What is a Qualified Institutional Buyer (QIB)?

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Synopsis:

Qualified institutional buyers or QIBs are investors, who have the expertise to assess and invest in financial markets. They typically have a huge corpus of funds and knowledge to make investments. Some of their examples include mutual funds, alternative investment funds, venture capital funds, etc.

Qualified institutional buyers (QIBs) are sophisticated investors with expertise and financial strength to assess and invest in financial markets. Compared to an individual investor, a QIB has a lot more funds, knowledge, and therefore strength to invest.

As QIBs have more funds than retail investors, their investments are also considerably larger than that of retail investors. Therefore, QIBs are an important category of investors. Having learned the full form of QIB, let us look at the list of qualified institutional buyers.

Which institutions are considered as QIBs in India?

According to the Securities and Exchange Board of India (SEBI), the following investors are considered QIBs:

  • Mutual funds, alternative investment funds, venture capital funds, and foreign venture capital investors that come under SEBI.
  • Commercial banks.
  • Public financial institutions.
  • Investors from foreign countries that are registered with SEBI.
  • Industrial development corporations under the government.
  • Financial institutions engaged in bilateral and multilateral development.
  • Provident funds with at least Rs. 25 crores corpus.
  • An insurance company authorised by the Insurance Regulatory and Development Authority.
  • Pension funds with at least Rs. 25 crores corpus.
  • Insurance funds established and taken care of by the army, air force, or navy of India.
  • The national investment fund.
  • Insurance funds established and taken care of by the Department of Posts, India.
  • Non-banking financial companies important from the systemic viewpoint.

Interesting facts about QIBs in India

There are many interesting facts about QIBs in India, which throw light on how such institutions have evolved over a period of time.

  • The Indian government allowed QIBs to participate in the capital markets when many domestic companies were expanding rapidly. For such an expansion, these companies needed capital, which QIBs could provide.
  • Before permitting QIBs to invest in India, regulators were worried that Indian companies were raising finance through the foreign route via American Depository Receipts (ADRs) and Global Depository Receipts (GDRs), which was increasing the dependence of domestic companies on foreign capital. To reduce this dependence, QIBs were allowed.
  • The move to allow QIBs helps companies to raise finance easily. Instead of getting most of their finance raised through public (which is expensive, as it requires publicity and advertisements), they could raise sufficient funds from a few QIBs.
  • When it comes to initial public offerings (IPOs), QIBs are an important category of investors. In India, in IPOs, often 60% shares on offer are offered to QIBs, which means they are extremely important from the viewpoint of IPO investments.
  • Compared to other modes of raising finance, a QIB can be set up quickly, at times in a few weeks. QIBs are not required to have bankers, solicitors, and auditors.
  • The rules in India allow all listed companies to place their securities with QIBs that are recognised so that these companies can raise money. But, a listed company is not allowed to raise funds through QIBs if its equity shares are not listed on stock exchanges and it does not follow the rules regarding minimum public shareholding patterns.
  • The regulator SEBI has strict norms to efficiently govern the relationship between companies keen to raise funds and the QIB they select. If a company wants to raise money through a QIB, then its promoters or anyone even remotely linked to them cannot access something called ‘specified securities’ of that QIB. These specified securities are those that are yet to be converted into equity shares.
  • While there are many benefits of raising money through QIBs, there are certain limitations as well. When QIBs hold a significant stake in a company, it dilutes the stake of other types of investors. As a result, the relative importance of other investors vis-à-vis QIBs declines.

Conclusion

If you are a retail investor who has just opened a trading account, should you be concerned about QIBs? Yes, you should be concerned about QIBs, particularly in the case of companies that you have already invested in. You need to check how often such companies raise finance from QIBs and why. That will tell you whether those companies are being managed well or not.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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