Qualified Institutional Buyers (QIBs)

How Do Qualified Institutional Buyers 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.
 

Additional Regulations

●    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

Advantages

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. 

Disadvantages

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. 
 

Types of Institutions Classified as QIBs

As per regulations laid down by SEBI, the following categories of investors are classified as Qualified Institutional Buyers (QIBs) due to their financial strength, professional expertise, and ability to assess investment risk independently: 

• Mutual Funds: SEBI-registered mutual funds qualify as QIBs as they manage pooled funds on behalf of investors and follow defined investment mandates.
• Foreign Institutional Investors (FIIs) / Foreign Portfolio Investors (FPIs): Registered foreign entities investing in Indian capital markets are classified as QIBs, subject to SEBI registration norms.
• Banks and Public Financial Institutions: Scheduled commercial banks and notified public financial institutions are included due to their scale, regulatory oversight, and capital base.
• Insurance Companies: Life and general insurance companies registered with the regulator qualify as QIBs, given their long-term investment horizon and institutional structure.
• Pension Funds and Provident Funds: Government and regulated pension or retirement funds are treated as QIBs owing to their large corpus and professional fund management.
• Venture Capital Funds (VCFs): SEBI-registered venture capital funds are classified as QIBs as they invest in early-stage and growth companies with informed risk-taking.
• Alternative Investment Funds (AIFs): Category I and II AIFs registered with SEBI are considered QIBs due to their sophisticated investment strategies and qualified investor base.

These institutions are recognised as QIBs because they possess the expertise, resources, and risk-evaluation capabilities required to participate in institutional capital-raising activities such as IPOs and Qualified Institutional Placements (QIPs).