Detailed Explanation of Private Placement, QIP, QIB and the concepts involved.

2. Introduction
Private placement (or non-public offering) is a funding
round of securities which are sold not through a public offering, but
rather through a private offering, mostly to a small number of
chosen investors.
"Private placement" usually refers to non-public offering of
shares in a public company.
PIPE (private investment in public equity) deals are one type of
private placement.
Private placements may typically consist of offers of common
stock or preferred stock or other forms of membership
interests, warrants or promissory notes (including convertible
promissory notes), bonds.
The purchasers are often institutional investors such
as banks, insurance companies or pension funds.

3. Types of Placements
Private placements fall into one of two categories: structured or
traditional.
 Traditional private placements act as long-term loans from a
separate or groups of investors. These investors receive their
investment money back, plus the agreed upon additional profit
percentage, as soon as the company reaches the required
profit margin and can pay them.
 Structured private placements offer investors the opportunity to
make additional income as the stock prices increases, while
protecting them if the stock price falls. That
protection, sometimes called a reset, allows shareholders to
gain additional stock up to the value of their original investment
if the stock price falls.

4. Types Of Private Placements
 Stock option: Pension funds and pension pools are often
invited to participate in the non-public offering, making it
possible for the issuing company to collect a great deal of
money before any of the remaining shares of stock are offered
to the public in some type of initial public offering. In this
scenario, private investors can often secure a significant
interest in options that are anticipated to provide steady returns
over the long-term.
 Bond: As with the stocks, private investors have the opportunity
to purchase the bond issues before they are offered to the
general public. The bonds may be structured with a short-term
maturity date (<3 years). It is also possible to obtain bonds that
provide a steady amount of returns in the form of interest over a
much longer period (as long as 20 years).

5. Types Of Private Placements
 Promissory notes: The terms of the notes are structured to
comply with governmental regulations in the country of
origin, with most providing some guidelines for when the note
can be called and the buyer can redeem the note. This particular
type of investment opportunity may come with an attractive rate
of interest that is paid when the note is settled in full, or it may
provide periodic payments according to a schedule agreed upon
by the buyer and the seller.
Private placement investments are traded by
industrial investors that specialize in private investments, rather
than being offered to investors who buy smaller lots in the
marketplace.

6. Advantages
Private placements provide several advantages over public
offerings or venture capital for both large and small companies.
 Staying private allows the company to choose its own investors,
unlike a public offering which is open to the general public.
 It saves the time and money required to make a public offering
and maintain the financial records for the SEC.
 Because private investors often are more patient than public
investors, with a private placement there is more time to arrive at
the agreed upon return.
 Finally, the options for type and amount of funding give more
flexibility and get capital much faster than searching for venture
capitalists, or waiting for shares to sell on the public market.

7. Drawbacks
Private placement, especially when structured, can have
disadvantages in both the long and short term.
 If only a few investors are interested, and don‟t want to invest
a large amount of money it becomes difficult to raise the required
amount of capital.
 Sometimes, private investors only buy in when the shares cost
substantially less than the projected cost of the
company, requiring you to sell more shares for the same amount
of income.
 The reset feature of structured private placement allows
private investors to gain additional shares, thereby reducing the
number of shares one can sell to new investors, especially if you
decide to go public in the future.

8. Qualified Institutional Placement
Qualified institutional placement (QIP) is a capital-raising tool,
primarily used in India, whereby a listed company can issue equity
shares, fully and partly convertible debentures, or any securities
other than warrants which are convertible to equity shares to
a qualified institutional buyer (QIB).
Apart from preferential allotment, this is the only other speedy
method of private placement whereby a listed company can issue
shares or convertible securities to a select group of persons.
QIP scores over other methods because the issuing firm does
not have to undergo elaborate procedural requirements to raise
this capital.

9. Regulations Governing a QIP
To be able to engage in a QIP, companies need to fulfill certain
criteria.
 The Company must be listed on an exchange which has trading
terminals across the country and having the minimum public
shareholding requirements which are specified in their listing
agreement.
 During the process of engaging in a QIP, the company needs to
issue a minimum of 10% of the securities issued under the
scheme to mutual funds.
 It is mandatory for the company to ensure that there are at least
two allottees, if the size of the issue is up to Rs 250 crore and at
least five allottees if the company is issuing securities above Rs
250 crore.
 No individual allottee is allowed to have more than 50% of the
total amount issued. Also no issue is allowed to a QIB who is
related to the promoters of the company.

10. Who can participate in the issue?
 The specified securities can be issued only to QIBs, who shall
not be promoters or related to promoters of the issuer.
 The issue is managed by a SEBI-registered merchant banker.
There is no pre-issue filing of the placement document with
SEBI.
 The placement document is placed on the websites of the stock
exchanges and the issuer, with appropriate disclaimer to the
effect that the placement is meant only QIBs on private
placement basis and is not an offer to the public.

11. Qualified Institutional Buyers (QIBs)
In terms of clause 2.2.2B (v) of DIP guidelines, a „qualified institutional
buyer‟ shall mean:
a) Public financial institution as defined in section 4A of the Companies
Act 1956;
b) Scheduled commercial banks;
c) Mutual funds;
d) Foreign institutional investor registered with SEBI;
e) Multilateral and bilateral development financial institutions;
f) Venture capital funds registered with SEBI.
g) Foreign venture capital investors registered with SEBI.
h) State industrial development corporations.
i) Insurance companies registered with the Insurance Regulatory and
Development Authority (IRDA).
j) Provident funds and Pension Funds with minimum corpus of Rs.25
crores;
"These entities are not required to be registered with SEBI as QIBs.
Any entities falling under the categories specified above are considered
as QIBs for the purpose of participating in primary issuance process."

12. Benefits of QIPs
 Time saving: QIBs can be raised within short span of time rather
than in FPO, Right Issue takes long process.
 Rules and regulations: There are fewer formalities with regard
to rules and regulation, as compared to follow-on public issue (FPO)
and rights Issue. A QIP would mean that a company would only
have to pay incremental fees to the exchange. Additionally in the
case of a GDR, you would have to convert your accounts to IFRS
(International Financial Reporting Standards).
 Cost-efficient: The cost differential vis-à-vis an ADR/GDR or
FCCB in terms of legal fees, is huge. It is easier to be listed on the
BSE/NSE vis-à-vis seeking a say Luxembourg or a Singapore
listing.
 Lock-in: It provides an opportunity to buy non-locking shares and
as such is an easy mechanism if corporate governance and other
required parameters are in place.

13. QIPs in India
 The QIP Scheme is open to investments made by “Qualified
Institutional Buyers” in any issue of equity shares/ fully
convertible debentures/ partly convertible debentures or any
securities other than warrants, which are convertible into or
exchangeable with equity shares at a later date.
 Pursuant to the QIP Scheme, the Securities may be issued by
the issuer at a price that shall be no lower than the higher of the
average of the weekly high and low of the closing prices of the
related shares quoted on the stock exchange
 during the preceding six months; or
 the preceding two weeks.
 The issuing company may issue the Securities only on the basis
of a placement document and a merchant banker needs to be
appointed for such purpose.

14. Obligations of the Merchant Banker
 The minimum number of QIP allottees shall not be less than two
when the aggregate issue size is less than or equal to Rs 250
crore; and not less than five, where the issue size is greater than
Rs 250 crore.
 No single allottee shall be allotted more than 50% of the
aggregate issue size.
 The aggregate of proposed placement under the QIP Scheme
and all previous placements made in the same FY by the
company shall not exceed five times the net worth of the issuer
as per the audited balance sheet of the previous FY.
 The Securities allotted pursuant to the QIP Scheme shall not be
sold by the allottees for a period of one year from the date of
allotment, except on a recognized stock exchange.

15. Types of Investors
Typically investors can be qualified into 7 broad categories.
The first two are not impacted by any market conditions. The last
five are affected by the market and balance out based on their
characteristics. These 7 types of investors are:
 Only Savers
 Regular Investor
 Window shoppers
 Seasonal Traders
 Scapegoats
 The Hi-tech Lalaji
 Mr. Cool