Qualified Institutional Buyers (QIBs) in IPO in India 

In India’s financial markets, Qualified Institutional Buyers (QIBs) play a crucial role, particularly in Initial Public Offerings (IPOs). As sophisticated investors, QIBs have significant advantages, privileges, and responsibilities when it comes to IPO participation. Understanding their role can offer insight into how the IPO market functions, particularly in terms of investment confidence and stability.

What Are QIBs?

The full form of QIB is Qualified Institutional Buyers. These are institutional investors with the financial expertise and resources to participate in large market transactions like IPOs. QIBs include mutual funds, insurance companies, pension funds, foreign portfolio investors (FPIs), and banks. These institutions are recognised by SEBI (Securities and Exchange Board of India), which regulates their activities to ensure market stability. QIBs are not subjected to the same investment caps as retail investors, which allows them to invest significant sums, contributing to large-scale investment in the financial markets.

Their recognition as QIBs is based on their ability to assess risk and make informed decisions, contributing to overall market stability. Additionally, their participation in IPOs enhances market credibility and investor confidence.

Who Can Be a QIB?

Based on Disclosure and Investor Protection (DIP) Guidelines set by SEBI, the following entities can be a QIB in an IPO:

• SEBI-registered mutual funds

• SEBI-registered venture capital funds

• Scheduled commercial banks

• IRDA-registered insurance companies

• Provident funds with a minimum corpus of ₹ 25 crores

• Public financial institutions as defined by Section 4A of the Companies Act, 1956

• Foreign institutional investors (FIIs) and sub-accounts (except foreign corporations or individuals)

• SEBI-registered foreign venture capital investors

• Bilateral and Multilateral development financial institutions

• State industrial development corporations

How QIBs Work in an IPO

In an IPO, a designated portion (usually 50%) is allocated to QIBs. Their role in the IPO process is critical as they often act as anchor investors, securing shares before the issue opens to the public. QIBs bid during the book-building process, helping determine the issue price of the stock. This early participation by QIBs sends a positive signal to the market, encouraging retail investors to also invest.

QIBs enjoy flexibility since they are exempt from a lock-in period, meaning they can sell or retain shares based on market conditions. This flexibility, along with their access to key financial data and market trends, positions QIBs as major influencers in IPO pricing and success. Their significant financial power and preferential treatment in IPO allotments provide stability to the overall offering and increase the IPO’s chances of success.

QIBs also act as market makers by absorbing large quantities of shares, which in turn stabilises demand and pricing. By participating in the early stages of an IPO, they lend credibility to the offering, which has a cascading effect on the confidence of other types of investors, particularly retail and non-institutional investors.

Rules and Regulations for QIBs in IPOs

The rules governing QIB participation are outlined by SEBI. These regulations ensure transparency and fairness in the IPO process. Here are the key rules:

• A listed company in the domestic market can issue securities to recognised QIBs. However, if a company does not have its shares listed or meet the minimum public shareholding requirements, it cannot raise funds through this route.

• SEBI enforces strict norms governing both QIBs and companies seeking funds, ensuring neutrality in QIB selection. Promoters or their affiliates cannot access ‘specified securities,’ i.e., non-equity shares.

• Merchant brokers manage QIPs and must maintain records, submitting a due diligence certificate to SEBI. A six-month gap is required between multiple placements of specified securities. Failure to submit due diligence certificates renders the transaction void.

• At least 50% of the shares in a book-built IPO must be allocated to QIBs. If QIB demand exceeds the allotment, a proportional distribution is followed.

• If a QIB is acting as an anchor investor, then they can get access to the IPO before the general public does. Anchor QIB investors need to make bids of over ₹ 10 Cr. and their allotment is capped at a maximum of 60% of the IPO shares.

These regulations are designed to promote healthy market participation while ensuring that QIBs bring expertise and stability to IPOs.

Advantages of Being a QIB in IPOs 

QIB investors enjoy several advantages in IPO participation, including:

1. Access to Exclusive Offerings 

QIBs enjoy exclusive access to high-quality investment opportunities through IPOs and Qualified Institutional Placements (QIPs). This privileged access allows them to acquire large shares that retail investors often cannot secure, providing them a competitive advantage in high-demand IPOs.

2. Lower Risk 

SEBI regulations ensure that QIBs are selected through a transparent process, reducing the likelihood of favouritism and fraud. This provides QIBs with a safer investment environment compared to other investors, as companies issuing securities to QIBs are often more stable and well-vetted.

3. Price Negotiation Leverage 

QIBs can negotiate the price of securities in private placements like QIPs, which enables them to get a better deal than public investors. They often benefit from lower entry prices, maximising their potential for capital appreciation.

4. No Need for IPO Lock-in Period 

QIBs are typically not subject to the lock-in period that applies to other investors in IPOs. This flexibility allows them to buy and sell shares without being constrained by time limitations, making their investments more liquid.

5. Better Information Access 

QIBs often have access to more in-depth financial data, projections, and other key information about companies, enabling them to make well-informed decisions. This ensures they have a strategic edge when evaluating investment opportunities.

6. Diverse Investment Portfolio 

By participating in various IPOs and private placements, QIBs can diversify their portfolios effectively. This diversification reduces their overall investment risk, ensuring better stability and returns across multiple sectors.

7. Priority Allotment 

In most IPOs, a certain percentage of shares is reserved for QIBs, ensuring they receive priority over other categories of investors. This increases the likelihood of securing shares in high-demand IPOs that might otherwise be difficult to acquire.

Disadvantages of Being a QIB in IPOs 

Despite the advantages, there are some drawbacks to being a QIB:

• High Risk: Although QIBs are well-informed, large investments in IPOs come with higher risks, especially if the stock underperforms post-listing.

• Market Influence: While QIBs have a strong market presence, their decisions can also influence stock volatility, particularly if they sell large shares immediately after listing.

• Higher Costs: Investing large sums requires a robust capital base, which may incur higher costs, including management fees and operational overheads.

Conclusion

Qualified Institutional Buyers (QIBs) are pivotal players in India’s IPO market. Their participation signals strength and confidence, boosting market sentiment and influencing pricing dynamics. Understanding their role, rules, and advantages can provide insight into the larger framework of IPO investments in India.