A] Who are the Qualified Institutional Buyers?
Qualified Institutional Buyers (QIBs), as defined under sub-clause (v) of clause 2.2.2B of the SEBI (DIP) Guidelines, can be one of the following: 1.A Public Financial Institution as defined in Section 4-A of the Companies Act. 2.A Bank
3.FII (Foreign Institutional Investors) that are registered with SEBI 4.Development Financial Institutional, both multilateral and bilateral 5.VCF (Venture Capital Funds) registered with SEBI
6.SIDC (State Industrial Development Corporations)
7.Insurance Companies registered with the IRDA (Insurance Regulatory and Development Authority) 8.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.
B] Changes brought in by SEBI that impacted QIB role in the recent years
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:
(a)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.
C] QIBs and price discovery – How effective were the QIB in discovering a realistic price in recent years?
QIBs are those who have the financial muscle and necessary expertise to make informed investment decisions. QIBs are expected to play an important role in the price discovery in the book-building mechanism. Theoretically, the QIBs can sober down the prices of the issue to realistic levels but practically, that seldom happens as seen by the recent bursting of the IPO bubble. The companies were quoting a hefty premium over similar stocks in the secondary market but the QIBs had little choice. If they wanted to participate in the offer, they had to do so in the exorbitant price band range dictated by the company and because of excess liquidity in the market and stiff competition, they generally bid at the upper end of the price band, thereby debunking the theory of book-building resulting in real price discovery. So, in reality, the QIBs did nothing to sober the prices of the fresh issues during the IPO bubble.
D] QIB vs the Retail Investors in the last 6 years
An article in Economic Times (4th Jan, 2007) , using the data for the last couple of months during that period, mentions that in IPOs, where QIBs are entitled for upto 50% of the issue size, gets subscribed upto 28 times while the retail portion gets subscribed for only upto 6 times...