Qualified Institutional Buyers (QIB)

Qualified Institutional Buyers, often called QIBs, are institutional investors carrying the expertise and financial resilience to assess and invest in capital markets carefully. Let's understand more about QIB here.

Who are Qualified Institutional Buyers (QIB)? 

Qualified Institutional Buyers are merely associations of like-minded individual investors who come together to raise significant investible amounts, post which they take an indirect route using a third-party’s financial services & knowhow. 

These third-party institutions possess the necessary market experience and knowledge to ensure better returns.

Additionally, such Qualified Institutional Buyers possess considerable financial heft, with exchange boards recognising them as legal entities. QIBs require far less oversight from Central authorities.

The definition of ‘QIB ’ was originally defined in the SEBI (Disclosure and Investor Protection Guidelines) Regulations, 2000. The said guidelines were repealed by SEBI ICDR Regulations in 2009, and which in turn was repealed by SEBI ICDR Regulations 2018.

Regulation 2(1)(ss) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 defines QIBs as under: “qualified institutional buyer” means:

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

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

(iii) a public financial institution;

(iv) a scheduled commercial bank;

(v) a multilateral and bilateral development financial institution;

(vi)a state industrial development corporation;

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

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

(ix) a pension fund with minimum corpus of twenty five crore rupees;

(x) National Investment Fund set up by resolution no. F. No. 2/3/2005-

DDII dated November 23, 2005 of the Government of India published in the Gazette of India;

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

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

(xiii) systemically important non-banking financial companies

An Overview of the Rules & Regulations that Govern QIBs

While it is true that QIBs are less tangled up in legal affairs and undergo lower scrutiny, there are several regulations that monitor and govern how QIBs are run. The most crucial ones are as follows – 

  1. Any listed company in the domestic market can place their securities with recognised QIBs. However, if a certain listed company does not have equity shares listed on stock exchanges and does not comply with the prescribed minimum public shareholding patterns, that entity cannot raise funds via the Qualified Institutional Buyers route.

  2. SEBI has comprehensive plans that govern the relationship between a company looking for funds and its chosen QIB. In other words, there are strict norms on both allottees & investors. The promoters of a company or anyone linked even remotely to the promoters cannot tap into a QIB’s ‘specified securities’, which denotes any security that is not yet converted to equity shares.

This measure was adopted in 2000 when the DIP Guidelines were laid down to prevent favouritism. All QIBs must be chosen neutrally and without bias.

  1. Merchant brokers, recognised by the SEBI, manage any QIPs or Qualified Institutional Payments that Institutional Buyers plan to invest in. These brokers must maintain detailed records and are obligated to submit a due diligence certificate to the Stock Exchange Board. The certificate will act as a guarantee that all norms notified by SEBI are followed.

  2. If such ‘specified securities’ are placed multiple times, a minimum gap of 6 months between 2 placements is mandatory. The Stock Exchange may ask for reports and undertakings for such transactions. However, in the case of QIPs and preferential allotments, it is not mandatory to submit any such reports. 

The merchant broker must submit the due diligence certificate, however. Otherwise, any investment via the Qualified Institutional Buyers channel will be rendered null and void.

QIB – Advantages and Disadvantages

The Indian Government introduced the QIBs concept when many domestic companies of varying sizes were looking to expand rapidly. With the QIB route, several Indian organisations started operating overseas, taking advantage of less stringent regulatory environments vis-a-vis India and bringing in jobs and precious foreign exchange. 

That does not mean that Qualified Institutional Buyers and its concept are beyond reproach. Here are some pros and cons.

Pros

  1. Unlike traditional methods of raking up investments, which take time and require SEBI’s approval, a QIP can be settled quickly, sometimes in a week’s time. A competent merchant broker can place a QIB’s investment corpus into a distressed firm’s coffers and revive it quickly.

  2. There is no requirement to hire a team of solicitors, auditors and bankers to invest. Some overheads are thus reduced.

  3. Finally, all Qualified Institutional Buyers can sell off large chunks of stock and exit at any point in time. This is in sharp contrast with investing in an IPO, where a 1-year lock-in period exists.

Cons

Institutional Buyers can own a substantial stake in a company, thanks to QIPs. It may dilute existing shareholders’ interests. It may lead to a marked reduction in the rights of stakeholders.

As the Central Government pushes for a rapid increase in domestic production, which in turn will be driven by heightened consumption, most market experts believe that Qualified Institutional Buyers will play a vital role in the rebuilding of the nation. 

It remains to be seen if any further amendments to The Companies (Amendment) Act 2020 are passed.

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