The whys, whats and wherefores of QIPs

An occupational hazard in being a business lawyer is that one is subjected to frequent and random questions on social occasions. Some stem from genuine interest, while others range from seeking free advise to one-upmanship.

Recently I was posed several questions about Qualified Institutional Placement (QIP), possibly as the Unitech placement had just happened, the first after July 2007. How QIP works, why it was introduced, whether in providing a select class of investors a fast track and simplified access, retail investors were being discriminated against? While providing the responses, I thought I had an idea for a column, as absence of clarity was manifest.

QIPs were introduced in 2006, but after the rampant price manipulation post meltdown, there has yet to be a resurgence, even after SEBI amended the pricing norms though the expectation is that under the new norms, things should improve. The Unitech QIP is the first based on the amended norms — as well as being the trigger point for my Q&A.

QIP is an investment option which is available only to QIBs -- Qualified Institutional Buyers, which are public and financial institutions, foreign venture capital and institutional investors registered with SEBI, scheduled commercial banks, mutual funds and various other categories, defined in Clause 2.2.2 B (v) of the SEBI (Disclosure & Investor Protection “DIP”), Guidelines.

At a time when the market was in the process of opening up, the DIP Guidelines, while permitting an unlisted company making a first time IPO without having the required asset base, distributable profits or net worth, allowed such companies to make offerings provided 50 per cent of the shares would be reserved for QIBs. If such allotment criteria are not fulfilled, the subscription money is to be refunded to all.

Sometime in 2006, SEBI permitted listed companies which had a track record of their shares being listed on a stock exchange having nationwide trading terminals for at least one year, and of compliance with applicable requirements of the Listing Agreement to seek private placement in a category other than pure preferential allotment.

Structured as a swadeshi option to raising funds overseas by issuing GDRs and ADRs, QIP found ready takers being cost, process and time effective. More important, the product was launched at a time when the markets were maturing and provided follow-on offering, which was far less onerous than the GDR process or that of an IPO.

The QIP regulatory regime was introduced in a new Chapter XIII A in the SEBI (DIP) Guidelines There are no limits to funds that can be raised through QIP in a financial year, provided it is less than five times the issuer’s net worth at its previous financial year ending. Ten per cent is reserved for mutual funds, while no single allottee can be issued more than 50 per cent of the total allotment.

Securities may be issued only to QIBs, and a QIB who is a promoter of related to promoters cannot participate. QIBs having existing rights, pooling and shareholders agreement including veto and right to appoint directors on the issuer company’s board are also excluded. There is lock in period of one year for off market transactions.

The compliance regime does not envisage a prospectus, but a simple placement document (PD) posted on the websites of the Stock Exchange and the Issuer Company. The disclosures include standard historical and contemporary financial information and statements, industry and business structure, board and organisational structure, litigation and liabilities.

The details of the offering, the instrument — the purpose of the issue and market price information are also provided in the PD. No prefiling with SEBI is required and the filings are done post allotment through the merchant banker who is also the manager of the Issue, a marked change from an IPO policing numbers.

Unfortunately the QIP image took a beating in the alleged bear play, accusing promoters of manipulation by rigging of share prices before offloading their stake to the QIB enabling them to earn higher returns, as the pricing was on the basis of six months weekly average. This manipulation was observed primarily in cases of newly-listed companies as subsequent private placements were then engineered at better valuation.

Realising that it was impossible to check share price rigging over a six month stretch in a volatile market SEBI came down strongly amending the pricing norms to the average of weekly high and low closing prices of shares two weeks prior to the issue date. This will certainly make playing with prices more difficult. The rest is a matter of wait and watch.

Kumkum Sen is a Partner at Rajinder Narain & Co., and can be reached at kumkumsen@rnclegal.com