India's economy, which ranks behind the US, China, Japan, Germany, and the United Kingdom in terms of Gross Domestic Product (GDP) and Purchasing Power Parities (PPP), is the sixth largest in the world as of 2022. According to the International Monetary Fund, the nominal GDP for FY 2021–22 was $3.7 trillion, a considerable increase brought on by a rise in the supply chain and an improving growth rate.
India is classified as either a "newly industrialised economy," a developing economy, or an emerging economy, depending on the criteria. Given the potential growth, there are many investors out there. Most retail investors employ tried-and-true strategies, including debentures, real estate, fixed-term investments (FDs), stock purchases, and provident funds, all governed by rules established by the Companies Act of 2013 and the SEBI.
The complexity of the laws frequently discourages individual investors. Qualified Institutional Buyers can help with that.
Who are Qualified Institutional Buyers (QIBs)?
Per the Qualified Institutional Buyer definition, investors who adhere to the guidelines established by SEBI are Qualified Institutional Buyers (QIB). According to SEBI, QIBs are institutional investors with the knowledge and resources needed to assess and participate in capital markets.
As per clause 2.2.2B (v) of the DIP (Disclosure and Investor Protection) Guidelines formulated in 2000, SEBI defines the following as Qualified Institutional Investors (QIBs):
● Mutual funds, venture capital funds, alternative investment funds, and foreign venture capital investors that come under SEBI
● Investors from abroad who have registered with SEBI
● As defined in Section 4A of the Companies Act of 1956, public financial institutions
● Designated commercial bank
● Institution for financing international and bilateral development
● The government-owned industrial development corporation
● A company that is insured and authorised by the Insurance Regulatory and Development Authority
● A provisional fund with a twenty-five crore rupees minimum corpus
● A pension fund with a minimum corpus of Rs. 25 crore
● National Investment Fund
● Insurance funds created and managed by the Indian Union Army, Navy, or Air Force
● Insurance funds created and managed by the Indian Postal Department
These organisations are exempt from registering with SEBI as QIBs. However, any entity that fits into one of the categories above is eligible to participate in the primary issuance process as a QIB.
How Do Qualified Institutional Buyers Practice Works?
When Indian businesses want to grow, the Securities and Exchange Board of India (SEBI) introduced the idea of QIBs. As a result, these Indian enterprises could begin doing business abroad through QIB, benefit from a regulatory environment that is less strict than India's, and bring in jobs in addition to foreign exchange.
A qualified institutional buyer contributes to the issuing company's qualified institutional placement (QIP). Through the QIP, publicly traded companies can raise capital by selling securities to institutional investors. A SEBI-registered merchant banker looks after the allocation in the QIP. Furthermore, these merchant bankers allocate funds following the conditions outlined in Chapter VIII of the SEBI rulebook.
Regulations on Qualified Institutional Buyers
A qualified institutional buyer typically faces fewer restrictions and scrutiny. The ability of QIBs to operate is, however, subject to some rules and regulations. Among the rules for QIB are the following:
● Any publicly traded company that qualifies to raise capital on the domestic market may sell securities to QIBs. However, this publicly traded company's equity shares should trade on a stock exchange. Additionally, they must adhere to the minimal public shareholding pattern requirements. These organisations can therefore raise money by turning to accredited institutional buyers.
Additionally, these rules apply to other types of security besides warrants, such as equity shares. Within six months of the allocation date, they may be converted or exchanged for equity shares later. The term "specified securities" describes these shares. They are fully paid during allotment.
● Who may invest in or be allotted to these specific securities is also subject to strict SEBI guidelines. For example, it states that institutional buyers who purchase them from QIBs are not allowed to be promoters of the issuer or their direct or indirect relatives. Additionally, every placement made with QIBs is done via private placement.
● These guidelines also include information on the total sum corporations may raise from QIBs issued by the issuer. A financial year cannot have more money raised than five times the issuer's net worth at the end of the prior fiscal year. Additionally, it has published guidelines to control how much these specific securities are priced.
Similar to GDR/FCCB issues, it is possible to determine the floor price for these specific securities. Any modification is possible through corporate actions like bonus issues or pre-emptive rights granted to the issuer's current shareholders.
● The Qualified Institutional Placements (QIPs) are managed by merchant bankers registered with SEBI. Due diligence certificate must be submitted to the stock exchange. Adherence to SEBI's guidelines and requirements is ensured with the aid of this certificate.
● The period between each placement of the specified securities, if any, shall be six months. For these securities to be approved for listing on the stock exchange, the issuer and merchant banker must also submit all reports, documents, and undertakings. However, in contrast, for QIPs and preferential allocation, submitting these documents is optional. The issuing company can also provide up to 5% on QIPs, but only with the consent of the existing shareholders.
Advantages and Disadvantages of a QIBs
Faster QIP completion benefits the issuing company because less time is spent waiting for SEBI to approve the documents. It is possible to complete the process in 4-5 days. This method saves money because it avoids hiring a team of bankers, lawyers, auditors, and solicitors to obtain approvals. After a company is listed, QIBs may make significant investments in it with the freedom to sell their shares at any time.
Institutional buyers can own a sizable stake in the company thanks to qualified institutional placements. Therefore, it reduces the ownership interests of current shareholders. As a result, businesses with substantial promoter holdings favour this approach over those with smaller promoter stakes because further stake dilution could endanger the company's management control.