Qualified Institutional Placements: SEBI Settles the Dust

[Shubham Sancheti is a 4^th Year B.A., LL.B. (Hons.) student at NALSAR University of Law, Hyderabad]

The Securities and Exchange Board of India [“SEBI”] omitted clause (c) under Regulation 82 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 [“Regulations”] by way of a recent amendment [“Amendment”]. The provision falls in Chapter VIII of the Regulations which deals with the Qualified Institutional Placement [“QIP”] for the listed companies. Regulation 82(c) was added to the regulations by the way of 2011 Amendment whereby a listed company was required to comply with the “Minimum Public Shareholding” [“MPS”] to the extent of 25% in accordance with sections 19(2) and 19A of the Securities Contracts (Regulation) Rules, 1957.

QIP has been defined in the Regulations as “allotment of securities by a listed company to the qualified institutional buyers on private placement basis”.[1] Explanation II of Section 42 of the Companies Act, 2013 [“2013 Act”] defines “private placement” as an offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter. Interestingly, the said Private Placement letter can be issued only to two hundred persons in a financial year excluding the Qualified Institutional Buyers [“QIBs”].[2] Thus, even when the QIBs are excluded from the ambit of private placement, an offer to them does not constitute a public offer. In other words, shares issued to a QIB apart from 200 members in a private placement shall not violate section 42 of the 2013 Act.

SEBI inserted Rule 19A in the Securities Contracts (Regulation) Rules, 1957 [“SCRR”] in 2010 wherein a listed company was mandated to have at least 25% of public shareholding in order to remain listed on a stock exchange. Moreover, in October 2017, SEBI released a circular [“2017 Circular”] whereby it streamlined its approach to ensure compliance with the MPS requirements by imposing sanctions to the extent of delisting upon non-compliance. The idea behind the threshold of 25% MPS was enunciated by the Securities Appellate Tribunal in one of its orders:

“minimum public holding of 25% is to prevent concentration of shares in the hands of a few market players by ensuring a sound and healthy public float to stave off any manipulation or perpetration of other unethical activities in the securities market which would unfortunately be the irrefragable consequence of the reins of the market being in the hands of a few.”

Prior to that, the idea behind inclusion of Rule 19A in the SCRR was postulated in the Press Release by the Finance Ministry:

“A dispersed shareholding structure is essential for the sustenance of a continuous market for listed securities to provide liquidity to the investors and to discover fair prices. Further, the larger the number of shareholders, the less is the scope for price manipulation.”

In November, 2015, SEBI released a circular [“2015 Circular”] which stipulated different modes in which a company could achieve MPS. In the circular, SEBI seemed to have taken a liberal approach by including a “residuary mode” which could be resorted to if the entities approach SEBI with relevant details without flouting any legislation. Thus, recently, on February 22, 2018, SEBI released another circular [“2018 Circular”] in furtherance of the 2015 Circular introducing two additional methods to achieve MPS. Firstly, a promoter/promoter group will now be able to relinquish 2% of total paid-up equity share capital in the open market subject to certain conditions prescribed therein and; secondly, allotment of securities by way of Qualified Institutional Placement in accordance with the Regulations.

Prior to the Amendment and 2018 Circular, a listed company was required to maintain at least 25% public shareholding to privately place the shares to QIBs. However, the allotment to the QIB would not be a private placement in its strict sense under section 42 of the 2013 Act (two hundred persons only).

This approach created twofold difficulties. Firstly, when the QIBs are excluded from the ambit of private placement, they are certainly not considered to be shareholders within the group of two hundred in a financial year.[3] However, assuming the fact of QIPs being excluded from the ambit of private placement is statutorily provided does not exist; an offer to QIBs would become a public offer if it is over and above 200 persons but; by imposing MPS as a condition precedent for QIP, it cannot be said as public offer as well. Secondly, if a company undergoes a scheme of arrangement by which the public shareholding falls below the requisite proportion of 25%, instead of rising up to the stipulated level of shareholding through QIP (which was introduced to make market more efficient, ironically) could not be done until an entity’s shares are sold to the public at large or through other methods stipulated under 2015 Circular.

The aforesaid problems may be two different sides of the same coin but the former poses problems that are more theoretical and interpretational in nature whereas the latter turns out to be a problem which the entities might have faced in practice. One of such matters was brought before SEBI to seek informal guidance on. Shareholders of a private company bought the shares of its listed subsidiary company and the public shareholding of the listed subsidiary, therefore, fell below the MPS requirement. The entity gave an undertaking to the stock exchange that the mark will be achieved by private placement to the QIBs within six months from the date of listing of fresh share capital. SEBI took a view which was, technically, in accordance with the regulations and responded that MPS was one of the critical eligibility criteria for an issuance to a QIB. QIP cannot be successfully completed if any of the eligibility criteria remains unfulfilled. The said interpretation posed a problem to the whole idea behind introduction of the QIPs in the first place. This problem has been constructively analysed in this post.

SEBI has effectively stated that this Amendment shall be a breather for the listed companies as– firstly, in addition to having the adequate funding, QIP is a swift solution for the listed companies to meet the MPS criterion and; secondly, sale of promoters’ shares in the open market would be a conveniently better way to meet the compliances since the Indian promoters’ shareholding is marginally above the threshold limit. By way of this Amendment and the 2018 Circular, not only has SEBI introduced other methods to achieve the MPS in much easier ways but it seems that the dust has been settled on the position of QIBs in the corporate sphere.

Conclusion

The Amendment and the 2018 Circular would be welcomed with open arms by the listed entities since no SEBI approval is required to meet MPS requirements through the QIP. Nevertheless, neither the 2018 Circular nor the Amendment restricts the QIBs from being promoter of the listed entity. This, therefore, may lead to misuse of the said avenue provided by the SEBI. The theoretical problem of QIP neither being public issue and nor being private placement (within two hundred) has to be remedied by amending the 2013 Act and the SCRR accordingly.

– Shubham Sancheti

[1] Regulations, § 81(b).

[2] Section 42 of the Companies Act, 2013 has been replaced by a new version under the Companies (Amendment) Act, 2017.

[3] Since Private Company restricts its membership to 200 as per section 2(68) of the 2013 Act, QIBs are not considered to be members of the company as private placement can be done to 200 persons apart from QIBs.