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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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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