Hi, folks. Before I get into the main theme of this post, I would like to explain, why did I choose this topic. Well, I am pursuing an MBA and hence, most of the time we are busy in presentations and lectures. One of my specialization is in finance. I am a novice in this subject as compared to the rest of the class. But, I am not going to let a subject beat me. So, I am working hard and trying to get the hang of finance. Then, it hit me. There might be others like me, who are struggling to get through their subjects. So, The idea of starting a blog came to me. And, here we are.
My first task was to determine what to start with. Then, I thought to myself - Why not write about my presentation assignments? In class, I was asked to give a presentation on private placements. When I first heard it, my first thought was - What the heck is that? Is it a process to place someone in a job privately? Getting a job in a private organization? Being in my final year of MBA, career placements has started to become a recurring theme in my thoughts. In my head, placements=jobs. Hence the obvious initial confusion regarding the term. Anyway, I did a bit of research, looked up the Internet and I actually found it to be quite interesting. So, I would like to share what I learned and maybe even get to help someone who wants to know about it.
Now, private placements have become a phenomenon in the economy of our country. There are some limitations to private placement of equity. However, the growth in private placement investment has been tremendous. To illustrate my point, I would like to summarize an article, which I read in the Business Line on 8th September, 2012 -
This is a summarized version of the actual article. So, as you have read, private placements are rising in India. So, why is it so? What is so special about private placements that it has become the favored method of debt issue to both organizations and investors? Let's find out, shall we?
Let's start with the question that came to my mind when i first heard the term. What is private placement? Well, the answer the unexpectedly simple. It is the issue of securities of a company via means other than public offering. Now, private placement is a term applicable only for companies listed in the stock exchanges. The reason being, when unlisted companies issues securities, it is obviously private. Let's go for another definition. Private placement refers to non-public offering of securities. Simple, right? So, what are these securities or debt instruments that are issued in private placements? Well, instruments issued in private placements are common stock, preferred stock or other forms of membership interests, warrants or promissory notes (including convertible promissory notes), bonds and debentures. Also, number of buyers cannot exceed 49.
Next, let's discuss why do companies and investors prefer private placement. Main reason is because public offering has some limitations w.r.t. time, cost and market variables. Of course, there are also some strategic objectives like-
Now, let's go into the type of private placements? Yes, that's right. Private placements are subdivided into further categories. They are Preferential Issues and Qualified Institutional Placements. Under the preferential issue system, a company issues shares or convertible securities to a selected group of investors. The companies opting for preferential issues has to abide by the guidelines given in Chapter 13 of Disclosures and Investor Protection by Securities and Exchange Board of India. In addition, they have to comply with the requirements in Companies Act, 1956. Now, the guidelines are mind numbingly complex. It took me hours to understand them. So, I will try my best to present these guidelines in layman terms.
Pricing:-The price of the shares should be the average of the weekly high and weekly low of closing prices of shares during the last 6 months, or the average of the weekly high and weekly low during the last 2 weeks, whichever is higher. In case the company has been listed for less than 6 months, then the average during the period it is listed is taken or, the average of last 2 weeks or, the share price during its IPO, whichever is higher. Of course, on completion of 6 months, the company then recomputes the prices and if the new price is greater, the buyers have to pay the difference. There is no question of the price being lower, as the companies always takes the highest price average.
I hope that was helpful. Now, in case of warrants, the conditions are same as in case of shares. However, 25% of the price is payable initially at time of allotment, which is later adjusted against the price payable on acquiring the shares or forfeited if the shares are not acquired. Conditions for convertible debentures are same as those of warrants.
It may seem confusing, but take your time. You will find it quite simple.
Currency of financial instruments:- In case of convertible debentures or warrants which can be used to acquire equity shares at a later date, the option to convert shall be valid for 18 months from the date of issue.
Non-transferability of financial instruments:- The instruments allotted on preferential basis are subject to a lock-in period of 1 year. In other words, the instruments cannot be sold by the buyer for one year from the date of allotment. In case of partially paid instruments, the lock in period commences from the date of allotment and continue to one year from the date when the instruments becomes fully paid up. So, its better to pay the price at once, isn't it? Else, you are gonna be stuck with them for a long time.
Currency of shareholders resolution:- Any allotment resolution passed in the meeting of shareholders regarding granting consent of preferential issues of any instruments, have to be completed within 15 days from date of resolution. Confused? In simple terms, any decisions taken should be acted upon within 15 days of the date the decision was taken. If allotment of instruments or issue of certificates doesn't take place within 15 days, the whole process has to be repeated.
Other requirements:- In addition to the above, some other guidelines are there. The auditor of the issuing company has to certify that the issuing process were in accordance to the above guidelines. Also, copies of the certificates has to be laid before the meeting of shareholders. And lastly, in case of preferential issue to promoters or their relatives, valuation of assets have to be done by a qualified independent valuer and the report has to be submitted to the exchanges where the company is listed.
Well, that was all about preferential allotment of instruments. I hope I succeeded in simplifying the concept for you. Now, let's move on to the next type of private placement i.e. Qualified Institutional Placements or QIPs. This is another method by which a company issues equity shares, partly or fully convertible debentures and other securities other than warrants to a specific group labelled as Qualified Institutional Buyers or QIBs. This method was introduced by SEBI to prevent companies from developing an excessive dependance on foreign capital. QIPs have become the most preferred form of private placements by buyers. The companies issuing QIPs have to comply with the guidelines in Chapter 13A of SEBI (DIP). Let's have a look at these guidelines and find out why investors prefer QIPs more. As I did in the case of preferential allotments, I will try to simplify the guidelines into layman terms so that they will be easily understandable. OK, here we go.
Applicability:- The equity shares of the company has to be listed in the stock exchange for atleast a year, prior to date of allotment. Also, it has to comply with the minimum public shareholding requirements of the listing agreement.
Investors:- Only QIBs can purchase the securities. SEBI defines QIBs as those institutional investors which possess the expertise and financial muscle to evaluate and invest in the capital markets. Some examples of QIBs are public financial institutions, scheduled commercial banks, mutual funds, FIIs, venture capital funds and foreign venture capital investors registered with SEBI, State Industrial Development Corporations, Insurance companies registered with the IRDA etc.
That was a mouthful, wasn't it? Wait till you see the complete list. I have mentioned only the common ones. Anyway, apart from being able to sell only to QIBs, 10% of the securities should be allotted to mutual funds. Of course, in case the minimum mutual funds are not allotted, then it can be allotted to other QIBs. Believe me, I still don't understand as why give this condition if it can be bypassed. Well, I am just the messenger. I have no say on the matter. Moving on, securities cannot be allotted to promoters or relatives of promoters.
Pricing:- Unlike the case of preferential allotment, only the average of the weekly opening or closing prices during the last 2 weeks, is taken. The same is applicable for convertible securities. Also, payment has to be fully paid at time of allotment.
Adjustments in price:- The issuing company can make adjustments in price of securities in certain cases like issuing of shares by way of capitalization of profits or reserves, consolidating its outstanding shares into smaller no. of shares, dividing its outstanding shares, reclassifying its shares into other securities etc. Easy, right? I thought so.
Currency of securities:- In case of convertible securities, the option to convert the securities is valid upto 60 months from date of allotment.
Shareholders resolution:- Unlike the case of preferential allotment, where the resolution of shareholders have to be completed within 15 days, in QIP, allotment can be made within 12 months from date of resolution. So, plenty of time to relax.
Placement Document:- A placement document containing information regarding the issue of securities is to be made. It is a private document and provided to selected investors through serially numbered copies. Also, a copy of the document is to be placed on the website of the stock exchange and the issuing company, stating that it is in connection to QIB. It should also be filed with SEBI.
Number of allottees:- The minimum number of allottees is 2 if the issue size is less than or equal to 2.5 billion rupees (250 crores) and 5, if issue size is more than that. Additionally, no allottee can be allotted more than 50% of the issue size.
Restriction on amount raised:- The aggregate of amount raised through all placements in a financial year should not exceed five times the net worth of the company as per the balance sheet in the previous year.
Finally!!! Something which is easily understandable. Anyway, only 3 more points left.
Transferability of securities:- For the first year after allotment the securities can only be sold on a recognized stock exchange.
Obligation of merchant bankers:- Issue and allotment of securities have to be manged by Merchant Bankers registered with SEBI. Merchant bankers are usually but not limited to brokers. They may also help raise finance for clients. In case of QIP, the merchant banker has to issue a diligence certificate that the issue is being made in compliance to the applicable guidelines.
Issuer certification:- Similarly, the issuing company too has to issue a diligence certificate.
So, finally we have discussed both the types of private placements. But before we conclude, let's take a look at the advantages that private placements offer over public offerings.
Private Placement presentation
Also, if you liked what you have read, please share or if you feel that I have missed something, made mistakes or you have any thoughts regarding this blog, please comment and let me know. And, I will try to post more topics so that I can help you guys more.
Cheers.
My first task was to determine what to start with. Then, I thought to myself - Why not write about my presentation assignments? In class, I was asked to give a presentation on private placements. When I first heard it, my first thought was - What the heck is that? Is it a process to place someone in a job privately? Getting a job in a private organization? Being in my final year of MBA, career placements has started to become a recurring theme in my thoughts. In my head, placements=jobs. Hence the obvious initial confusion regarding the term. Anyway, I did a bit of research, looked up the Internet and I actually found it to be quite interesting. So, I would like to share what I learned and maybe even get to help someone who wants to know about it.
Now, private placements have become a phenomenon in the economy of our country. There are some limitations to private placement of equity. However, the growth in private placement investment has been tremendous. To illustrate my point, I would like to summarize an article, which I read in the Business Line on 8th September, 2012 -
"Though public issues of debt has gained traction over the past four years, private placement still remains a more favorable route of raising funds. Private placement has totaled 8659.83 billion (865,983 crore) rupees as compared to 490.46 billion (49,046 crore) rupees in public issue of debt, during the 2008-09 to 2011-12 period. The Indian bond market has improved in 2011-12 as evident from the fact that there were 20 public debt issues in 2011-12 which raised 356.11 billion (35,611 crore) rupees, in comparison to 14 debt issues over the previous 3 years which managed to just 134.51 billion (13,451 crore) rupees. This was an amazing 276.8 percent rise in the value of trading. However, private placement was even higher. During 2011-12, private placement of Rs. 1898.03 billion (189,803 crore) was reported at the National Stock Exchange, an over two-fold rise and Rs. 567.94 billion (56,794 crore) was reported at the Bombay Stock Exchange, an almost five times increase in comparison to 2007-08 levels.
Moreover, Q1 of financial year 2012-13 recorded private placements of Rs. 737.59 billion (73,759 crore) in the stock exchanges whereas not even a single public issue of debt took place."
This is a summarized version of the actual article. So, as you have read, private placements are rising in India. So, why is it so? What is so special about private placements that it has become the favored method of debt issue to both organizations and investors? Let's find out, shall we?
Let's start with the question that came to my mind when i first heard the term. What is private placement? Well, the answer the unexpectedly simple. It is the issue of securities of a company via means other than public offering. Now, private placement is a term applicable only for companies listed in the stock exchanges. The reason being, when unlisted companies issues securities, it is obviously private. Let's go for another definition. Private placement refers to non-public offering of securities. Simple, right? So, what are these securities or debt instruments that are issued in private placements? Well, instruments issued in private placements are common stock, preferred stock or other forms of membership interests, warrants or promissory notes (including convertible promissory notes), bonds and debentures. Also, number of buyers cannot exceed 49.
Next, let's discuss why do companies and investors prefer private placement. Main reason is because public offering has some limitations w.r.t. time, cost and market variables. Of course, there are also some strategic objectives like-
- Consolidation or amalgamation of stakes of promoters.
- Induct a strategic investor or joint venture partner.
- Provide management stakes to senior management or working directors
- Implement an employee stock option plan
Now, let's go into the type of private placements? Yes, that's right. Private placements are subdivided into further categories. They are Preferential Issues and Qualified Institutional Placements. Under the preferential issue system, a company issues shares or convertible securities to a selected group of investors. The companies opting for preferential issues has to abide by the guidelines given in Chapter 13 of Disclosures and Investor Protection by Securities and Exchange Board of India. In addition, they have to comply with the requirements in Companies Act, 1956. Now, the guidelines are mind numbingly complex. It took me hours to understand them. So, I will try my best to present these guidelines in layman terms.
Pricing:-The price of the shares should be the average of the weekly high and weekly low of closing prices of shares during the last 6 months, or the average of the weekly high and weekly low during the last 2 weeks, whichever is higher. In case the company has been listed for less than 6 months, then the average during the period it is listed is taken or, the average of last 2 weeks or, the share price during its IPO, whichever is higher. Of course, on completion of 6 months, the company then recomputes the prices and if the new price is greater, the buyers have to pay the difference. There is no question of the price being lower, as the companies always takes the highest price average.
I hope that was helpful. Now, in case of warrants, the conditions are same as in case of shares. However, 25% of the price is payable initially at time of allotment, which is later adjusted against the price payable on acquiring the shares or forfeited if the shares are not acquired. Conditions for convertible debentures are same as those of warrants.
It may seem confusing, but take your time. You will find it quite simple.
Currency of financial instruments:- In case of convertible debentures or warrants which can be used to acquire equity shares at a later date, the option to convert shall be valid for 18 months from the date of issue.
Non-transferability of financial instruments:- The instruments allotted on preferential basis are subject to a lock-in period of 1 year. In other words, the instruments cannot be sold by the buyer for one year from the date of allotment. In case of partially paid instruments, the lock in period commences from the date of allotment and continue to one year from the date when the instruments becomes fully paid up. So, its better to pay the price at once, isn't it? Else, you are gonna be stuck with them for a long time.
Currency of shareholders resolution:- Any allotment resolution passed in the meeting of shareholders regarding granting consent of preferential issues of any instruments, have to be completed within 15 days from date of resolution. Confused? In simple terms, any decisions taken should be acted upon within 15 days of the date the decision was taken. If allotment of instruments or issue of certificates doesn't take place within 15 days, the whole process has to be repeated.
Other requirements:- In addition to the above, some other guidelines are there. The auditor of the issuing company has to certify that the issuing process were in accordance to the above guidelines. Also, copies of the certificates has to be laid before the meeting of shareholders. And lastly, in case of preferential issue to promoters or their relatives, valuation of assets have to be done by a qualified independent valuer and the report has to be submitted to the exchanges where the company is listed.
_______________________________________________________
Well, that was all about preferential allotment of instruments. I hope I succeeded in simplifying the concept for you. Now, let's move on to the next type of private placement i.e. Qualified Institutional Placements or QIPs. This is another method by which a company issues equity shares, partly or fully convertible debentures and other securities other than warrants to a specific group labelled as Qualified Institutional Buyers or QIBs. This method was introduced by SEBI to prevent companies from developing an excessive dependance on foreign capital. QIPs have become the most preferred form of private placements by buyers. The companies issuing QIPs have to comply with the guidelines in Chapter 13A of SEBI (DIP). Let's have a look at these guidelines and find out why investors prefer QIPs more. As I did in the case of preferential allotments, I will try to simplify the guidelines into layman terms so that they will be easily understandable. OK, here we go.
Applicability:- The equity shares of the company has to be listed in the stock exchange for atleast a year, prior to date of allotment. Also, it has to comply with the minimum public shareholding requirements of the listing agreement.
Investors:- Only QIBs can purchase the securities. SEBI defines QIBs as those institutional investors which possess the expertise and financial muscle to evaluate and invest in the capital markets. Some examples of QIBs are public financial institutions, scheduled commercial banks, mutual funds, FIIs, venture capital funds and foreign venture capital investors registered with SEBI, State Industrial Development Corporations, Insurance companies registered with the IRDA etc.
That was a mouthful, wasn't it? Wait till you see the complete list. I have mentioned only the common ones. Anyway, apart from being able to sell only to QIBs, 10% of the securities should be allotted to mutual funds. Of course, in case the minimum mutual funds are not allotted, then it can be allotted to other QIBs. Believe me, I still don't understand as why give this condition if it can be bypassed. Well, I am just the messenger. I have no say on the matter. Moving on, securities cannot be allotted to promoters or relatives of promoters.
Pricing:- Unlike the case of preferential allotment, only the average of the weekly opening or closing prices during the last 2 weeks, is taken. The same is applicable for convertible securities. Also, payment has to be fully paid at time of allotment.
Adjustments in price:- The issuing company can make adjustments in price of securities in certain cases like issuing of shares by way of capitalization of profits or reserves, consolidating its outstanding shares into smaller no. of shares, dividing its outstanding shares, reclassifying its shares into other securities etc. Easy, right? I thought so.
Currency of securities:- In case of convertible securities, the option to convert the securities is valid upto 60 months from date of allotment.
Shareholders resolution:- Unlike the case of preferential allotment, where the resolution of shareholders have to be completed within 15 days, in QIP, allotment can be made within 12 months from date of resolution. So, plenty of time to relax.
Placement Document:- A placement document containing information regarding the issue of securities is to be made. It is a private document and provided to selected investors through serially numbered copies. Also, a copy of the document is to be placed on the website of the stock exchange and the issuing company, stating that it is in connection to QIB. It should also be filed with SEBI.
Number of allottees:- The minimum number of allottees is 2 if the issue size is less than or equal to 2.5 billion rupees (250 crores) and 5, if issue size is more than that. Additionally, no allottee can be allotted more than 50% of the issue size.
Restriction on amount raised:- The aggregate of amount raised through all placements in a financial year should not exceed five times the net worth of the company as per the balance sheet in the previous year.
Finally!!! Something which is easily understandable. Anyway, only 3 more points left.
Transferability of securities:- For the first year after allotment the securities can only be sold on a recognized stock exchange.
Obligation of merchant bankers:- Issue and allotment of securities have to be manged by Merchant Bankers registered with SEBI. Merchant bankers are usually but not limited to brokers. They may also help raise finance for clients. In case of QIP, the merchant banker has to issue a diligence certificate that the issue is being made in compliance to the applicable guidelines.
Issuer certification:- Similarly, the issuing company too has to issue a diligence certificate.
_________________________________________
So, finally we have discussed both the types of private placements. But before we conclude, let's take a look at the advantages that private placements offer over public offerings.
- Fast and cost effective:- Because the middleman is eliminated and costs associated with public offerings are not there, private placements are fast as well as cost effective.
- Choice of Investors:- Unlike public offerings, where anybody can purchase securities, in private placements, the companies can choose their investors.
- Flexibility in type and amount of funding:- The investors can choose the type of security they want to purchase. Also, they have flexibility in their payment options, where they can choose to pay in parts or at once.
- Easier to negotiate on return:- In public offerings, the rate of return is fixed. However, in private placements, the investors can negotiate the return rates.
- Less Amount of scrutiny:- In private placements, issuers are subjected to a lesser amount of scrutiny by SEBI as compared to during public offerings. Hence, they retain a degree of independence in allotment decisions.
Private Placement presentation
Also, if you liked what you have read, please share or if you feel that I have missed something, made mistakes or you have any thoughts regarding this blog, please comment and let me know. And, I will try to post more topics so that I can help you guys more.
Cheers.
