WHAT IS A QIP
A Qualified Institutional Placement is a capital raising tool wherein a listed company can issue equity shares, fully and partly convertible debentures, or any security other than warrants that are convertible into equity shares. But unlike in an IPO or an FPO, only institutions or qualified institutional buyers can participate in a QIP.
THE LEGAL DEFINITION
QIP has been defined in the Securities Regulations as “allotment of securities by a listed company to the qualified institutional buyers on private placement basis”. The Companies Act defines “private placement” as an offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter.
A special resolution which approves the Qualified Institutional Placement must be passed by the Shareholders in their respective company. The shares that have to be issued to the Qualified Institutional Buyers (QIBs) must belong to the same class and must be listed by a recognized National Stock Exchange. Their listing must have been done at least one year prior. This is mandatory as only if the condition is fulfilled can a company pass the special resolution as is required and mandated by the provisions of Companies Act, 2013 and 1956.
WHO ARE QIBs
“Qualified institutional buyer” means:
- A mutual fund, venture capital fund[, Alternative Investment Fund]9 and foreign venture capital investor registered with the Board;
- A 10[foreign portfolio investor other than Category III foreign portfolio investor], registered with the Board;
- A public financial institution as defined in section 4A of the Companies Act, 1956;
- A scheduled commercial bank;
- A multilateral and bilateral development financial institution;
- A state industrial development corporation;
- An insurance company registered with the Insurance Regulatory and Development Authority;
- A provident fund with minimum corpus of twenty five crore rupees;
- A 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;]
Pricing of the QIP
It shall be based on the price which cannot be less than the average of the highest price of the equity shares and the lowest prices on the stock exchange in the week, two weeks prior to relevant date.
Restrictions on Allotment
Certain restrictions have been imposed wherein it is mentioned that in any whatsoever, the Qualified Institutional Placement cannot be made to the Promoter or any of his relatives or to any manner who may be related to the promoter in any way. Also a Minimum number of of QIBs to whom shares are allotted shall not be less than
- Two, in cases where the issue size is <= Rs.250 crores.
- Five, where the issue size is >= Rs.250 crores.
Also once the applicants in qualified institutional placement have made their bid and the issue process has been closed they cannot withdraw their bids after the Closure.
Advantages of a QIP
- This mode of qualified institutional placement is essentially the most expeditious method by which capital can be raised without undergoing any cumbersome process. Generally, by other methods like FPO and rights issues, it takes a lot of time and money to undergo the documentation and approval.
- It saves ancillary expenses which otherwise are involved when securities are issued by some any other mode.
- In cases where a company cannot directly buy from the market a large stake as it might create market volatility, in this way issuing shares by increasing capital is one of the ways to attract investors.
- Better bargains take place by means of QIP, as it gives the opportunity to raise and purchase as well at better-bargained costs.
- Finally, in case of QIP the formula to arrive at a floor price, is the average stock price of the last two weeks, but in case of preferential allotment, it is the average stock price of last six months from the cut-off date. The cut-off date for calculation of average stock price is the date which is 30 days prior to the date when shareholders‟ meeting is held and the decision of fresh equity issue is taken.
- Interestingly, a Private Placement letter can be issued only to two hundred persons in a financial year excluding the Qualified Institutional Buyers [“QIBs”]. Thus, even when the QIBs are excluded from the ambit of private placement, an offer to them does not constitute a public offer. In other words, shares issued to a QIB apart from 200 members in a private placement shall not violate section 42 of the 2013 Act. This is a big advantage to companies and QIBs.