualified Institutional Placement of securities with no pre-issue filings with the regulator. This move was to encourage Indian companies to raise funds from domestic markets instead of tapping overseas markets.

The guidelines provided that QIPs may be made for securities which can be issued as equity shares or any securities other than warrants which are convertible into or exchangeable with equity shares and will be called specified securities. In the case of related instruments convertible into equity, such conversion will have to take place within five years from the date of the issue and should be fully paid up.

Delhi based Spentex Industries Limited was the first company to raise funds through QIPs followed by Apollo Tyres, Asian Electronics, Kalpataru Power and Ashapura Minechem Limited. It was felt that cost being a major factor is likely to shift companies’ preference from ADRs/GDRs/FCCBs; and over a period of time the funds raised through QIPs will overtake the mobilization from ADR/GDR/FCCB route.While Edelweiss Capital can claim first mover advantage given that they were the first company to complete QIP of Rs 46.59 crores for Spentex Industries Limited, a BSE listed company and Kotak Investment Bank soon followed close behind doing $75 million placement for Kalpataru Power.

Though Edelweiss and Kotak appear to have set the ball rolling, many other merchant bankers are increasingly indicating their willingness to promote this route as a viable tool for raising funds over depository receipts (ADRs/GDRs), follow-on issues and preferential allotment of equity shares by a company.

Qualified Institutional Buyers (QIBs)

Qualified Institutional Buyers (QIBs) 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:a) Public financial institution as defined in section 4A of the Companies Act, 1956;b) Scheduled commercial banks;c) Mutual Funds;d) Foreign institutional investor registered with SEBI;e) Multilateral and bilateral development financial institutions;f) Venture Capital funds registered with SEBI.g) Foreign Venture Capital investors registered with SEBI.h) State Industrial Development Corporations.i) Insurance Companies registered with the Insurance Regulatory and Development Authority (IRDA).j) Provident Funds with minimum corpus of Rs.25 croresk) Pension Funds with minimum corpus of Rs. 25 crores"These entities are not required to be registered with SEBI as QIBs. Any entities falling under the categories specified above are considered as QIBs for the purpose of participating in primary issuance process."

QIPs in India and US

In US US securities laws contain a number of exemptions from the requirement of registering securities with the US Securities & Exchange Commission (SEC). Pursuant to Rule 144A of the Securities Act of 1933, issuers may target private placements of securities to QIBs. Although often referred to as Rule 144A offerings, as a technical matter, transactions must actually involve an initial sale from the issuer to the underwriter and then a resale from the underwriters to the QIBs. A QIB is defined under Rule 144A as having investment discretion of at least $100 million and includes institutions such as insurance agencies, investment companies, banks, etc.Rule 144A was adopted by the SEC in 1990 in order to make the US private placement market more attractive to foreign issuers who may not wish to make more onerous direct US listings. Whereas the US regulators by enacting Rule 144A sought to make the domestic US capital markets more attractive to foreign issuers, the Indian regulators are seeking to make the domestic Indian capital markets more attractive to domestic Indian issuers.

In IndiaTherefore, in order to encourage domestic securities placements (instead of foreign currency convertible bonds (FCCBs) and global or American depository receipts (GDRs or ADRs)), the Securities Exchange Board of India (SEBI) has with effect from May 8, 2006 inserted Chapter XIIIA into the SEBI (Disclosure & Investor Protection) Guidelines, 2000 (the DIP Guidelines), to provide guidelines for Qualified Institutional Placements (the QIP Scheme).The QIP Scheme is open to investments made by “Qualified Institutional Buyers” (which includes public financial institutions, mutual funds, foreign institutional investors, venture capital funds and foreign venture capital funds registered with the SEBI) in any issue of equity shares/ fully convertible debentures/ partly convertible debentures or any securities other than warrants, which are convertible into or exchangeable with equity shares at a later date (Securities).Pursuant to the QIP Scheme, the Securities may be issued by the issuer at a price that shall be no lower than the higher of the average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange (i) during the preceding six months; or (ii) the preceding two weeks.The issuing company may issue the Securities only on the basis of a placement document and a merchant banker needs to be appointed for such purpose. There are certain obligations which are to be undertaken by the merchant banker.The minimum number of QIP allottees shall not be less than two when the aggregate issue size is less than or equal to Rs 250 crore; and not less than five, where the issue size is greater than Rs 250 crore. However, no single allottee shall be allotted more than 50 per cent of the aggregate issue size.The aggregate of proposed placement under the QIP Scheme and all previous placements made in the same financial year by the company shall not exceed five times the net worth of the issuer as per the audited balance sheet of the previous financial year.The Securities allotted pursuant to the QIP Scheme shall not be sold by the allottees for a period of one year from the date of allotment, except on a recognized stock exchange. This provision allows the allottees an exit mechanism on the stock exchange without having to wait for a minimum period of one year, which would have been the lock–in period had they subscribed to such shares pursuant to a preferential allotment.

The Difference

There are some key differences between the SEC’s Rule 144A and the SEBI QIP Scheme such as the SEBI pricing guidelines and the US rule that a private placement under Rule 144 A must be a resale and not a direct issue by the issuer. In addition, the target audience of both regulations is different -while the impetus behind Rule 144A was to encourage non-US issuers to undertake US private placements, the impetus behind the SEBI QIP Scheme was to encourage domestic Indian issuers to undertake domestic Indian private placements. Nonetheless, the intention of both regulations is to encourage private placements in the domestic markets of the US and India, respectively

Benefits of Qualified Institutional Placements

Time Saving:

QIBs can be raised within short span of time rather than in FPO, Right Issue takes long process.

Rules & Regulations:

In a QIP there are lesser formalities, in regard to rules and regulation, as compared to Follow-on Public Issue (FPO) and Rights Issue.

A QIP would mean that a company would only have to pay incremental fees to the exchange. Additionally in the case of a GDR, you would have to convert your accounts to IFRS (International Financial Reporting Standards). For a QIP, company’s audited results are more than enough

Cost Efficient:

The cost differential vis-à-vis a ADR/GDR or FCCB in terms of legal fees, is huge. Then there is the entire process of listing overseas, the fees involved. It is easier to be listed on the BSE/NSE vis-à-vis seeking a say Luxembourg or a Singapore listing.

Lock-In:It provides an opportunity to buy non-locking shares and as such is an easy mechanism if corporate governance and other required parameters are in place.