Deck IX - Chapter 10

PRIVATE
PLACEMENTS
(CHAPTER 10)
Private Placements - Overview
Private
Placements
Unlisted Listed
Companies Companies
Private Placements
Private Placements made with a Private Issues of equity made with a

fund raising objective strategic objective
 Early Stage Venture Capital  Promoters and promoter group
 Later Stage Private Equity  Employees and senior management
 Institutional Placements  Bonus issues
 Non-institutional Placements  Induction of strategic investors
 International Capital Markets  Induction of JV partners
Privately Placement of Debt

Securities in Capital Market
PSU Bonds Bonds from Banks Corporate Debt

and Institutions Securities
Privately Placement of Equity
Venture Capital Institutional Private Institutional and Non-

(Early Stage) Equity (Later Stage) Institutional Placements
Public Investment in Private Equity (PIPE)
 Private Investment in Public Equity (PIPE) occurs

when shares in listed companies are issued
privately.
 PIPEs are classified under preferential allotments
under law.
 Examples of PIPE allotments –
 To promoters
 To employees
 To strategic partners
 To technology providers
 To private investors
QUALIFIED INSTITUTIONAL
PLACEMENTS
(QIP)
Qualified Institutional Placement
 QIP is a mechanism available for listed companies

to raise equity through the private placement
mechanism without being subject to the restrictions
under the preferential issue route.
 The placement requires the following conditions to
be fulfilled –
 The issue should be only for pure equity or convertible
instruments except warrants.
 The placement should be to QIBs – mutual funds, FIIs,
private equity and venture funds, banks, FIs, insurance
companies, pension funds etc. None of the allottees shall
have any direct or indirect association with the promoter
group.
 The company should be listed on a nation wide electronic stock

exchange (BSE or NSE).
 The company should be compliant with the minimum non-promoter
shareholding norm.
 There should be a reservation of atleast 10% of the offer to mutual
funds. The unsubscribed portion of this reservation can be allotted
to other QIB investors.
 The pricing of a QIP shall be determined in the same way as
in a preferential allotment with respect to the relevant date.
The provisions are identical even in the case of
convertibles, i.e. the price shall be determined with
reference to either the relevant date or the date falling 30
days prior to the proposed conversion date.
 The entire amount due on the share / instrument should be
received at the time of allotment.
 Convertible issued under QIP should have a

maximum currency of 60 months from the date of
allotment.
 The currency of the shareholders’ resolution shall
be for a period of twelve months.
 If two separate placements are being made under
the same resolution, they shall have a gap of
atleast six months. Therefore, a maximum of two
separate allotments are possible under one
resolution.
 The resolution shall specify the QIP and the
relevant date.
 Case of Bharti Airtel QIP
 The QIP offer document should be prepared in accordance with the disclosure
requirements and should contain inter alia, the following –
 Summary of the Offering and Instrument
 Risk Factors
 Market Price Information and details of trading volumes as prescribed.
 Use of proceeds
 purpose of the issue;
 break-up of the cost of project for which the money is raised through issue;
 the means of financing such project; and
 proposed deployment status of the proceeds at each stage of the project.
 Industry Description
 Business Des cription
 Organizational Structure and Major Shareholders
 Board of Directors and Senior Management
 Taxation Aspects relating to the Instrument
 Legal Proceedings
 Capitalization Statement
 The audited consolidated or unconsolidated financial statements prepared
in accordance with Indian GAAP shall contain the following:
 Report of Independent Auditors on the Financial Statements
 Balance Sheets
 Statements of Income
 Schedules to Accounts
 Statements of Changes in Stockholders’ Equity
 Statements of Cash Flows
 Statement of Accounting Policies
 Notes to Financial Statements
 Statement Relating to Subsidiary Companies (in case of unconsolidated
financial statements)
 Management’s Discussion and Analysis of Financial Condition and Results
of Operations
 Accountants
 General Information
 The QIP memorandum should be numbered and circulated privately and also
placed on the website of the company and the stock exchange and also sent to
SEBI within 30 days of allotment for record.
 The minimum number of allottees shall be two for an issue below Rs.250 crore and
three for an issue above Rs. 250 crore further subject to the condition that no
single allottee shall get more than 50% of the issue. Each category shall be treated
as one allottee for this purpose.
 The total amount raised under the QIP shall not exceed five times the networth of
the company prior to the placement.
 The shares allotted under QIP can be sold in the secondary market without any
lock-in but not in off-market deals upto a period of one year.
 Appointment of a merchant banker for the QIP is mandatory.
 The merchant banker shall conduct due diligence and issue necessary certificate to
stock exchange on the compliance of the QIP guidelines and apply for listing of the
QIP shares. A copy of the QIP memorandum should also be furnished. The listing
application should also be accompanied by a certificate from the company that the
issue has been made in accordance with the QIP guidelines and other necessary
undertakings under the Listing Agreement.
PIPE Vs QIP - Assessment
 Currency of shareholders’ resolution – Preferential Issue has to completed
in 15 days while QIP can be executed within 12 months. This provides
greater flexibility for the company in negotiating the terms and finding
appropriate investors.
 The shares issued to investors under preferential issue are locked in for one
year. There are also other lock-in restrictions. However, shares issued under
QIP are free from lock-in for secondary market sales. This provides better
flexibility for the investors and a premium to market price for the company.
 Convertibles issued under QIP have a currency of 60 months vis-à-vis 18
months in a preferential issue. This provides a staggered dilution and better
investor perception and market capitalisation.
 There are however restrictive covenants on the number of investors and the
maximum allotment per investor under QIP while no such restrictions exist
under preferential issue.
 The cost of a QIP would be higher since there is a requirement for
appointment of a merchant banker and due diligence and preparation of
QIP document.
 The level of disclosures in QIP are higher than in a preferential issue.
Private Placement Categories under Law
 Private Placements are defined as ‘issues made to investors

numbering less than 200’. All private placements are
executed through preferential allotments.
 The terms ‘preferential issue / allotment’ and ‘private
placement’ are sometimes used interchangeably though they
have a subtle distinction. Preferential issues are made to
known investors while placements are made through
investment banks following a prescribed process to QIBs.
 Investment bankers are mandatory in QIPs but not in PIPEs.
Advantages and Pitfalls of Private Placements
 Private placements are time and cost-effective for the issuer. The
placement requires less amount of paper work, approvals and
clearances and can be placed with a closed community of
investors.
 As long as a company raises equity through private placements
and postpones a public offering, there would be a significant
growth prospect in its IPO pricing.
 A listed company raising equity through private placement (PIPE)
would mean equity expansion without corresponding increase in
floating stock. This is beneficial from the point of view of
prevention of stock volatality and threat of hostile takeover.
 On the flip side, private placements are meant only for informed
investors since the level of scrutiny and disclosures are not on par
with public offers.
 Private placements may not be based on issue related market
factors but more on fundamentals and long term factors.
HDFC QIP
 In August 2009, HDFC (the largest mortgages company in India),
raised Rs. 4.3 billion by a QIP issue of NCDs with warrants, the first
such issue in the private placement market.
 The warrant would freeze the conversion price to the warrant holder
for three years at Rs. 3000 per share. However, the warrant had an
issue price of Rs. 275 keeping in line with SEBI guidelines. So the
effective price for the share was Rs. 3275.
 The coupon on the debenture was 7.15% for a two year tenor and
7.85% for a three year tenor.
 Both the NCDs and warrants would be separately listed on the stock
exchange.
 One of the biggest investors in the issue was LIC (India’s largest
insurance company).

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PRIVATE

Private Placements made with a Private Issues of equity made with a

Privately Placement of Debt

PSU Bonds Bonds from Banks Corporate Debt

Privately Placement of Equity

Venture Capital Institutional Private Institutional and Non-

 Private Investment in Public Equity (PIPE) occurs

 QIP is a mechanism available for listed companies

 The company should be listed on a nation wide electronic stock

 Convertible issued under QIP should have a

 Private Placements are defined as ‘issues made to investors

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