Qualified Private Placements for a Fast-Paced Business Transaction

What Is a Private Placement?

A private placement is one of the means available to a company for raising funds. Instead of publicly offering shares to people at large, the company offers its securities, such as shares or bonds, to a select group of private investors.

Why Choose a Private Placement?

Raising funds is not just a matter of bringing capital into a company. It is a strategic decision that shapes the trajectory and direction of the company's growth, which makes it essential to align the goals of the company with an investor who brings expertise or useful contacts along with their capital. In close business relationships of this kind, it also matters to be able to assert bargaining power and keep the terms and finer details of the transaction confidential. Private placements facilitate quicker access to capital on these terms.

One type of private placement is the Qualified Institutional Placement, or QIP. QIPs emerged in the Indian market to reduce companies' dependency on American Depository Receipts and Global Depository Receipts.

Criteria to Issue QIPs

1. Any securities of a listed company, except warrants, that can be converted into or exchanged for equity shares can be issued to Qualified Institutional Buyers by listed companies. Under the Issue of Capital and Disclosure Requirements Regulations, 2018, Qualified Institutional Buyers are essentially mutual funds, alternative investment funds, public financial institutions, scheduled commercial banks, and other classes of financial institutions specified under Regulation 2(1)(ss) of the 2018 Regulations.
2. A special resolution approving the qualified institutions placement must be passed by the shareholders of the issuer.
3. The aggregate funds raised through QIPs in one year cannot exceed five times the issuer's net worth at the end of the previous financial year.
4. The tenure of the issued security cannot exceed sixty months from the date of allotment.
5. The 2018 Regulations also impose the following conditions on the allotment of securities:
   • A minimum of 10% of the securities in each placement must be allotted to mutual funds.
   • Each placement requires at least two allottees for an issue size up to Rs. 250 crore, and at least five allottees for an issue size above Rs. 250 crore.
   • No single allottee can be allotted more than 50% of the issue size.

With the pace of business transactions increasing, it has become essential for fund raisers to keep their compliance requirements light and turn to quicker tools for infusing funds. That trend shows up in the numbers, with fundraising through QIPs reaching Rs. 78,089 crore in the financial year 2023-24.¹

QIPs offer a balanced route to raising funds, giving companies the flexibility of confidentiality and a faster procedure. That ease of doing business, however, comes at the cost of diluting existing shareholders' interest to a meaningful extent. It is essential for an investor to carry out comprehensive due diligence on the investee company and to have an exit laid out clearly in advance, and equally essential for the investee company to negotiate carefully with investors and get its private placement documents and deal structure right. Consulting your lawyers before entering into such an arrangement is worth doing early rather than late.

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.

Reference: (1) Economic Times, "Fundraising via QIP hits Rs 78,000 crore in FY24 on strong market sentiment."