Lock-in goes for QIB placements

India Inc's domestic resource-raising plans get boost.

Listed companies can now make domestic placements of shares and convertibles (excluding warrants) to qualified institutional buyers (QIBs), without these shares attracting a lock-in period.

Retaining the same pricing formula as applicable to preferential allotments or global depository receipts, the Securities and Exchanges Board of India on Monday announced new rules, allowing listed companies to raise funds exclusively from QIBs through placements.

The rules say that the securities can be sold by QIBs only to recognised stock exchanges, for a period of one year from the date of allotment.

According to merchant bankers, it is not clear whether these shares can be tendered in a buy-back or an open offer since these are typically off-market transactions.

If an open offer is made within a year of a placement, QIBs will not be able to offer the shares, since an off-market transaction will attract a lock-in.

The move will make it more attractive for companies to raise resources within the country. Rather than approaching the overseas markets either through foreign currency convertible bonds and GDRs, they can now tap the same set of investors, since there is no lock-in period.

With QIBs now subscribing to these issues in the domestic market, the market will have greater depth. But merchant bankers say the process could have been made more transparent with the inclusion of a bidding process for QIBs, rather than simply using the pricing formula.

The rules specify that the aggregate funds that can be raised through this route in a fiscal year cannot exceed five times the net worth of the issuer at the end of the previous financial year.

Moreover, companies will need to maintain a gap of at least six months between each placement in case of multiple placements of specified securities, if they are using the same shareholders' resolution.

The rules are less stringent than those for preferential allotments to some extent in that the resolution, passed under Sub-section (1A) of Section 81 of the Companies Act, 1956, or any other applicable provision, will remain valid for a period of 12 months.

In a preferential allotment, the resolution is valid for just 15 days. Besides, a convertible instrument can be converted into shares any time after allotment and within a period of 60 months, whereas in a preferential allotment, the conversion has to take place within 18 months.

Within the overall allotment to QIBs, which cannot be promoters or entities related to promoters, a minimum of 10 per cent of the securities in each placement have been reserved for mutual funds. But no investor can be allotted more than 50 per cent of the issue size.

For every placement, Sebi has prescribed that there should be at least two allottees for an issue with a size of up to Rs 250 crore and at least five allottees for an issue size exceeding Rs 250 crore.

Merchant bankers say that greater disclosures are being sought for such a placement to QIBs, compared with those for a preferential allotment, which may not necessarily make the procedure less time-consuming.

A placement document is needed to be filed post-issue and merchant bankers are required to furnish a due diligence certificate to Sebi stating that the issue complies with all requirements.

The pricing formula is the same as that for a preferential allotment. This will be the higher of the average of the weekly high and a low of the closing prices of related shares quoted on a stock exchange during the six months preceding the relevant date or the average of the weekly high and low of the closing prices of related shares quoted on the stock exchange during the two weeks preceding the relevant date.

The QIBs, the rules say, cannot be related to a promoter directly or indirectly. Any QIB which has the rights under a shareholders' agreement or voting agreement entered into with promoters or persons related to the promoters is not eligible for placement.

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.