What is private placements?
It is one of the means of raising funds for a company. Shares or bonds of a company are offered to a particular group of private investors as opposed to publicly offering shares to the people at large. in which a company offers its securities, such as shares or bonds, to a select group of private investors rather than making a public offering.
Why Priavte Placement?
Raising funds is not just a matter of infusing funds into the company. It is a strategic game plan that dominates the trajectory and direction of the growth of the company. Thereby, it is essential to align the goals of a company with an investor that brings in either expertise or contacts. In such close business relations, it is essential to be able to assert bargaining power and keep the terms and finer details of the transaction confidential. Private placements facilitates quicker capital acquisition.
One of the types of private placements are the Qualified Institutional Placement (QIP). The need for QIPs was seen in the Indian market to reduce the dependency on American Depository receipts and the global depository receipts.
What are the criterias to issue QIPS?
1. Any securities of a listed company except for warrants that can be converted into or exchangeable with equity shares can be issued to Qualified Institutional Buyers (QIBs) by listed companies. As per, Issue of Capital and Disclosure Requirements) Regulations, 2018 (“2018 Regulation”), QIBs are essentially mutual funds, alternative investment funds, a public financial institution, a scheduled commercial bank and such other classes of financial intuitions as specified in Regulation 2(1)(ss) of the 2018 Regulation.
2. A special resolution is to be passed by the shareholders of the issuer. The said resolution shall approve the qualified institutions placement.
3. The aggregate funds that can be raised through QIPS in one year shall not exceed five times of the worth of the issuer at the end of the previous financial year.
4. The tenure of the issued security shall not exceed 60 (sixty) months from the date of allotment.
5.Following are the regulations imposed by the 2018 Regulation on the allotment of securities: –
- A minimum of 10% of the securities in each placement shall be allotted to Mutual Funds.
- For each placement, there shall be at least two allottees for an issue of size up to Rs.250 crores and at least five allottees for an issue size in excess of Rs.250 crores.
- Further, no single allottee shall be allotted in excess of 50 per cent of the issue size.
With the advent of fast paced business transactions, it is essential for fund raisers to minimise their compliances and resort to quick tools of infusion of funds. This need is reflected in the numbers, as fundraising through QIPs reached a whooping of Rs. 78,089 crore in the financial year 2023-24[1].
QIPs is a balanced means of infusing funds. It gives the flexibility of confidentiality and fast-tracking the procedure. However, the ease of doing business comes at the cost of dilution of existing shareholders’ interest to a substantial extent.
It is essential for an investor to ensure that a comprehensive due diligence is undertaken for the investee company and the exit is laid out elaborately. While, the investee company should look out for negotiations with the investors and drafting of the private placement documents along with deal structuring. It is essential to consult your lawyers before effectuating such arrangements.
DISCLAIMER
The content of this article is intended to provide general guidance on the subject matter. Specialist advice should be sought about your specific circumstances.
[1] https://economictimes.indiatimes.com/markets/stocks/news/fundraising-via-qip-hits-rs-78000-crore-in-fy24-on-strong-market-sentiment/articleshow/108912989.cms?from=mdr
