Introduction
In the world of finance, Qualified Institutional Buyers (QIBs) hold an important role. Recognized and defined by the Securities and Exchange Board of India (SEBI), these institutional investors possess not only substantial financial resources but also the requisite knowledge to actively participate in capital markets. QIBs serve as key players in the realm of investments and securities.
According to SEBI, Qualified Institutional Buyers (QIBs) are institutional investors who meet the criteria set by SEBI and possess the knowledge and resources necessary to participate in capital markets.
Qualified Institutional Investors (QIBs), as defined by SEBI in clause 2.2.2B (v) of the 2000 Disclosure and Investor Protection Guidelines (DIP), include:
- Mutual funds, venture capital funds, alternative investment funds, and foreign venture capital investors registered with SEBI.
- Foreign investors registered with SEBI.
- Public financial institutions as defined in Section 4A of the Companies Act of 1956.
- Designated commercial banks.
- Institutions involved in international and bilateral development financing.
- Government-owned industrial development corporations.
- Insurance companies authorized by the Insurance Regulatory and Development Authority.
- Funds with a minimum corpus of twenty-five crore rupees.
- Pension funds with a minimum corpus of Rs. 25 crore.
- National Investment Fund.
- Insurance funds managed by the Indian Union Army, Navy, or Air Force.
- Insurance funds managed by the Indian Postal Department.
These organizations are not required to register with SEBI as QIBs but are eligible to participate in the primary issuance process as QIBs.
How Do Qualified Institutional Buyers Operate?
SEBI introduced the concept of QIBs to promote the growth of Indian businesses. This allows Indian companies to expand globally through QIBs, benefit from a less strict regulatory environment abroad, and create jobs and foreign exchange earnings.
A qualified institutional buyer works in the qualified institutional placement (QIP) of the issuing company. Publicly traded companies use QIP to raise capital by selling securities to institutional investors. SEBI-registered merchant bankers oversee the allocation in the QIP, following conditions outlined in Chapter VIII of SEBI’s rulebook.
Regulations on Qualified Institutional Buyers.
While QIBs generally face fewer restrictions and scrutiny, there are some rules and regulations they must follow:
- Publicly traded companies eligible to raise capital domestically can sell securities to QIBs, provided their equity shares are listed on a stock exchange and they meet minimal public shareholding requirements. These organizations can raise funds through authorized institutional buyers.
- SEBI guidelines dictate who may invest in these specific securities, such as institutional buyers who purchase them from QIBs. Promoters of the issuer or their direct or indirect relatives are not allowed to invest. Every placement with QIBs is done via private placement.
- Guidelines also specify the maximum amount corporations can raise from QIBs, limited to five times the issuer’s net worth at the end of the previous fiscal year. Pricing guidelines are also provided for these specific securities.
- Similar to GDR/FCCB issues, a floor price for these specific securities can be determined, and adjustments are possible through corporate actions like bonus issues or pre-emptive rights granted to the issuer’s current shareholders.
Additional Regulations: QIPs are managed by merchant bankers registered with SEBI, and a due diligence certificate must be submitted to the stock exchange to ensure compliance with SEBI’s guidelines.
- There should be a six-month gap between each placement of the specified securities, and all necessary reports, documents, and undertakings must be submitted for listing on the stock exchange. However, for QIPs and preferential allocations, submitting these documents is optional. Issuing companies can offer up to 5% on QIPs, with the consent of existing shareholders.
Advantages and Disadvantages of QIBs
Advantages
- Faster QIP completion saves time and money by avoiding the need to hire a team of professionals for document approvals, with the process typically taking 4-5 days.
- QIBs can make significant investments in a company and have the freedom to sell their shares at any time after the company is listed.
Disadvantages
- Qualified institutional placements can lead to institutional buyers owning a significant stake in the company, potentially diluting the ownership interests of existing shareholders, especially in companies with substantial promoter holdings.
Frequently Asked Questions
QIBs play a crucial role in providing liquidity and stability to financial markets. They are considered sophisticated investors and can invest in large volumes.
QIBs can invest in various securities, including stocks, bonds, convertible securities, and certain private placements.
Yes, QIBs are subject to regulations to ensure market integrity and investor protection. These regulations may vary by jurisdiction.
Yes, the status of an institution as a QIB can change based on fluctuations in assets, regulatory changes, or business activities.
Yes, QIBs often participate in IPOs, helping companies go public by purchasing significant shares.
