Qualified Institutional Placement (QIP)- Simplified

CHAPTER VI: Regulation 171 – 180 of SEBI (ICDR) Regulation, 2018

The concept of raising fund through Qualified Institutional Placement (QIP) was not introduced in Indian market until 2006. Prior to that, large funding requirements of corporates was met through External Commercial Borrowings (ECB), Foreign Currency Convertible Bonds (FCCB) or Global Depository Receipts (GDR). This allowed Indian entities to raise funds from institutional investors outside India at lower cost as compared to issuing securities in Indian markets. This led to overdependence of domestic entities on international funding. With the growing funding capacity of domestic QIBs, the QIP route was introduced in India in 2006. This provided a quick and efficient solution to corporates for raising funds from large institutional investors within India.

QIP is a type of preferential issue of securities made to select investors being Qualified Institutional Buyers (QIB). QIP is not defined under Companies Act, 2023 (the Act).

However, Regulation 2(1) (tt) of ICDR defines QIP as below:

• issue of eligible securities
• by a listed issuer
• to qualified institutional buyers (QIB)
• on a private placement basis
• and includes an offer for sale of specified securities by the promoters and/or promoter group on a private placement basis.

where,

• eligible securities, as per Regulation 171(a) of ICDR, includes equity shares, non-convertible debt instruments along with warrants and convertible securities other than warrants.
• qualified institutional buyer as defined under Regulation 2(1)(ss) of ICDR means,

(i) a mutual fund, venture capital fund, alternative investment fund and foreign venture capital investor registered with the Board;

(ii) foreign portfolio investor other than individuals, corporate bodies and family offices;

(iii) a public financial institution;

(iv) a scheduled commercial bank;

(v) a multilateral and bilateral development financial institution;

(vi) a state industrial development corporation;

(vii) an insurance company registered with the Insurance Regulatory and Development Authority of India;

(viii) a provident fund with minimum corpus of twenty-five crore rupees;

(ix) a pension fund with minimum corpus of twenty five crore rupees registered with the Pension Fund Regulatory and Development Authority established under sub-section (1) of section 3 of the Pension Fund Regulatory and Development Authority Act, 2013;

(x) National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated November 23, 2005 of the Government of India published in the Gazette of India;

(xi) insurance funds set up and managed by army, navy or air force of the Union of India; and

(xii) insurance funds set up and managed by the Department of Posts, India; and

(xiii) systemically important non-banking financial companies.

Advantages of QIP-

• Lower cost and less time consuming than other issues.
• Good investment avenue for domestic institutional investors.
• Useful when promotors are not able to infuse capital by way of preferential issue.
• QIBs investing in companies helps boost the image of the company in the market.
• QIB are excluded from the limit of 200 identified persons under private placement.
• QIP does not have a strict lockin requirement as compared preferential issue.
• Ownership and control stay of the company in the hands of domestic investors.

Relevant date

The relevant date for QIP shall be,

• in case of allotment of equity shares, the Board Meeting approving QIP,
• in case of eligible convertible securities, either the Board Meeting date or the date on which the holders of such convertible securities become entitled to apply for the equity shares.

The relevant date is to be mentioned in the special resolution.

Conditions for issue-

The following eligibility conditions are required to be fulfilled under Regulation 172 of ICDR Regulation for QIP,

1. Pass a Special Resolution in General Meeting except offer for sale by promoters or promoter group for compliance with minimum public shareholding requirements

2. The promoter or director of the issuer should not be fugitive economic offenders.

3. The equity shares of same class are listed for atleast 1 year prior to the sending of notice of general meeting. Not applicable to offer for sale by promoters or promoter group for compliance with minimum public shareholding requirements.

Other conditions to note-

– The special resolution shall mention the following-

• • That the issue is by way of QIP,
  • The relevant date for calculating price,
  • Details of discount, if any, being provided as allowed under ICDR.

– The special resolution is valid for 365 days and allotment needs to be completed with 365 days of passing the resolution.

– No partly paid-up eligible security to be allotted except warrants.

– There should be a gap of atleast two weeks between two QIP issues.

– Convertible Securities issued under QIP need to be converted within 60 months of allotment.

– The issuer whose promoter or director is/are wilful defaulters or fraudulent borrowers can issue eligible securities through QIP provided the same is disclosed in the placement documents.

Conditions for Offer for Sale (OFS)-

OFS is when the promoter or member of the promoter group or other existing shareholders offer shares held by them for sale.

The conditions for making such OFS through the QIP route are for achieving minimum public shareholding as per Securities Contracts (Regulation) Rules, 1957-

1. The equity shares offered should be fully paid up.

2. The promoter or member of the promoter group who have purchased or sold any equity shares of the issuer during 12 weeks period prior to the date of the opening of the issue cannot make such offer for sale.

3. The promoter or member of the promoter group shall not purchase or sell any equity shares of the issuer during the 12 weeks period after the date of closure of the issue except as per conditions specified by SEBI.

4. There shall be a gap of minimum 2 weeks between the two successive offer(s).

Placement Document

1. The placement documents shall have disclosures as mentioned in Schedule VII of ICDR and companies act.

2. It shall specify if the issuer or any of its promoters or directors is a wilful defaulter or a fraudulent borrower.

3. It shall be serially numbered, stamped and certified by the authorized signatory of the company.

4. Preliminary Placement Document shall be uploaded on the website of the Stock Exchange before the same is circulated to the QIBs and displayed on the website of the Company.

5. Should have a disclaimer to the effect that it is in connection with a qualified institutions placement and that no offer is being made to the public or to any other category of investors.

Pricing-

• Minimum price for QIP shall be the:
  • average of the weekly high and low of the closing prices of the equity shares of the same class quoted on the stock exchange
  • during the 2 weeks preceding the relevant date.

(Where the stock exchange is the one which has recorded the highest trading volume during the 2 weeks preceding the relevant date)

• A discount of not more than 5% can be offered with approval of shareholders. Shareholder approval not required in case of OFS.
• Adjustments to price to be done to give effect to various corporate actions or other similar events or circumstances, which in the opinion of the concerned stock exchange, require adjustments.
• The effect of material price movement and confirmation of reported event or information may be excluded if Regulation 30(11) of LODR is complied.

Application & Allotment

• Application cannot be withdrawn or revised downwards post issue closure.
• In case where the QIP if for NCDs with warrants, the investor may apply for NCD or warrant or both.
• No allotment, either directly or indirectly, to any QIB who is a promoter or related to the promoters of the issuer.
  • Where deemed to be related to promoter means:
    • Having right under shareholder agreement entered into with promoter or promoter group,
    • Veto right, or
    • Right to appoint nominee director
  • Not deemed to be related to promoter means:
    • Not holding any shares in issuer
    • Acquired rights in capacity as lender
  • Minimum 10% of issue to be allotted to mutual funds. Any unsubscribed portion may be allotted to other QIBs.
  • Where QIP issue size <= Rs.250 crores, minimum 2 allottees.
  • Where QIP issue size > Rs.250 crores, minimum 5 allottees.
  • No individual allottee is allowed to have more than 50% of the total amount issued.
  • QIB under the same group/ under same control is considered as single allottee.

Monitoring Agency

• Issue size, excluding offer for sale, exceeds Rs. 100 cr.
• By Credit Rating Agency registered with Board,
• Not applicable to issue by PFI, Bank, Insurance Companies,
• Report to be submitted to issuer on quarterly basis in format specified,
• Till 100% of the proceeds of the issue are utilised
• Board of Directors of issue to give comments on the report in format specified
• Issuer to upload the report on its website within 45 days from end of quarter and submit the same to Stock Exchange.

Process of issue of eligible securities through QIP- Pre-issue-

• Check if the limit of the authorised capital of the company is enough to accommodate the proposed issue. If not enough, then first authorised capital to be increased in General Meeting of shareholders under the Companies Act.
• Also check if issue of eligible securities through QIP is permissible under AOA of the company. If not, the same need to be amended first via shareholder resolution.
• Check if promoter or any of the directors of the issuer is fugitive economic offenders.
• Ensure that a period of 1 year has elapsed between listing of equity shares of issuer and the proposed date of sending of notice of general meeting for approving QIP.
• Appoint one or more merchant banker as Lead Manager to the issue.
• Engage a Credit Rating Agency (CRA) and obtain credit rating where NCDs are proposed to be issued.
• Obtain prior approval of lender if there is any covenant relating to change in shareholding.
• Appointment of Monitoring Agency if the issue size exceeds 100 cr.

Issue Process-

• Issue notice of Board Meeting.
• Prior intimation to Stock Exchange of the meeting of Board of Director for approving issue of securities through QIP atleast 2 working days in advance (excluding date of intimation and date of meeting) under Regulation 29 of LODR.
• Pass Board Resolution in Board Meeting for the following
  • Approving raising of funds through QIP
  • Recording names of proposed allottees
  • Approving draft placement document
  • Calling of General Meeting for approving the issue
  • Approving notice and Explanatory statement for General Meeting
  • Approving opening of separate bank account
  • Authorizing filing of Form MGT-14 and Form SH-7, if required.
• Intimation of result of Board Meeting to Stock Exchange within 30 minutes of conclusion of the meeting under Regulation 30 of LODR.
• Sending of notice of general meeting.
• Prior intimation to Stock Exchange of the shareholder meeting for approving issue of securities through QIP atleast 2 working days in advance (excluding date of intimation and date of meeting) under Regulation 29 of LODR.
• Pass Special Resolution in general meeting.
• Disclosure of proceedings of General Meeting to Stock Exchange.
• Lead manager to apply for in-principle approval to Stock Exchange by providing:
  • a due diligence certificate
  • a copy of the preliminary placement document
  • other required documents as per checklist of the exchange.
• File the resolution/s passed in Form MGT-14 within 30 days of passing of resolution.
• File Form SH-7 intimating alteration of share capital to ROC within 30 days of passing of resolution, in case authorized capital is required to be increased.
• Issue preliminary placement document to proposed allottees and upload on the website of the issuer after the same is uploaded on website of the stock exchange.
• Opening of separate bank account.
• Issue opens and applications are received. Issue closes as per offer period.
• Obtain certificate from PCS/ PCA certifying confirming the floor price (with calculations) and receipt of funds. Submit the same to Stock Exchange.
• Pass Board Resolution for following,
  • Approving allotment of securities
  • Authorizing filing of Form PAS-3 and Form FC-GPR, if applicable
  • Authorizing Corporate Action
• Execute Corporate Action
• Obtain final listing and trading approval from all Stock Exchange.

Post issue- 

• File Form PAS 3 within 15 days of allotment.
• Funds so raised can be utilized post filing of Form PAS-3.
• File Form FC-GPR within 30 days of allotment, in case of foreign holders.
• Make necessary entries in the Register of Securities in Form MGT-1 or Form MGT-2.
• Maintain record of the issue in Form PAS-5.
• Make disclosures on website of the company under regulation 46 of LODR.
• Ensure monitoring of use of funds by Monitoring Agency so appointed and timely submission of report from the said agency to Stock Exchange and uploading the same on the website of the issuer.
• Ensure that the eligible securities so allotted are not sold for a period of 1 year from the date of allotment, except on a recognised stock exchange.
• Ensure to disclose every year regarding the utilization of funds during that year in the Annual Report until such funds are fully utilized as per Regulation 32 of LODR.

Stock Exchange Checklist-

• BSE Checklist for IPA- https://www.bseindia.com/downloads1/QIP_Pre_Issue.zip
• Post Issue BSE Checklist – https://www.bseindia.com/downloads1/QIP_Post_Issue.zip

Conclusion: The introduction of Qualified Institutional Placement has been a boon for listed issuers reducing their dependence on international markets for funding requirements. A recent consultation paper has been published by SEBI for simplification and streamlining of disclosures in placement document for QIP. As the QIP market continues to grow, we will see more such changes by the regulator in order to simplify the process and make QIP a more lucrative fund raising option.

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Disclaimer- The information provided is for educational purposes and should not be considered as professional advice. The author shall not be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.