Exploring Qualified Institutional Buyers (QIBs) in Indian Initial Public Offerings (IPOs)
In the realm of initial public offerings (IPOs) in India, a company embarks on its journey to raise capital by introducing its shares to the public for the very first time. The triumph of an IPO stands as a pivotal factor in determining the company’s growth trajectory and long-term prosperity. An IPO attracts a diverse array of investors, comprising Retail Investors, Anchor Investors, High Net Worth Individuals (HNIs), and the crucial Qualified Institutional Buyers (QIBs). Among these categories, QIBs play a paramount role in shaping the destiny of a company’s IPO. In India, Qualified Institutional Buyers are essentially institutional investors encompassing entities like mutual funds, pension funds, insurance companies, and banks, collectively recognised as QIBs. In this article, we delve into the intricate world of Qualified Institutional Buyers in the context of IPOs.
Unravelling the Identity: What is a Qualified Institutional Buyer (QIBs)
Qualified Institutional Buyers (QIBs) represent institutional investors endowed with substantial financial resources and a profound acumen for assessing the potential of a company poised to go public. It is imperative for QIBs to be duly registered with SEBI- Securities and Exchange Board of India.
Their significance in the IPO process transcends mere participation, as they contribute a substantial portion of the capital required for a successful IPO. The involvement of QIBs instills confidence in other categories of investors, including retail investors, thereby fostering a positive climate for IPO participation. Typically, QIBs are offered a discount on the IPO offer price and have the capacity to acquire sizable blocks of shares, significantly bolstering the prospects of a successful IPO.
Within the QIB category, there exists a subcategory known as “anchor” investors. These anchor investors partake in the IPO even before it becomes accessible to the general public. To qualify, their applications must exceed ₹10 crores, and they are limited to acquiring a maximum of 60% of the QIB portion. Both QIBs and anchor investors are subject to a 30-day lock-in period after the IPO’s listing, and they are prohibited from submitting bids at the cut-off price.
Defining the Spectrum: Who are Qualified Institutional Buyers (QIBs)
As per clause 2.2.2B (v) of the DIP Guidelines, a “Qualified Institutional Buyer” is characterised by the following entities:
a) Public financial institutions as per section 4A of the Companies Act, 1956;
b) Scheduled commercial banks;
c) Mutual funds registered with the Board; d) Foreign institutional investors and sub-accounts registered with SEBI, excluding foreign corporates or individuals;
e) Multilateral and bilateral development financial institutions; f) Venture capital funds registered with SEBI;
g) Foreign venture capital investors registered with SEBI;
h) State industrial development corporations;
i) Insurance companies registered with the Insurance Regulatory and Development Authority (IRDA);
j) Provident funds with a minimum corpus of Rs. 25 crores;
The Mechanism of QIBs in IPOs
The genesis of Qualified Institutional Buyers (QIBs) came into being when Indian enterprises, irrespective of their size, harbored aspirations of rapid expansion. SEBI has introduced the concept of QIBs, allowing Indian businesses to engage in international ventures, leveraging a regulatory framework less stringent than that in India, and facilitating the generation of employment opportunities and foreign currency inflow.
A Qualified Institutional Buyer invests in the qualified institutional placement (QIP) of the issuing company. Listed companies utilize QIPs to raise funds by selling securities to institutional investors. The allocation within QIPs is orchestrated by SEBI-licensed merchant bankers acting on behalf of institutional buyers who have conducted thorough due diligence. These merchant bankers also allocate funds in compliance with Chapter VIII of the 2009 SEBI (ICDR) Regulations.
Navigating the Rules and Regulations
Several rules govern the functioning of Qualified Institutional Buyers (QIBs), with the following being particularly noteworthy:
Any domestically traded public company may allot its securities to reputable QIBs. However, a listed company cannot employ the Qualified Institutional Buyer method to raise funds if it lacks equity shares listed on stock exchanges or fails to adhere to the mandated minimum public shareholding criteria.
SEBI’s intricate directives regulate both the company seeking funding and the chosen QIB. The “specified securities” of a QIB, referring to any securities yet to be converted into equity shares, remain off-limits to the company’s promoters or any individuals even remotely connected to them. In essence, stringent regulations are imposed on both investors and allottees.
Advantages Encompassed by QIBs in an IPO
Let us delve into the advantages that QIBs enjoy vis-à-vis other investor categories:
- Robust Financial Foundation: Qualified Institutional Buyers boast formidable financial prowess, enabling them to invest substantial sums in an IPO. Their financial clout surpasses that of other investor groups.
- Risk Management Capability: QIBs are adept at managing the inherent risks linked with investing in a fledgling IPO. Thanks to their seemingly impregnable financial standing, institutional buyers can weather potential losses without enduring significant repercussions, a luxury not afforded to other investor types.
- Substantial Share Allocation: Recognizing the financial might of QIBs, companies often allocate a considerable portion of the IPO to them. Depending on the nature of the business and the public offering, QIBs may secure anywhere from 65% to 90% of the available shares. In stark contrast, retail investors typically receive a modest allocation ranging from 10% to 35% of the IPO.
Disadvantages to Contemplate
However, it is crucial to acknowledge certain disadvantages entailed by the significant participation of institutional buyers through qualified institutional placements. This influx of shares can potentially devalue the holdings of existing shareholders, elevating the risk to the company’s management control. Typically, this approach is favoured by companies whose founders possess substantial stakes.
In summary, Qualified Institutional Buyers (QIBs) occupy a pivotal role within the intricate fabric of the IPO process. Their participation serves as a linchpin, instilling confidence in the market and contributing significantly to the overall success of the IPO endeavor.
In India, QIBs can include various entities such as public financial institutions, scheduled commercial banks, registered mutual funds, foreign institutional investors, multilateral and bilateral development financial institutions, venture capital funds, foreign venture capital investors, state industrial development corporations, registered insurance companies, provident funds with a minimum corpus of Rs. 25 crores, and pension funds with a minimum corpus of Rs. 25 crores. These entities play a crucial role in the Indian capital markets.
Only entities recognized as QIBs by SEBI can apply in the QIB category of an IPO or other securities offerings. They must submit their bids through a SEBI-registered merchant banker or a syndicate member and provide 10% of the bid amount as margin money during the bidding process. This ensures that QIBs meet specific criteria and contribute substantially to the success of offerings.
Qualified Institutional Buyers UPSC refers to QIBs participating in IPOs of public sector undertakings (PSUs) conducted through the UPSC (Union Public Service Commission) route. This method involves the government selling its stake in PSUs through an IPO. QIBs in this route adhere to the same rules and regulations as in any other IPO, contributing to the disinvestment process.
Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.