corporate project

8/2/2019 Corporate Project

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RROOLLEE OOFFQQUUAALLIIFFIIEEDDIINNSSTTIITTUUTTIIOONNAALLBBUUYYEERRSS IINN

PPUUBBLLIICCOOFFFFEERR

SUBMITTED TO: MR.SUDHIR KUMAR

FACULTY, Corporate Regulation (Hons.)

SUBMITTED BY: - BARCELONA PANDA

ROLL NO- 17

SEMESTER IX; BATCH VII

Reg. No.07/007/0019

HIDAYATULLAH NATIONAL LAW UNIVERSITY,

RAIPUR, (C.G)


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Role of Qualified Institutional Buyers in Public Offer

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AACCKKNNOOWWLLEEDDGGEEMMEENNTT

In the making of this project, I express my gratitude to my parents and Hidayatullah National

Law University for providing the motivation and facilities required. Without the constant support

and guidance of Mr. Sudhir Kumar, Faculty for Corporate Regulation (hons) it would have been

extremely difficult to complete this project in a systematic and informative manner. Special

thanks to the Library Department, for providing a scholarly and informative books and manuals

related to Corporate Regulations having national and international repute. I acknowledge the

service of Computer and Wi-fi lab for enabling the indispensable internet facility. Last but not

the least; I thank almighty for giving the strength to work out my endeavours regarding this

project successfully.

Barcelona Panda


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LLIISSTT OOFF AABBBBRREEVVIIAATTIIOONNSS

ICDR - SEBI (Issue of Capital and Disclosure requirements)

Regulations, 2009

DIP - (Disclosure and Investor Protection) Guidelines, 2000

NSE - National Stock Exchange

BSE - Bombay Stock Exchange

IPO - Initial Public Offer

QIP - Qualified Institutional Placements

QIB - Qualified Institutional Buyers

VC - Venture Capital

FII - Foreign Institutional InvestorsMF - Mutual Funds

SEBI - Securities and Exchange Board of India

IPO - Initial Public Offer

FPO - Further Public Offer

ADR - American Depository Receipts

GDR - Global Depository Receipts

IDR - Indian Depository Receipts

SCRA - Securities Contracts (Regulation) Act, 1956

SIDC - Small Industries Development Corporation


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SSCCOOPPEE AANNDD MMEETTHHOODDOOLLOOGGYY

SCOPE OF PROJECT

This Project focuses on the Role played by Qualified Institutional Buyers in the presentFinancial Market. This aims to analyze in detail the regulations and process in which the QIBS

perform. Also, the project aims to find out the criticisms that the QIBs have been facing in the

current regulatory framework such as ICDR and SEBI Guidelines. The project suggests

measures needed to be taken in the existing framework which can strengthen the current role

played by the QIBs in the Public Offer by ensuring effective protection to them.

RESEARCH METHODOLOGY

The researcher has followed doctrinal methodology of research in the preparation of the project.

Thorough use of the available books, regulations, journals and periodicals has been made

wherever necessary.

CERTIFICATE OF DECLARATION

I Barcelona Panda, student of Batch VII, semester IX of Hidayatullah National Law University,

Raipur of B.A.LL.B (Hons.) hereby declare that the research work on this project topic is totally

original and is based on my hard work and application of mind.


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TTAABBLLEE OOFF CCOONNTTEENNTTSS

1. Introduction 12. Chapter I: Overview of Indian Financial Market 43. Chapter II: Public offer & Indian Financial Market 114. Chapter III: Qualified Institutional Placement

& Qualified Institutional Buyers 23

5. Chapter IV: Regulatory Framework of QIBS 356. Conclusion 407. Bibliography v-vi


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INTRODUCTION

Until the early nineties, corporate financial management in India was a relatively drab and placid

activity. There were not many important financial decisions to be made for the simple reason that

firms were given very little freedom in the choice of key financial policies. The government

regulated the price at which firms could issue equity, the rate of interest which they could offer

on their bonds, and the debt equity ratio that was permissible in different industries. Moreover,

most of the debt and a significant part of the equity were provided by public sector institutions.

Working capital management was even more constrained with detailed regulations on how much

inventory the firms could carry or how much credit they could give to their customers. Working

capital was financed almost entirely by banks at interest rates laid down by the central bank. The

idea that the interest rate should be related to the creditworthiness of the borrower was still

heretical.1 Even the quantum of working capital finance was related more to the credit need of

the borrower than to creditworthiness on the principle that bank credit should be used only for

productive purposes. What is more, the mandatory consortium arrangements regulating bank

credit ensured that it was not easy for large firms to change their banks or vice versa.

Firms did not even have to worry about the deployment of surplus cash. Bank credit was

provided in the form of an overdraft (or cash credit as it was called) on which interest was

calculated on daily balances. This meant that even an overnight cash surplus could be parked inthe overdraft account where it could earn (or rather save) interest at the firms borrowing rate.

Effectively, firms could push their cash management problems to their banks. Volatility was not

something that most finance managers worried about or needed to. The exchange rate of the

rupee changed predictably and almost imperceptibly. Administered interest rates were changed

infrequently and the changes too were usually quite small. More worry-some were the regulatory

changes that could alter the quantum of credit or the purposes for which credit could be given. In

that era, financial genius consisted largely of finding ones way through the regulatory maze,

exploiting loopholes wherever they existed and above all cultivating relationships with those

officials in the banks and institutions who had some discretionary powers.

The last couple of decades of financial reforms have changed all this beyond recognition.

Corporate finance managers today have to choose from an array of complex financial

1 Management of Working Capital, available at:www.egyankosh.ac.in/bitstream/123456789/38353/1/Unit-16.pdf
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instruments; they can now price them more or less freely; and they have access (albeit limited) to

global capital markets. On the other hand, they now have to deal with a whole new breed of

aggressive financial intermediaries and institutional investors; they are exposed to the volatility

of interest rates and exchange rates; they have to agonize over capital structure decisions and

worry about their credit ratings. If they make mistakes, they face retribution from an increasingly

competitive financial marketplace, and the retribution is often swift and brutal.2

The major reform in the capital market was the abolition of capital issues control and the

introduction of free pricing of equity issues in 1992. Simultaneously the Securities and Exchange

Board of India (SEBI) was set up as the apex regulator of the Indian capital markets. In the last

five years, SEBI has framed regulations on a number of matters relating to capital markets. SEBI

has been going through a protracted learning phase since its inception.3 Capital markets have

always had the potential to exercise discipline over promoters and management alike, but it wasthe structural changes created by economic reform that effectively unleashed this power.

Minority investors can bring the discipline of capital markets to bear on companies by voting

with their wallets. They can vote with their wallets in the primary market by refusing to

subscribe to any fresh issues by the company. They can also sell their shares in the secondary

market thereby depressing the share price. Financial sector reforms set in motion several key

forces that made these forces far more potent than in the past.4

The oxygen of any business is funds or cash which keeps it going indefinitely as per the Going

Concern Concept of GAAP principles. There is plethora of sources from where an organization

can raise funds for accomplishing activities of expansion, growth and diversification. These

funds could be raised either from domestic market or foreign market.5 Raising funds from

domestic market involves the options of IPO for equity shares, preference shares and/or

debentures; bank loan and finally QIP. Whereas raising funds from foreign market involves the

2 Barua, S. K. , V. Raghunathan, J. R. Varma and N. Venkiteswaran (1994), Analysis of the Indian SecurityIndustry: Market for Debt, Vikalpa, 19(3), p 3-22.3Masahiro Kawai, Eswar S. Prasad, Asian Perspectives on Financial Sector Reforms and Regulation, BrookingsInstitution Press, 2011, p. 2614 See, Jayanth R. Varma, Indian Financial Sector Reforms: A Corporate Perspective, available at:www.iimahd.ernet.in/~jrvarma/papers/vik23-1.pdf5Qualified Institutional Placements, available at:www.uttamcorporate.com/resources/qip.pdf
http://www.iimahd.ernet.in/~jrvarma/papers/vik23-1.pdfhttp://www.iimahd.ernet.in/~jrvarma/papers/vik23-1.pdfhttp://www.uttamcorporate.com/resources/qip.pdfhttp://www.uttamcorporate.com/resources/qip.pdfhttp://www.uttamcorporate.com/resources/qip.pdfhttp://www.uttamcorporate.com/resources/qip.pdfhttp://www.iimahd.ernet.in/~jrvarma/papers/vik23-1.pdf


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route of ADR/GDR/FCCB. All these modes are highly differentiated in respect to the ownership

dilution, cost of issue, time of issue, increased liability, more regulations etc.6

When a business entity needs money the general course of action that it follows is that it goes to

the bank. However banks may not be ready to provide huge finance for a long time especially ifthe returns are not fixed. The best way to raise money is through offer of shares. The securities

which the companies issue for the first time to the public and other financial institutions either

after incorporation or on conversion from private to public company is called INITIAL

PUBLIC OFFER or IPO. Raising equity gives boost to economical development of the

country. Raising money through IPO is a very complex process. It requires analysis and

implementation of various commercial laws applicable to IPO-Prospectus. These laws are

Companies Act, Income Tax Act, FEMA, Securities Contract Act and SEBI Guidelines on Issue

of Capital and Disclosure Requirements.7 It is also necessary to implement circulars from time

to time by SEBI. The introduction of SEBI attracted Foreign Institutional Investors to invest

money in stock market in India. It has also helped Indian Companies to offer securities in most

scientific method to Indian and Foreign investors.

6The International Financial Crisis: its causes and what to do about it? available at:www.alde.eu/fileadmin/webdocs/key_docs/Finance-book_EN.pdf7 Varma, J. R. (1996), Financial Sector Reforms: The Unfinished Agenda, Paper presented at the Seminar onEconomic Reforms: The Next Step at Rajiv Gandhi Institute for Contemporary Studies, New Delhi, October 2-4,1996.
http://www.alde.eu/fileadmin/webdocs/key_docs/Finance-book_EN.pdfhttp://www.alde.eu/fileadmin/webdocs/key_docs/Finance-book_EN.pdfhttp://www.alde.eu/fileadmin/webdocs/key_docs/Finance-book_EN.pdf


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CHAPTER-I

OVERVIEW OF THE INDIAN FINANCIAL MARKETS

The Financial Market is an amorphous set of players who come together to trade in financial

assets. Financial Markets in any economic system tends to act as a conduit between theorganizations who need funds and the investors who wish to invest their money into profitable

opportunity. Thus, it helps institutions and organizations that need money to have an access to it

and on the other hand, it helps the public in general to earn savings. Thus they perform the

crucial function of bringing together the entities who are either financially scarce or who are

financially slush.8 This helps generally in a smoother economic functioning in the sense that

economic resources go to the actual productive purposes. In modern economic systems Stock

Exchanges are the epicenter of the financial activities in any economy as this is the place where

actual trading in securities takes place.

Modern day Stock Exchanges are the major center where trading in the existing financial assets

takes place. In this respect, they have come a long way in the sense that these days, they act as a

platform to launch new securities as well as act as most authentic and real time indicator of the

general economic sentiment.9 The zone of activities in the capital market is dependent partly on

the savings and investment in the economy and partly on the performance of the industry and

economy in general. In other words capital market constitutes the channel through which the

capital resources generated in the society and are made available for economic development of

the nation.

As such, Financial Markets are functionally classified as having two parts10, namely:

1. The Primary Market: Primary Market comprises of the new securities which are offered to the

public by new companies. It is the mechanism through which the resources of the community are

mobilized and invested in various types of industrial securities.11 Whenever a new company

wants to enter the market it has to first enter the primary market.

8 Ministry of Finance (1991), Report of the Committee on the Financial System (Narasimham Committee), NewDelhi, Government of India.9 Varma, J. R. (1997), Corporate Governance in India: Disciplining the Dominant Shareholder, IIMB ManagementReview, 9(4), 5-1610 See, FAQ's on Primary Market and Secondary Market, available at:www.sebi.gov.in/faq/smdfaq.html11See, Primary Market NSE, available at:www.nseindia.com/content/us/ismr2010ch2.pdf
http://www.sebi.gov.in/faq/smdfaq.htmlhttp://www.sebi.gov.in/faq/smdfaq.htmlhttp://www.sebi.gov.in/faq/smdfaq.htmlhttp://www.nseindia.com/content/us/ismr2010ch2.pdfhttp://www.nseindia.com/content/us/ismr2010ch2.pdfhttp://www.nseindia.com/content/us/ismr2010ch2.pdfhttp://www.nseindia.com/content/us/ismr2010ch2.pdfhttp://www.sebi.gov.in/faq/smdfaq.html


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2. The Secondary Market: Secondary Market comprises of further issues which are floated by the

existing companies to enhance their liquidity position. Once the new issues are floated and

subscribed by the public then these are traded in the secondary market.12 It provides easy

liquidity, transferability and continuous price formation of securities to enable investors to buy

and sell them with ease. The volume of activity in the Secondary Market is much higher

compared to the Primary Market

PRIMARY MARKET-GENESIS AND GROWTH

When a business entity needs money the general course of action that it follows is that it goes to

the bank. However banks may not be ready to provide huge finance for a long time especially if

the returns are not fixed. The best way to raise money is through offer of shares and for this the

Primary Market is the answer. The Primary Market deals with the new securities which werepreviously not available for trade to the public. The main function is to facilitate the transfer of

resources from savers to entrepreneurs seeking to establish or to expand and diversify existing

events.13 The mobilization of funds through the Primary Market is adopted by the state

government and corporate sector. In other words the Primary Market is an integral part of the

capital market of a country together with the securities market. The development of security as

well as the scope for higher productive capacity and social welfare depends upon the efficiency

of the Primary Market.

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago.

The earliest records of security dealings in India are meager and obscure. The East India

Company was the dominant institution in those days and business in its loan securities used to be

transacted towards the close of the eighteenth century. By 1830's business on corporate stocks

and shares in Bank and Cotton presses took place in Bombay. Though the trading list was

broader in 1839, there were only half a dozen brokers recognized by banks and merchants during

1840 and 1850. The 1850's witnessed a rapid development of commercial enterprise and

12 FAQ's on Secondary Market, available at:www.sebi.gov.in/faq/smdfaq.html13 Primary Market - Capital Market available at:www.capitalmarket.com/macro/economysurvey/...02/.../chap42.pdf
http://www.sebi.gov.in/faq/smdfaq.htmlhttp://www.sebi.gov.in/faq/smdfaq.htmlhttp://www.sebi.gov.in/faq/smdfaq.htmlhttp://www.capitalmarket.com/macro/economysurvey/...02/.../chap42.pdfhttp://www.capitalmarket.com/macro/economysurvey/...02/.../chap42.pdfhttp://www.capitalmarket.com/macro/economysurvey/...02/.../chap42.pdfhttp://www.sebi.gov.in/faq/smdfaq.html


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brokerage business attracted many men into the field and by 1860 the number of brokers

increased into 60.14

In 1860-61 the American Civil War broke out and cotton supply from United States and Europe

was stopped and thus started the 'Share Mania' in India. The number of brokers increased toabout 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump

began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at

Rs. 87). At the end of the American Civil War, the brokers who thrived out of Civil War in 1874,

found a place in a street (now appropriately called as Dalal Street) where they would

conveniently assemble and transact business. In 1887, they formally established in Bombay, the

"Native Share and Stock Brokers' Association" (which is alternatively known as "The Stock

Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was

inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.15

Ahmedabad gained importance next to Bombay with respect to cotton textile industry. After

1880, many mills originated from Ahmedabad and rapidly forged ahead. As new mills were

floated, the need for a Stock Exchange at Ahmedabad was realised and in 1894 the brokers

formed "The Ahmedabad Share and Stock Brokers' Association". What the cotton textile

industry was to Bombay and Ahmedabad, the jute industry was to Calcutta. Also tea and coal

industries were the other major industrial groups in Calcutta. After the Share Mania in 1861-65,

in the 1870's there was a sharp boom in jute shares, which was followed by a boom in tea shares

in the 1880's and 1890's; and a coal boom between 1904 and 1908. On June 1908, some leading

brokers formed "The Calcutta Stock Exchange Association". In the beginning of the twentieth

century, the industrial revolution was on the way in India with the Swadeshi Movement; and

with the inauguration of the Tata Iron and Steel Company Limited in 1907, an important stage in

industrial advancement under Indian enterprise was reached. Indian cotton and jute textiles, steel,

sugar, paper and flour mills and all companies generally enjoyed phenomenal prosperity, due to

the First World War.16

14History of Stock Market, available at:http://www.indianstocktimes.com/test/tutorial1.html15

M. Javaid, Indian Stock Market: An Overview, available at:

http://space.vidyanidhi.org.in:8080/.../bitstream/2009/.../JMI-2002-168-2..16See History of Stock Market, available at:http://www.indianstocktimes.com/tutorial1.php
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In 1920, the then demure city of Madras had the maiden thrill of a stock exchange functioning in

its midst, under the name and style of "The Madras Stock Exchange" with 100 members.

However, when boom faded, the number of members stood reduced from 100 to 3, by 1923, and

so it went out of existence. In 1935, the stock market activity improved, especially in South India

where there was a rapid increase in the number of textile mills and many plantation companies

were floated. In 1937, a stock exchange was once again organized in Madras - Madras Stock

Exchange Association (Pvt) Limited which was later on changed to Madras Stock Exchange

Limited. Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with

the Punjab Stock Exchange Limited, which was incorporated in 1936.17

The Second World War broke out in 1939. It gave a sharp boom which was followed by a slump.

But, in 1943, the situation changed radically, when India was fully mobilized as a supply base.

On account of the restrictive controls on cotton, bullion, seeds and other commodities, those

dealing in them found in the stock market as the only outlet for their activities. They were

anxious to join the trade and their number was swelled by numerous others. Many new

associations were constituted for the purpose and Stock Exchanges in all parts of the country

were floated. The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange

Limited (1940) and Hyderabad Stock Exchange Limited (1944) were incorporated. In Delhi two

stock exchanges - Delhi Stock and Share Brokers' Association Limited and the Delhi Stocks and

Shares Exchange Limited - were floated and later in June 1947, amalgamated into the Delhi

Stock Exchnage Association Limited.18

Most of the exchanges suffered almost a total eclipse during depression. Lahore Exchange was

closed during partition of the country and later migrated to Delhi and merged with Delhi Stock

Exchange. Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.

Most of the other exchanges languished till 1957 when they applied to the Central Government

for recognition under the Securities Contracts (Regulation) Act, 1956. Only Bombay, Calcutta,

Madras, Ahmedabad, Delhi, Hyderabad and Indore, the well established exchanges, were

recognized under the Act. Some of the members of the other Associations were required to be

admitted by the recognized stock exchanges on a concessional basis, but acting on the principle

17 Id.18 Id.
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of unitary control, all these pseudo stock exchanges were refused recognition by the Government

of India and they thereupon ceased to function. Thus, during early sixties there were eight

recognized stock exchanges in India (mentioned above). The number virtually remained

unchanged, for nearly two decades. 19

During eighties, however, many stock exchanges were established: Cochin Stock Exchange

(1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock

Exchange Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock

Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh Stock

Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989), Bhubaneswar

Stock Exchange Association Limited (1989), Saurashtra Kutch Stock Exchange Limited (at

Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and recently established

exchanges - Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized

stock exchanges in India excluding the Over The Counter Exchange of India Limited (OTCEI)

and the National Stock Exchange of India Limited (NSEIL).20

Trading in Indian stock exchanges are limited to listed securities of public limited companies.

They are broadly divided into two categories, namely, specified securities (forward list) and non-

specified securities (cash list). Equity shares of dividend paying, growth-oriented companies

with a paid-up capital of at least Rs.50 million and a market capitalization of atleast Rs.100

million and having more than 20,000 shareholders are, normally, put in the specified group and

the balance in non-specified group. Two types of transactions can be carried out on the Indian

stock exchanges: (a) spot delivery transactions "for delivery and payment within the time or on

the date stipulated when entering into the contract which shall not be more than 14 days

following the date of the contract" : and (b) forward transactions "delivery and payment can be

extended by further period of 14 days each so that the overall period does not exceed 90 days

from the date of the contract". The latter is permitted only in the case of specified shares. The

19M.R. Mayya, Do our Stock exchanges have a future, Economic and Political Weekly, Bombay, Februrary 1978,pg. 1920 Report of the High Powered Committee on Stock Market Reforms. Vol. III (Chairman: G.S.Patel), 1985, P. 239
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brokers who carry over the outstandings pay carry over charges (cantango or backwardation)

which are usually determined by the rates of interest prevailing.21

A member broker in an Indian stock exchange can act as an agent, buy and sell securities for his

clients on a commission basis and also can act as a trader or dealer as a principal, buy and sellsecurities on his own account and risk, in contrast with the practice prevailing on New York and

London Stock Exchanges, where a member can act as a jobber or a broker only. The nature of

trading on Indian Stock Exchanges are that of age old conventional style of face-to-face trading

with bids and offers being made by open outcry. However, there is a great amount of effort to

modernize the Indian stock exchanges in the very recent times. With the liberalization of the

Indian economy, it was found inevitable to lift the Indian stock market trading system on par

with the international standards. On the basis of the recommendations of high powered Pherwani

Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development

Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance

Corporation of India, all Insurance Corporations, selected commercial banks and others.22

Trading at NSE can be classified under two broad categories:

(a)Wholesale debt market and(b)Capital market.

Wholesale debt market operations are similar to money market operations - institutions and

corporate bodies enter into high value transactions in financial instruments such as government

securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc.23

There are two kinds of players in NSE:

(a) trading members and(b)participants.

Recognized members of NSE are called trading members who trade on behalf of themselves and

their clients. Participants include trading members and large players like banks who take direct

21 NSE Factbook- 2000, Secondary Market trading, P-8322 RBI (1999): Handbook of Statistics on Indian Economy, Reserve Bank of India Annual Report, RBI,Mumbai.23 See Art. 7
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settlement responsibility. Trading at NSE takes place through a fully automated screen-based

trading mechanism which adopts the principle of an order-driven market. Trading members can

stay at their offices and execute the trading, since they are linked through a communication

network. The prices at which the buyer and seller are willing to transact will appear on the

screen. When the prices match the transaction will be completed and a confirmation slip will be

printed at the office of the trading member. NSE has several advantages over the traditional

trading exchanges. They are as follows:

NSE brings an integrated stock market trading network across the nation. Investors can trade at the same price from anywhere in the country since inter-market

operations are streamlined coupled with the countrywide access to the securities.

Delays in communication, late payments and the malpractices prevailing in thetraditional trading mechanism can be done away with greater operational efficiency and

informational transparency in the stock market operations, with the support of total

computerized network.24

Unless stock markets provide professionalized service, small investors and foreign investors will

not be interested in capital market operations. And capital market being one of the major source

of long-term finance for industrial projects, India cannot afford to damage the capital market

path. In this regard NSE gains vital importance in the Indian capital market system.

25

24 Facts and Figures, Indian Stock Market, The Delhi Stock Exchange Association Ltd. Compiled and Edited by ShriC.S. Verma on behalf od DSE, Printed by Thomson Press.25 SEBI Annual Report- 1999-2000
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CHAPTER II

PUBLIC OFFER AND THE INDIAN FINANCIAL MARKET

A business can raise capital for its enterprise through the sale of securities, which include stocks,

bonds, notes, debentures, or other documents that represent a share in the company or a debt

owed by the company. When a company proceeds to issue the securities, it is called an offering.

There are two types of offering: private and public. A private offering is made to a limited

number of persons who are so well-informed about the affairs of the company that the company

does not need to file separate statements/ documents for obtaining special permission as it can be

done by following the proper internal proceedings as laid down by the law of the land and

providing a simple intimation to the regulating authority abour such issuance once the entire

process is done with.26

In contrast, a public offering is made to the public at large and is governed by federal and state

regulations. Until the 1930s the public offering of securities was subject to minimal regulation.

Investors had no reliable way of knowing whether the information they received about a public

offering was correct and complete. Because of the lack of regulation, fraudulent public offerings

were common, leading to the sale of worthless stock. But as of now it is an area which is

governed by very strict legislations and is constantly monitored by the statutory watchdogs of the

financial markets, stake holders of the financial markets as well as the public at large.27

Primarily, issues made by an Indian company can be classified as Public issue, Rights issue,

Bonus issue and Private Placement.28 While right issues by a listed company and public issues

involve a detailed procedure, bonus issues and private placements are relatively simpler.

a) Public issue: When an issue / offer of securities is made to new investors for becomingpart of shareholders family of the issuer29 it is called a public issue. Public issue can be

further classified into (i) Initial Public Offer (IPO) and (ii) Further Public Offer (FPO).The significant features of each type of public issue are illustrated below:

26Issues by Indian Companies in India, Chapter II, available at:www.sebi.gov.in/faq/subsection.pdf27 Public offer of securities: An analysis, available at: http://www.caclubindia.com/forum/public-offer-of-securities-8212-an-analysis-145730.asp28 Frequently Asked Questions on Primary Market Issuances, available at:www.investor.sebi.gov.in/faq/pubissuefaq.pdf29 Frequently Asked Questions (FAQs) on Issues, available at:www.sebi.gov.in/faq/pubissuefaq.pdf
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(i) Initial public offer (IPO): When an unlisted company makes either a freshissue of securities or offers its existing securities for sale or both for the first

time to the public, it is called an IPO. This paves way for listing and trading of

the issuers securities in the Stock Exchanges.30

(ii) Further public offer (FPO): When an already listed company makes either afresh issue of securities to the public or an offer for sale to the public, it is

called as an FPO or in market parlance is also referred to as Follow on

Offer.31

b) Rights Issue: When an issue of securities is made by an issuer to its shareholdersexisting as on a particular date fixed by the issuer (i.e. record date), it is known as a

Rights Issue. The rights are offered in a particular ratio to the number of securities held as

on the record date.32c) Bonus Issue: When an issuer makes an issue of securities to its existing shareholders as

on a record date, without any consideration from them, it is called a bonus issue. The

shares are issued out of the Companys free reserve or share premium account in a

particular ratio to the number of securities held on a record date.33

d) Private Placement: When an issuer makes an issue of securities to a select group ofpersons not exceeding 49, and which is neither a rights issue nor a public issue, it is

called a private placement. Private placement of shares or convertible securities by listed

issuer can be of two types:

(i) Preferential Allotment: When a listed issuer issues shares or convertiblesecurities, to a select group of persons in terms of provisions of Chapter VII of

SEBI (ICDR) guidelines, it is called a preferential allotment. The issuer is

required to comply with various provisions which inter-alia include pricing,

disclosures in the notice, lock-in etc, in addition to the requirements specified

in the Companies Act.34

30 Definition of Initial Public Offering (IPO), available at:www.investopedia.com31Definition of Follow On Public Offer (FPO), available at:www.investopedia.com32What is Rights issue? available at:www.lastbull.com/rights-issue-explanation/33Issue of Bonus Shares : A Lucrative Preposition, available at:http://legalserviceindia.com/article/l204-Issue-of-Bonus-Shares.html34 Preferential Allotment - Securities and Exchange Board of India, available at:www.sebi.gov.in/commreport/rep245a1.html
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(ii)Qualified Institutions Placement (QIP): When a listed issuer issues, equityshares, non-convertible debt instruments along with warrants and convertible

securities other than warrants to Qualified Institutional Buyers on a private

placement basis in terms of provisions of Chapter VIII of SEBI (ICDR)

guidelines, it is called a QIP.35

REASONS FOR GOING PUBLIC

To raise funds for financing capital expenditure needs like expansion diversification etc. To finance increased working capital requirement As an exit route for existing investors For debt financing.

Advantages Of Going Public

Stock holder Diversification as a company grows and becomes more valuable, itsfounders often have most of its wealth tied up in the company. By selling some of their

stock in a public offer, the founders can diversify their holdings and thereby reduce

somewhat the risk of their personal portfolios;

Easier to raise new capital: If a privately held company wants to raise capital by sale ofnew or additional stock, it must either go to its existing shareholders or shop around forother investors. This can often be a difficult and sometimes impossible process. By going

public it becomes easier to find new investors for the business;

Enhances liquidity: The stock of a closely held firm is not liquid. If one of the holderswants to sell some of his shares, it is hard to find potential buyers-especially if the sum

involved is large. Even if a buyer is located there is no established price at which to

complete the transaction. These problems are easily overcome in a publicly owned

company;

Establishes value for the firm: This can be very useful in attracting key employees withstock options because the underlying stock have a market value and a market for them to

be traded that allows for liquidity for them;

35 Chapter VIII, SEBI (ICDR) regulations , 2009


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Image: The reputation and visibility of the company increases. It helps to increasecompany and personal prestige.

Other Advantages

Additional incentive for employees in the form of the companies stocks. This also servesas an attraction for potential prospective employees;

It commands better valuation of the company; Better situated for making acquisitions.

DISADVANTAGES OF GOING PUBLIC

Cost of Reporting: A publicly owned company must file quarterly reports with theSecurities and exchange Board of India. These reports can be costly especially for small

firms;

Disclosure: Management may not like the idea or reporting operating data, because suchdata will then be available to competitors;

Self dealings: The owning managers of closely held companies have many opportunitiesfor self-transactions, although legal they may not want to disclose to the public;

Inactive market and low price: If a firm is very small and its shares are not tradedfrequently, then its stock will not really be liquid and the market price may not be trulyrepresentative of the stocks real value;

Control: Owning less than 50% of the shares could lead to a loss of control in themanagement.

Other Disadvantages

The profit earned by the company should be shared with its investors in the form ofdividend;

An IPO is a costly affair and an amount equivalent to around 15-20% of the actualamount realized through the IPO is spent on raising the same; and

A substantial amount of time and effort has to be invest


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ANALYSIS OF THE TRENDS IN IPO

Primary Reasons For A Company Going Public

Most people label a public offer as a marketing event, which it typically is. For the majority of

firms going public, they need additional capital to execute long-range business models, increase

brand name, to finance possible acquisitions or to take up new projects. By converting to

corporate status, a company can always dip back into the market and offer additional shares

through a rights issue.

Performance in 90s

Let us have a look at the general development of the Primary Markets in the nineties. There have

been many regulatory changes in the regulation of primary market in order to save investorsfrom fraudulent companies. The most path breaking development in the primary market

regulation has been the abolition of CCI (Controller of Capital Issues). The aim was to give the

freedom to the companies to decide on the pricing of the issue and this was supposed to bring

about a self-managing culture in the financial system. But the move was hopelessly misused in

the years of 1994-1995 and many companies came up with issues at sky-high prices and the

investors lost heavily. That phase took a heavy toll on the investors sentiment and the result was

the amount of money raised through IPO route.

1993-96: SUNRISE, SUNSET

With controls over pricing gone, companies rushed to tap the Primary Market and they did so,

with remarkable ease thanks to overly optimistic merchant bankers and gullible investors.

Around Rs20000 crores were raised through 4053 issues during this period. Some of the

prominent money mobilizes were the so called sunrise sectors-polyester, textiles, finance,

aquaculture. The euphoria spilled over to the Secondary Market. But reality soon set in. Issuers

soon failed to meet projections, many disappeared or sank. Result: the small investor deserted

both markets-till the next boom!36

1998-2000: ICE ON A HOT STREAK

36Domino Effect, Business Outlook India, available at:www.iinvestor.com/printarticle.aspx?92639
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As the great Indian software story played itself out, software stocks led a bull charge on the

bourses. The Primary Market caught up, and issues from the software markets flooded the

market. With big IPOs from companies in the ICE (Information Technology, Communication

and Entertainment) sectors, the average issue price shot up from Rs.5 crore in 1994-96 to Rs.30

crore in the 2000 era. But gradually, hype took over and valuations reached absurd levels. Both

markets tanked.

2001-2002-ALMOST CLOSED

There were hardly any IPOs and those who ventured, got a lukewarm response. A depressed

Secondary Market had ensured that the doors for the Primary Market remained closed for the

entire FY 2001-2002.There were hardly any IPOs in FY 2001-2002.37

2002: QUALITY ON OFFER

The Primary Market boom promises to be different. To start with, the cream of corporate India is

queuing up, which ensures quality. In this fragile market, issue pricing remains to be

conservative, which could, potentially mean listing gains. This could rekindle the interest of

small investors in stocks and draw them back into the capital market. The taste of gains from the

primary issues is expected to have a spillover effect on the secondary market, where valuations

today are very attractive.

2003: IPO-IMPROVED PERFORMANCE OVERALL!

Even as the secondary market moved into top gear in 2003 the primary market too scripted its

own revival story, buoyed largely by the Maruti IPO which was oversubscribed six and a half

times. In 2003 almost all primary issues did well on domestic bourses after listing, prompting

retail investors to flock to IPOs. All IPOs, including Indraprastha Gas and TV Today Network

which was oversubscribed 51 times showed the growing appetite for primary issues. Divi Labs

hit the market in February followed by Maruti. Initially, the Maruti share price was considered

steep at Rs125 per share for a Rs5 paid-up share. By the end of the year, the stock had climbed to

over Rs355. Close on the heels of Maruti, came the Uco Bank IPO, which attracted about

1million applicants. The primary issue of Indian Overseas Bank attracted about 4.5mn applicants

37An Overview of the Indian Stock Market, available at:www.isid.org.in/pdf/03_ksc2.pdf
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and Vijaya Bank over Rs40bn in subscriptions. The last one to get a huge response was

Indraprastha Gas, which reportedly garnered about Rs30bn. TV Todays public offer was

expected to draw in excess of Rs30bn. In overseas listings, the only notable IPOs were Infosys

Technology's secondary ADR offer and the dull debut of Sterlite Group company Vedanta on the

London Stock Exchange.

It was really Maruti Udyog that took the lead with its new issue in June. The issue was heavily

over-subscribed and by the middle of December the share value appreciated 186 per cent. The

near trebling of the investment in less than 6 months inspired the retail investor who is now back

again in the market scouting for good scrips.

After the phenomenal success of Maruti issue, a number of companies have approached the

capital market and a lot more are waiting for SEBI approval. SEBI has taken enough care toforce companies to make relevant disclosures for the investor to judge the quality of new

issues.38 Besides, the companies themselves have been careful not to over-price the shares. On

the contrary, some of the companies have deliberately under-priced them to let the issue get

over-subscribed and to let the investor share some of the capital gain after listing. With the care

taken by SEBI and the companies it is unlikely that the experience of 1995 will be repeated. In

the financial year just ended, 23 companies tapped the primary market and managed to garner

less than Rs200bn. The latest development in the primary market has been the Indian players

thirst for money satiating offshore

THE PROCESS OF AN IPO

The issue of securities to members of the public through a prospectus involves a fairly elaborate

process, the principal steps of which are as follows39:

1. The board of directors approves the proposal to raise capital from the public andauthorizes the managing director (or a board committee) to do all the tasks relating to thepublic issue.

38 Report of the Kumar Mangalam Birla Committee on Corporate Governance available at:http://www.sebi.gov.in/commreport/corpgov.html39 About Public Issues, BSE India, available at:http://www.bseindia.com/bookbuilding/about.asp
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2. The company convenes a meeting to seek the approval of shareholders and the shareholders pass a special resolution under section 81(1A) of the Companies Act authorizing

the company to make the public issue.

3. The company appoints a merchant banker as the lead manager (LM) to the issue.4. The lead manager carries out due diligence to check all relevant information, documents,

and certificates for the issue.

5. The company, advised by the lead manager, appoints various intermediaries such as theregistrar to the issue, the bankers to the issue, the printers, and advertiser.

6. The lead manager draws up the issue budget, keeping in mind the guidelines issued bythe Ministry of Finance on issue expenses, and the company approves the same (The

main components of the issue expenses are fees for lead manager, underwriters, registrar

and bankers, brokerage, postage, stationery, issue marketing expenses, etc.)7. The lead manager prepares the draft prospectus in consultation with management and

seeks the approval of the board.

8. The lead manager files the draft prospectus, approved by the board, with SEBI for itsobservation along with a soft copy. SEBI places the same on its website for comments

from the public.

9. The company makes listing application to all the stock exchanges where the shares areproposed to be listed along with copies of the draft prospectus. The draft prospectus is

also hosted on the websites of the lead manager and the underwriters.

10.The company enters into a tripartite agreement with the registrar and all the depositoriesfor providing the facility of offering the shares in a dematerialized mode.

11.If the issue is proposed to be underwritten (it is optional in a retail issue and mandatory ina book built issue to the extent of the net public offer), the lead manager makes

underwriting arrangements.

12.Within 21 days, SEBI makes its observations on the draft prospectus. The stockexchanges also suggest changes, if any. The company carries out the modifications to the

satisfaction of these authorities.

13.The company files the prospectus with the Registrar of Companies (ROC).14.The lead manager and the company market the issue using a combination of press

meetings, brokers' meetings, investors' meeting and so on.
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15.The company releases a mandatory advertisement, called the 'announcementadvertisement 10 days prior to the opening of the issue. This has to conform to Form 2A,

also called the abridged prospectus.

16.The lead manager and the printer dispatch the application forms to all stock exchanges,SEBI, collection centers brokers, underwriters, and investor associations. Every

application form is accompanied by the abridged prospectus.

17.The issue is kept open for a minimum of 3 days and a maximum of 21 days.18.After the issue is closed, the basis of allotment is finalized by the stock exchange, lead

manager and the registrar, in conformity with certain SEBI- prescribed rules.

19.The lead manager ensures that the demat credit or dispatch of share certificates andrefund orders to the allottees is completed within two working days after the basis of

allotment is finalized and the shares are listed within 7 days of the finalization of thebasis of allotment.

The cost of public issue is normally between 8 and 12 percent depending on the size of the issue

and on the level of marketing efforts. The important expenses incurred for a public issue are as

follows40:

1. Underwriting expenses: The underwriting commission is fixed at 2.5 % of the nominalvalue (including premium, if any) of the equity capital being issued to public.

2. Brokerage applicable to all types of public issues of industrial securities is fixed at 1.5%whether the issue is underwritten or not. The managing brokers (if any) can be paid a

maximum remuneration of 0.5% of the nominal value of the capital being issued to

public.

3. The aggregate amount payable as fees to the managers to the issue was previously subjectto certain limits. Presently, however, there is no restriction on the fee payable to the

managers of the issue.

4. Fees for Registrars to the Issue: The compensation to he registrars, typically based on apiece rate system, depends on the number of applications received, number of allotters,

and the number of unsuccessful applicants.

40 K Ellis, A Guide to the Initial Public Offering Process, available at:www.forum.johnson.cornell.edu/faculty/michaely/guide.pdf
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price band indicated by the company (the price band mentions the lowest/floor and the

highest/cap prices at which a share can be sold). The process aims at tapping both wholesale and

retail investors. The offer/issue price is then determined after the bid closing date based on

certain evaluation criteria. According to the book building process, three classes of investors can

bid for the shares:

a. Qualified Institutional Buyers: Mutual funds and Foreign Institutional Investors;b. Retail investors: Anyone who bids for shares under Rs 50,000 is a retail investor &c. High net worth individuals and employees of the company.

Allotment is the process whereby those who apply are given (allotted) shares. The bids are first

allotted to the different categories and the over-subscription (more shares applied for than shares

actually available) in each category is determined. Retail investors and high net worthindividuals get allotments on a proportional basis. The Allotment Process is as follows:

a. The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'.b. It then specifies the number of securities to be issued and the price band for orders.c. It also appoints syndicate members with whom orders can be placed by the investors.d. Investors place their order with a syndicate member who inputs the orders into the

'electronic book'. This process is called 'bidding' and is similar to open auction.

e. A Book should remain open for a minimum of 5 days.f. Bids cannot be entered less than the floor price mentioned in the price band. And they

can be revised by the bidder before the issue closes.43

On the close of the book building period the 'book runner evaluates the bids on the basis of the

evaluation criteria which may includePrice Aggression, Investor quality, Earliness of bids, etc.

The book runner and the company conclude the final price at which it is willing to issue the stock

and allocation of securities. Generally, the numbers of shares are fixed; the issue size gets frozen

based on the price per share discovered through the book building process. Allocation of

securities is made to the successful bidders. Book Building is a good concept and represents a

capital market which is in the process of maturing.

43 Issue of Shares, Accounting for Shares and Debentures, Chapter 23, p. 65, available at:www.nos.org/srsec320newE/320EL23.pdf
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All the applications received till the last date are analyzed and a final offer price, known as the

cut-off price is arrived at. The final price is the equilibrium price or the highest price at which all

the shares on offer can be sold smoothly. If your price is less than the final price, you will not get

allotment. If your price is higher than the final price, the amount in excess of the final price is

refunded if you get allotment. If you do not get allotment, you should get your full refund of your

money in 15 days after the final allotment is made. If you do not get your money or allotment in

a month's time, you can demand interest at 15 per cent per annum on the money due. As per

regulations, at least 25 per cent of the shares on offer should be set aside for retail investors. Fifty

per cent of the offer is for qualified institutional investors. Qualified Institutional Bidders (QIB)

are specified under the regulation and allotment to this class is made at the discretion of the

company based on certain criteria. QIBs can be mutual funds, foreign institutional investors,

banks or insurance companies. If any of these categories is under-subscribed, say, the retailportion is not adequately subscribed, then that portion can be allocated among the other two

categories at the discretion of the management. The allotment of shares is made on a pro-rata

basis.44

The traditional method of doing IPOs is the fixed price offering. Here, the issuer and the

merchant banker agree on an "issue price". Then one has the choice of filling in an application

form at this price and subscribing to the issue. Extensive research has revealed that the fixed

price offering is a poor way of doing IPOs. Fixed price offerings, all over the world, suffer from

`IPO under pricing'. In India, on average, the fixed-price seems to be around 50% below the

price at first listing; i.e. the issuer obtains 50% lower issue proceeds as compared to what might

have been the case. This average masks a steady stream of dubious IPOs who get an issue price

which is much higher than the price at first listing. Hence fixed price offerings are weak in two

directions: dubious issues get overpriced and good issues get underpriced, with a prevalence of

under pricing on average.45 What is needed is a way to engage in serious price discovery in

setting the price at the IPO. No issuer knows the true price of his shares; no merchant bankerknows the true price of the shares; it is only the market that knows this price.

44 Sowmya Sundar, The constructs of book building , Hindu Business Line, available at:http://www.thehindubusinessline.in/iw/2004/03/07/stories/2004030700221100.htm45

Shelly and Balwinder Singh Over subscription and and IPO under pricing: Evidence from India, IUP Journal ofApplied Finance, December, 2008.
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CHAPTER III

QUALIFIED INSTITUTIONAL PLACEMENTS AND QUALIFIED INSTITUTIONAL

BUYERS

Qualified Institutional Placement (QIP) is a capital raising tool, primarily used in India, whereby

a listed company can issue equity shares, fully and partly convertible debentures, or any

securities other than warrants which are convertible to equity shares to a Qualified Institutional

Buyer (QIB). Apart from preferential allotment, this is the only other speedy method of private

placement whereby a listed company can issue shares or convertible securities to a select group

of persons.46 QIP scores over other methods because the issuing firm does not have to undergo

elaborate procedural requirements to raise this capital. Post financial crisis scenario, Indian stock

markets were facing boom of Qualified Institution Placements (QIPs) mainly by real estategiants like Unitech & India bulls infrastructure. News of issuance of QIP made a permanent

place in all the dailies every day. QIP is a cost-effective and time saving fund raising tool for any

organization, so every one of them looking to get a pie of it.

QIP can be simply defined as the method of raising money/funds from the market by issuing

equity shares, fully and partly convertible debentures or any securities excluding warrants to a

Qualified Institutional Buyers (QIBs) by any listed company in India. It is the cost-effective and

time saving tool for raising money in comparison to IPO or bank loans. In Pre-Lehman fall era,QIP was not so famous in the capital markets instead companies took the IPO route since

investors are optimistic about the market and ready to take risks. At that time, investors emotions

were high because of rapid and large growth in countrys as well as worlds economy. Indias

GDP before Lehman fall led financial crisis i.e. around 2007 & early 2008 was at 9.3%

approximately and similarly stock exchanges (economic barometers) were doing extremely good

and were at their highest level in their history.47

After this crisis, liquidity crunch happened all across the globe (thanks to globalization) and

markets plunged drastically. Due to great efforts put in by RBI & SEBI for revival of the

economy by creating liquidity in the market, investors starts to get stable and started trusting

46 SEBI, Frequently Asked Questions (FAQs) on Issues, available at:www.sebi.gov.in/faq/pubissuefaq.pdf47Qualified Institutional Placements, available at:www.uttamcorporate.com/resources/qip.pdf
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Due to this fixed formula for QIP pricing, if suddenly market emotions falls like we have seen

during post budget session in July 2009, the stock prices began to fall. And, in that condition

instead of going for high valued QIP (historical average prices of weekly high and weekly low);

investor will choose to buy from the market at low prices. For example, companies which have

managed to raise the money from the market using this tool had to downsize their issues than

was planned initially.

The Securities and Exchange Board of India (SEBI) introduced the QIP process through a

circular issued on May 8, 200651, to prevent listed companies in India from developing an

excessive dependence on foreign capital. Prior to the innovation of the qualified institutional

placement, there was concern from Indian market regulators and authorities that Indian

companies were accessing international funding via issuing securities, such as Americandepository receipts (ADRs), in outside markets. The complications associated with raising

capital in the domestic markets had led many companies to look at tapping the overseas markets.

This was seen as an undesirable export of the domestic equity market, so the QIP guidelines

were introduced to encourage Indian companies to raise funds domestically instead of tapping

overseas markets.52

To be able to engage in a QIP, companies need to fulfill certain criteria such as being listed on an

exchange which has trading terminals across the country and having the minimum public

shareholding requirements which are specified in their listing agreement. During the process of

engaging in a QIP, the company needs to issue a minimum of 10% of the securities issued under

the scheme to mutual funds. Moreover, it is mandatory for the company to ensure that there are

at least two allottees, if the size of the issue is up to Rs 250 crore and at least five allottees if the

company is issuing securities above Rs 250 crore. No individual allottee is allowed to have more

than 50% of the total amount issued. Also no issue is allowed to a QIB who is related to the

promoters of the company.

53

The specified securities can be issued only to QIBs, who shall notbe promoters or related to promoters of the issuer. The issue is managed by a SEBI-registered

merchant banker. There is no pre-issue filing of the placement document with SEBI. The

51 See, SEBI circular on QIP: http://www.sebi.gov.in/circulars/2006/dipcir0506.html52 See, Qualified Institutional Placement - Wikipedia, the free encyclopedia.mht53 Siddhartha Sankar Saha, The Book Building Mechanism of IPOs available at: www.220.227.161.86/11142p198-206aug04.pdf
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placement document is placed on the websites of the stock exchanges and the issuer, with

appropriate disclaimer to the effect that the placement is meant only for QIBs on private

placement basis and is not an offer to the public.

Qualified Institutional Buyers (QIBs) are those institutional investors who are generallyperceived to possess expertise and the financial muscle to evaluate and invest in the capital

markets. These entities are not required to be registered with SEBI as QIBs. Any entities falling

under the categories specified above are considered as QIBs for the purpose of participating in

primary issuance process. The insertion of definition of "qualified institutional investor" enables

identification of a class of "qualified institutional investors" who may be subject to a more

liberal, enabling regulation regime.54 This would be particularly relevant in the context of private

placements. Qualified institutional investors (QIBs) make the payment on allotment. This is an

international practice. Once QIBs make a commitment, they cant go back on it

In terms of clause 2(1)(zd) of Securities and Exchange Board of India (Issue Of Capital And

Disclosure Requirements) Regulations, 2009 (ICDR Regulations) , a Qualified Institutional

Buyer shall mean: qualified institutional buyer means:

(i) a mutual fund, venture capital fund and foreign venture capital investorregistered with the Board;

(ii) a foreign institutional investor and sub-account (other than a sub-accountwhich is a foreign corporate or foreign individual), registered with the Board;

(iii) a public financial institution as defined in section 4A of the Companies Act,1956;

(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 andDevelopment Authority;

(viii) a provident fund with minimum corpus of twenty five crore rupees;54 Executive Summary of Principal Recommendations, Part - I A: Pertaining to Draft Securities Bill and DraftDepositories (Amendment) Act 1998, available at:http://www.sebi.gov.in/commreport/Dhanuka3.html
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(ix) a pension fund with minimum corpus of twenty five crore rupees;(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;

Different Types of QIBs

i. Mutual fund: A mutual fund is just the connecting bridge or a financial intermediary thatallows a group of investors to pool their money together with a predetermined investment

objective. The mutual fund will have a fund manager who is responsible for investing the

gathered money into specific securities (stocks or bonds). When you invest in a mutual

fund, you are buying units or portions of the mutual fund and thus on investing becomes

a shareholder or unit holder of the fund.55 Mutual funds are considered as one of the bestavailable investments as compare to others they are very cost efficient and also easy to

invest in, thus by pooling money together in a mutual fund, investors can purchase stocks

or bonds with much lower trading costs than if they tried to do it on their own. But the

biggest advantage to mutual funds is diversification, by minimizing risk & maximizing

returns.56

ii. Venture capital fund: Venture capital is a means of equity financing for rapidly-growingprivate companies. Finance may be required for the start-up of a company,

development/expansion or purchase of a company, etc. Venture Capital firms invest

funds on a professional basis, often focusing on a limited sector of specialization (eg. IT,

infrastructure, health/life sciences, clean technology, etc.). The goal of venture capital is

to build companies so that the shares become liquid (through IPO or acquisition) and

provide a rate of return to the investors (in the form of cash or shares) that is consistent

with the level of risk taken. With venture capital financing, the venture capitalist acquires

an agreed proportion of the equity of the company in return for the funding. Equity

finance offers the significant advantage of having no interest charges. 57 It is "patient"

capital that seeks a return through long-term capital gain rather than immediate and

55 Investments In Mutual Funds, SEBI Investor Education Programme, available at:http://www.sebi.gov.in/faq/mf_faq.html56Mutual Funds Basic, available at http://www.mutualfundsindia.com/mfbasic.asp57Nidhi Bothra, Venture Capital Regulations in India available at:www.india-financing.com/...
http://www.sebi.gov.in/faq/mf_faq.htmlhttp://www.sebi.gov.in/faq/mf_faq.htmlhttp://www.india-financing.com/http://www.india-financing.com/http://www.in

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