What is QIP & QIB and difference between both?

We are very much aware about market participants as often we brush shoulders with them. The buyer, the seller and the agent or middleman. Similarly, in financial markets the functionaries mentioned about are present in one or the other form. However, they are further placed in separate categories by market regulators in order to simplify their regulations and to keep a check on their participation.
There are retail buyers, high networth individuals, institutional – local and overseas, are some of the broad categories of buyers present in the market.
Of the above, certain institutional buyers are further segregated in Qualified Institutional Buyer (QIB).
The Securities Exchange Board of India (SEBI) guideline defines QIBs, as one of the following:
A Public Financial Institution as defined in Section 4-A of the Companies Act.
A Bank

FII (Foreign Institutional Investors) that are registered with SEBI
Development Financial Institutional, both multilateral and bilateral
VCF (Venture Capital Funds) registered with SEBI
SIDC (State Industrial Development Corporations)
Insurance Companies registered with the IRDA (Insurance Regulatory and Development Authority)
Provident and Pension Funds with minimum corpus of 25 crores.
Such QIBs shall not be promoters or related to promoters of the issuer, either directly or indirectly. Besides, QIBs cannot have either veto rights or the right to appoint any nominee director to the board because that would also be considered to be related to the promoter.

The QIBs (especially the Mutual Funds and FIIs) play a very important role in the stock price movements. QIBs play an important role by bringing in the necessary funds needed by the equity stock market. The FIIs, though volatile and essentially market driven, facilitate significantly to the foreign funds inflow. QIBs are generally believed to bring in more efficiency and liquidity in the system.
Earlier, in the book building route for public issue, 50% was reserved for QIBs, 15% for HNI and 35% for Retail investors. Even without this reservation for QIBs, the merchant bankers had the discretion alot shares to QIBs in any manner they liked. SEBI brought about the following major changes in the Primary Market in the last 6 years which impacted the role of QIBs in a big way.

QIBs now have to bid with margin money of 10% of the application value of the issue. Earlier they did not have to give any margin money. This was an attempt to discourage manipulation of issue oversubscription by forming a cartel of QIBs.
(b) The merchant banks’ discretionary quota to the QIB is done away with. The allotment of the shares to the QIB will be on a proportionate basis.
(c) Mutual funds get at least 5% of the overall 50% reservation for QIBs.
(d) All listed companies must have a minimum public holding of 25% of its shares on a continuous basis.
All these changes are for the benefit of the small investor and improve liquidity of the stocks.

As regards sellers, there are various modes by which sale take place. Initial public offering (IPO), follow-on public offering (FPO), preferential, private placements, etc.
Qualified institutional placement (QIP) is simply the means whereby a listed company issues equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares to a Qualified Institutional Buyer (QIB).

QIP is a capital-raising tool, primarily used in India and other parts of Southern Asia. Its a quick and cost effective method of raising funds by way of private placement of securities or convertible bonds with QIBs.
Apart from preferential allotment, this is the only other method of private placement whereby a listed company can issue shares or convertible securities to a select group of persons. However, it scores over other methods, as it does not involve many of the common procedural requirements such as the submission of pre-issue filings to the market regulator.

The SEBI introduced the QIP process in 2006, to prevent listed companies in India from developing an excessive dependence on foreign capital.
The complications associated with raising capital in the domestic markets had led many companies to look at tapping the overseas markets via Foreign Currency Convertible Bonds (FCCB) and Global Depository Receipts (GDR) to fulfil their needs. To keep a check on this process and to give a push to the domestic markets, QIPs were launched.
To be able to engage in a QIP, companies need to fulfil certain criteria such as being listed on an exchange which has trading terminals across the country and having the minimum public shareholding requirements which are specified in their listing agreement.

During the process of engaging in a QIP, the company needs to issue a minimum of 10% of the securities issued under the scheme to mutual funds. Moreover, it is mandatory for the company to ensure that there are at least two allottees, if the size of the issue is up to Rs 250 crore and at least five allottees if the company is issuing securities above Rs 250 crore.
No individual allottee is allowed to have more than 50% of the total amount issued. Also no issue is allowed to a QIB who is related to the promoters of the company.

The intention of SEBI behind allowing QIP Scheme, is to promote the domestic private placement which is generally considered to have two prime advantages over FCCBs (Foreign Currency Convertible Bonds) and GDRs (Global Depository Receipts), i.e. keeping liquidity in the same market and faster way to get approvals. Through QIP guidelines, SEBI has opened a window for Indian companies to raise funds domestically instead of exporting the private placement market out of India. QIP has certainly emerged as a preferred instrument for entities to raise funds as it involves lesser disclosures and does not require a pre-issue filing with SEBI. Sebi guidelines say only QIBs can participate in QIPs.

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