Monday, April 2, 2012

Institutional Placement Program

(The following post is contributed by Yogesh Chande, an advocate practising in Mumbai)
The Institutional Placement Program (IPP) was approved by Securities and Exchange Board of India (SEBI) at its board meeting held on 3 January 2012. Subsequently, by a gazette notification dated 30 January 2012, the provision relating to IPP (Chapter VIII-A) was inserted in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations).
IPP is one of the methods available to Indian listed companies for the purpose of complying with minimum public shareholding requirements[1] under the Securities Contracts Regulation (Rules), 1957 (SCRR), apart from the following methods prescribed under sub-clause (ii) of clause 40A of the equity listing agreement[2]:
(a)  issuance of shares to public through prospectus; or
(b)  offer for sale of shares held by promoters to public through prospectus; or
As regards pricing of the offering in case of an IPP, like in case of a public offering (initial or follow-on) under the ICDR Regulations, no pricing formula has been prescribed, except that under regulation 91F of the ICDR Regulations the eligible seller is obliged to announce a floor price or price band. The floor price or price band in case of an IPP is not linked to the historical market price of the equity shares or any other parameter, like in case of a “preferential allotment” under chapter VII of the ICDR Regulations[4], or like in case of a “qualified institutions placement” under chapter VIII of the ICDR Regulations[5]. It appears that the policy of the regulator has always been to regulate pricing norms in case of offerings where “retail shareholders” are not permitted to participate. SEBI has for the first time allowed free pricing regime for a “restricted public offer” like IPP.
Of all the modes prescribed under clause 40A of the equity listing agreement, IPP is the only mode available to an Indian listed company or its promoter[6] to comply with the minimum public shareholding requirement where a placement can be done only to “qualified institutional buyers”[7], without any pricing restriction, and without any participation by the “retail shareholders”. “Retail shareholders” are not permitted to invest in companies which (or its promoters) adopt the IPP. It is worth mentioning that, listed companies which are required to comply with the requirement of minimum level of public shareholding are typically those which are well managed fast growing companies (including MNCs) with good balance sheets and/or with consistent track record of paying dividends, in which the “retail shareholders” may also wish to participate but, may not be able to do so if the IPP is adopted for diluting the promoter shareholding in such companies.  
It is also interesting to note that one of the pre-requisites, both under chapter VII[8] (dealing with “preferential allotment”) and chapter VIII[9] (dealing with “qualified institutions placement”) of the ICDR Regulations, is that the listed issuer company should be in compliance with the requirement of minimum public shareholding. This is however not the case with regard to IPP. On the contrary, IPP is available only to those Indian listed companies which need to comply with the minimum public shareholding requirements under Securities Contracts (Regulation) Rules, 1957.
It is pertinent to note that, the “offer for sale by promoters through the secondary market” route is the fastest (settlement is completed on T+2 basis, where T is the date of closure of the offer), and more inexpensive than all the other routes prescribed under clause 40A (ii) of the equity listing agreement (including IPP), and where a “retail shareholder” is also permitted to bid. Hence, unless a company is in need of capital, there is no additional advantage (to the company) of IPP over “offer for sale by promoters through the secondary market” route, albeit the success of the offer will depend on the pricing of the shares being offered through both the routes.
- Yogesh Chande

[1] Listed companies where promoter shareholding is above 75%
[2] Amended on 8 February 2012
[3] This was also approved at the board meeting of SEBI held on 3 January 2012 and was made effective by a circular dated 1 February 2012
[4] Regulation 76
[5] Regulation 85
[6] “Eligible seller” in case of an IPP can be either the company or the promoter
[7] Defined in regulation 2(1)(zd)
[8] Regulation 72(1)(c)
[9] Regulation 82(c)

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