Qualified Institutional Placement - QIPs in India and The US

QIPs in India and The US

In US US securities laws contain a number of exemptions from the requirement of registering securities with the US Securities & Exchange Commission (SEC). Pursuant to Rule 144A of the Securities Act of 1933, issuers may target private placements of securities to QIBs. Although often referred to as Rule 144A offerings, as a technical matter, transactions must actually involve an initial sale from the issuer to the underwriter and then a resale from the underwriters to the QIBs. A QIB is defined under Rule 144A as having investment discretion of at least $100 million and includes institutions such as insurance agencies, investment companies, banks, etc. Rule 144A was adopted by the SEC in 1990 in order to make the US private placement market more attractive to foreign issuers who may not wish to make more onerous direct US listings. Whereas the US regulators by enacting Rule 144A sought to make the domestic US capital markets more attractive to foreign issuers, the Indian regulators are seeking to make the domestic Indian capital markets more attractive to domestic Indian issuers.

In India Therefore, to encourage domestic securities placements (instead of foreign currency convertible bonds (FCCBs) and global or American depository receipts (GDRs or ADRs)), the Securities Exchange Board of India (SEBI) has with effect from May 8, 2006 inserted Chapter XIIIA into the SEBI (Disclosure & Investor Protection) Guidelines, 2000 (the DIP Guidelines), to provide guidelines for Qualified Institutional Placements (the QIP Scheme). The QIP Scheme is open to investments made by “Qualified Institutional Buyers” (which includes public financial institutions, mutual funds, foreign institutional investors, venture capital funds and foreign venture capital funds registered with the SEBI) in any issue of equity shares/ fully convertible debentures/ partly convertible debentures or any securities other than warrants, which are convertible into or exchangeable with equity shares at a later date (Securities). Pursuant to the QIP Scheme, the Securities may be issued by the issuer at a price that shall be no lower than the higher of the average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange (i) during the preceding six months; or (ii) the preceding two weeks. The issuing company may issue the Securities only on the basis of a placement document and a merchant banker needs to be appointed for such purpose. There are certain obligations which are to be undertaken by the merchant banker. The minimum number of QIP allottees shall not be less than two when the aggregate issue size is less than or equal to Rs 250 crore; and not less than five, where the issue size is greater than Rs 250 crore. However, no single allottee shall be allotted more than 50 per cent of the aggregate issue size. The aggregate of proposed placement under the QIP Scheme and all previous placements made in the same financial year by the company shall not exceed five times the net worth of the issuer as per the audited balance sheet of the previous financial year. The Securities allotted pursuant to the QIP Scheme shall not be sold by the allottees for a period of one year from the date of allotment, except on a recognized stock exchange. This provision allows the allottees an exit mechanism on the stock exchange without having to wait for a minimum period of one year, which would have been the lock–in period had they subscribed to such shares pursuant to a preferential allotment.