Private Placement

Source-This post on Private Placement is based on the article “Sebi decides to repeal certain circulars related to private placement of securities” published in “The Indian Express” on 13th March 2024.

Why in the News?

The Securities and Exchange Board of India (SEBI) has recently decided to repeal certain circulars that provided relaxation for the allotment of securities through the private placement route.

What is Private Placement?

1. About– It is the sale of stock shares or bonds to selected investors and institutions rather than being offered publicly on the open market.

2. Investors attracted– Private placement programs invite investors like wealthy individuals, banks, mutual funds, insurance companies, and pension funds.

3. Benefit:
a. A benefit of private placement is its minimal regulatory demands.
b. Through private placements, companies can maintain closer investor relationships, negotiate flexible terms, and possibly retain more control over their direction and growth strategies.

Note– Under the Companies Act, 1956, issuing securities to 49 people was seen as private placement. This limit was raised to 200 under the Companies Act, 2013.

4. Types of of private placements– Preferential allotment and qualified institutional placement.

Preferential allotment:

1. About– This method involves a company issuing new shares to a select group of existing shareholders or specific investors, usually at a price lower than the current market price.

2. Purpose– This method is often used when a company aims to reward or retain existing shareholders, like promoters, by offering them the chance to buy more shares.

3. Regulation– Preferential allotment in India is regulated by SEBI regulations and the Companies Act. The company needs permission from its shareholders to proceed with preferential allotment.

Qualified Institutional Placement (QIP):

1. About– QIP is a private placement option for listed companies only. With QIP, a listed company can issue shares or securities to qualified institutional buyers (QIBs), like mutual funds, banks, insurance companies, and foreign institutional investors, without going public.

2. Purpose– Companies use QIP to quickly and efficiently raise capital from institutional investors for various purposes such as expansion, debt reduction, or other corporate needs.

3. Regulation– SEBI has set guidelines for QIP issuances in India.

UPSC Syllabus- Indian Economy