As of 2020, India is the world’s 6th largest economy by nominal GDP and the 3rd largest by PPP, behind the US, China, Japan, Germany and the United Kingdom. According to data made available by the International Monetary Fund, the nominal GDP for FY 2020-’21 stood at $2.6 trillion, a significant decline owing to multiple shutdowns, supply chain disruptions and a sluggish growth rate.
India is variously categorised as a ‘newly industrialised economy’, a developing or an emerging economy. Given the potential of growth, there is no dearth of investors. Most retail investors follow tried-and-tested avenues including debentures, real estate, FDs, stock purchases and Provident Funds– all of which are governed by rules set down by The Companies Act (2013) and the SEBI.
Such multiplicity of laws often deters individual investors. That is where Qualified Institutional Buyers come in.
In this article
Defining QIB Qualified Institutional Buyer
Often simply called QIBs, these 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 Securities and Exchange Board of India or SEBI defines a QIB as –
“An institutional investor that possesses the necessary expertise plus the financial background to carefully evaluate and strategically invest in capital markets.”
In accordance with clause 2.2.2B (v) of the DIP (Disclosure and Investor Protection) Guidelines which were formulated in 2000 and amended, SEBI designates the following as QIBs.
|List of Qualified Institutional Buyers as defined by SEBI|
|All scheduled commercial banks|
|Foreign investors who are registered with the SEBI|
|Development financial institutions, both multilateral and bilateral|
|Venture Capital (VC) funds registered with the SEBI|
|Industrial Development Corporations of any state|
|All insurance companies recognised by the IRDAI|
|Any Provident Fund with a minimum corpus of Rs. 25 Crores|
|Any Pension Fund with identical minimum corpus|
|Department of Posts-managed insurance programs|
|Any public financial institutions (must abide by relevant sections of Section 4A of The Companies Act 1956 and 2013, besides The Companies (Amendment) Act of 2020|
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 which monitor and govern how QIBs are run. The most crucial ones are as follows –
- 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 do not comply with the prescribed minimum public shareholding patterns, that entity cannot raise funds via the Qualified Institutional Buyers route.
- SEBI has comprehensive plans which 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.
- 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.
- 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 Qualified Institutional Buyerschannel will be rendered null and void.
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.
It is one of several reasons why India’s GDP grew immensely post 2000.
That does not mean that Qualified Institutional Buyers and its concept are beyond reproach. Here are some pros and cons.
- Unlike traditional methods of raking up investments which takes time and requires 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.
- There is no requirement to hire a team of solicitors, auditors and bankers to invest. Some overheads are thus reduced.
- 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.
- 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.