The Indian stock market has grown significantly over the last few years, becoming the fourth largest in the world. This has been possible because of Indian and foreign investors who invest in various securities such as stocks, mutual funds, exchange traded funds, etc.
Among the numerous types of investors, one of the influential ones are Qualified Institutional Buyers (QIBs).
Who are qualified institutional buyers?
Qualified institutional buyers (QIBs) are investors with extensive financial market knowledge and are more actively involved in buying and selling securities. When a company comes out with its initial public offering (IPO), the qualified institutional buyers in IPO invest a significant amount directly, and the company allocates them shares to be included in their asset allocation plan. The QIBs can sell or hold these shares after the IPO is completed and the shares are listed on the stock exchanges.
QIB investors can take numerous forms and are defined under Regulation 2(1)(ss) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 as:
- A public financial institution
- A foreign portfolio investor, excluding individuals, family offices, and corporate bodies
- A mutual fund, alternate investment fund, venture capital fund, and board-registered foreign venture capital investor
- A scheduled commercial bank
- A state industrial development corporation
- A bilateral and multilateral development financial institution
- An IRDAI-registered insurance company
- A pension or provident fund with a minimum fund value of Rs. 25 crores
- National Investment Fund
- Insurance funds created and managed by the Navy, Army, or Air Force
- Insurance funds created and managed by the Indian Postal Department
These organisations are not required to register with SEBI as QIB investors. However, any entity that fulfils the above criteria can participate and invest in an IPO as a qualified institutional buyer.
How do qualified institutional buyers practise work?
In the past, the most that the Indian capital markets saw were retail investors who didn’t have significant investment amounts and financial expertise. However, with time and the expanding financial literacy, Indian entities expanded their operations and wanted to invest significant amounts in India and abroad. Hence, the Securities and Exchange Board of India (SEBI) introduced QIBs, a type of investor that can directly invest to buy shares of companies during IPO or after they go public.
When QIBs invest during an IPO, they are called qualified institutional buyers in IPO. However, they can also invest in public companies through qualified institutional placement (QIP). QIP is a way for publicly listed companies to raise capital by selling shares to qualified institutional buyers.
Regulations on qualified institutional buyers
Since QIBs are market experts with significant investment corpus, they face less scrutiny and restrictions than other types of investors. The guidelines and rules for QIBs are as follows:
- Any Indian company that trades its shares on Indian stock exchanges and is allowed by SEBI to raise capital on the Indian market may sell its shares to QIBs. However, the company must adhere to the SEBI-regulated minimum public shareholding pattern.
- The company must adhere to guidelines for the total sum it can raise from QIBs in a financial year. According to the regulations, a company cannot raise money five times the issuer’s net worth at the end of the previous fiscal year.
- SEBI requires merchant bankers with a SEBI-registered licence to manage the allotment of shares to QIBs made through QIPs. If a company raises capital through qualified institutional placement, the merchant bankers must submit a due diligence certificate with SEBI. Furthermore, the merchant bankers must allocate the funds under QIP as per the regulations listed under Chapter VIII of the 2009 SEBI (ICDR).
- The period between each allotment of securities to QIBs should be six months. The merchant banker and issuer must submit all documents, reports, and undertakings for the securities to be approved by SEBI for listing on the stock exchanges. However, for preferential allocation and QIP, the submission of such reports is optional.
Advantages and disadvantages of QIBs
Advantages
Qualified institutional buyers bring increased liquidity to the financial markets because of their substantial financial resources. As they can engage in large-scale and high-volume investments, they create a more liquid market by increasing overall demand.
Furthermore, QIBs help companies raise significant funds and ensure successful fundraising rounds. Their active participation in IPOs and QIPs brings the required capital and helps companies expand their business. Additionally, the investments by QIBs positively affect investor sentiments as investors feel motivated to invest if financial experts such as QIBs invest in a specific security.
Disadvantages
One of the disadvantages of qualified institutional buyers is the concern about their market dominance. Since they invest a significant amount, their buying and selling can greatly impact the securities' price. The dominance can reduce healthy market competition and negatively affect smaller investors.
Furthermore, there are fewer regulations because of the high influence of QIBs. In some instances, the lack of utmost transparency has led to manipulation, insider trading, and abuse of power, undermining market integrity.
Conclusion
Qualified institutional buyers (QIBs) are among the most influential investors in the Indian market. As they are experts in the financial markets, they play a significant role in companies' fundraising measures before an IPO or after their shares trade publicly. However, as they have advantages and disadvantages, it is important to analyse their effect on the market before making any investment decision.
